If that’s the case for you, Fred, good bond replacements would be cash, high-interest savings accounts (HISAs), or maybe a guaranteed investment certificate (GIC), if your need for the money is a year or two down the road. Ideally, you want no volatility and easy accessibility. (Here MoneySense’s lists of the best HISAs and best GICs in Canada right now.)

Bonds reduce portfolio risk 

Equities have historically provided higher rates of return than bonds over the long term. (You can see for yourself using this calculator, although there is no guarantee that what happened in the past will happen in the future.) 

The challenge for some investors, however, is tolerating short-term volatility and staying invested—even when the equity portion of their portfolio drops 30% or more. Can you stay the course? Say, when the news is predicting it’s going to get worse, your neighbours tell you they got out, and social media explains why a doomsday event is nigh or that you should switch to some investment you’ve never heard of.

Many investors, therefore, hold bonds to reduce their portfolio’s volatility overall, which can help them overcome the feeling of needing to sell when markets drop.

If you fall into this camp, Fred, appropriate bond alternatives may include assets that provide an income such as preferred shares, dividend stocks, REITs and other investments, such as a mortgage investment corporation (MIC).

Even though these bond alternatives may fluctuate in value, some investors take comfort in knowing that an investment is still paying a dividend or distribution and are more willing to hold on to it through market downturns. 

Bonds add diversification to your portfolio 

Bonds typically don’t move in the same direction as equities. Often when there is a large drop in equities, you see a rise in bond prices. 

Fred, are you holding bonds in your portfolio because you’re looking for something that might not move in the same up and down pattern as equities?

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