Why Hold Fixed Income at All?
Fixed income serves three primary functions in a portfolio: reducing volatility, providing rebalancing fuel, and generating predictable income. For high-income professionals with long time horizons, the temptation is to hold 100% equities for maximum growth. While this is mathematically optimal in isolation, it ignores the behavioural reality that most investors cannot tolerate 40-50% drawdowns without making costly emotional decisions.
The 2008-2009 financial crisis saw the S&P 500 decline 57% peak-to-trough. Investors who held through recovered within 4 years and went on to exceptional returns. But studies show that the majority of investors who experienced the full decline sold at or near the bottom — crystallizing permanent losses. A 20-30% fixed income allocation would have limited the drawdown to 35-40%, keeping more investors in their seats.
Fixed Income Options for Canadians
| Type | Risk Level | Typical Yield | Best For |
|---|---|---|---|
| High-interest savings | Minimal | 3.5-4.5% | Emergency fund, short-term |
| GICs (1-5 year) | None (CDIC insured) | 3.8-4.5% | Known timeline, capital preservation |
| Government bond ETFs | Low-moderate | 3.5-4.0% | Liquidity, flight-to-quality hedge |
| Corporate bond ETFs | Moderate | 4.5-5.5% | Higher yield, diversified credit |
| Preferred shares | Moderate-high | 5.0-6.5% | Tax-efficient income (dividend credit) |
Asset Location: Where to Hold Fixed Income
Interest income from bonds and GICs is taxed at your full marginal rate — the least tax-efficient form of investment income. For a professional in the 53.53% bracket (Ontario), nearly half of bond interest goes to tax in a non-registered account. This makes registered accounts (particularly RRSPs) the optimal location for fixed income, while equities (taxed at lower capital gains and dividend rates) are better suited to non-registered and TFSA accounts.
How Much Fixed Income Do You Need?
The traditional "age in bonds" rule (hold your age as a percentage in fixed income) is overly conservative for high-income professionals with stable careers. A more nuanced framework considers:
- Human capital: Stable professional income functions like a bond — reducing the need for fixed income in the portfolio
- Time horizon: 20+ years allows for higher equity allocation regardless of age
- Behavioural tolerance: Only hold enough fixed income to prevent panic-selling during corrections
- Income needs: Retirees drawing from the portfolio need more stability than accumulators