MYTH 6: “Bonds are a simple, safe and risk-free way to generate income.” Not exactly. Sure, buying a broadly diversified bond fund or ETF can be a relatively easy way to generate interest income during retirement. And yes, in general, bonds tend to be less volatile than most stocks. But they are by no means a risk-free financial panacea. While the interest payments that bonds generate (a bond’s “coupon”) usually stay the same throughout the term of the bond, the bond’s underlying value can go up and down in response to changes in interest rates. When rates rise, the value of an existing bond that was issued with a previous, lower interest rate often decreases. In a time of rapidly rising rates (such as we experienced a year or two ago), that can lead to a dramatic drop in the value of a bond portfolio. And if you’re an investor who’s attracted to corporate bonds because of their higher yields, understand that these bonds can be quite sensitive to the ebb and flow of the business cycle. That makes them much more likely to move up or down according to shifting economic sentiment, the risk of recession and investor behaviour. Such moves can be quite a surprise for retirees who are looking for a “simple, safe and riskfree” source of income. MYTH 7: “Emergency fund? We don’t need that – we have a line of credit.” A very common myth. Absolutely, a line of credit (typically secured against the equity built up in your home) can be an affordable, convenient source of funds for large purchases – a renovation, or perhaps the purchase of a touring RV, or maybe even a vacation property. But by no means is a line of credit the same thing as cash in the bank which you can access at any time. Keep in mind that many lines of credit are structured as demand loans: the issuer has the legal right to demand repayment at any time, even if you’ve never missed a payment. Under normal circumstances, the chances of that are pretty low. But it can happen: if your home drops in value, for example, the bank could reduce your loan limit and force you to pay any amount over the now-lower limit. Or, if a bank needs more liquidity, it could reign in or even eliminate lines of credit altogether in an effort to reduce risk – something that actually happened to some customers during the 2008 financial crisis. Sure, a line of credit might be a viable solution to get you out of a financial pickle. But a better approach is to think about the ill-timed, yet inevitable financial challenges which we all face: the car needs a new transmission; you need an MRI right now; there’s a leak in the roof; whatever. Instead of scrambling to find the money when these things happen, build up a fund for such “predictable emergencies” over time. Finance CSANews | WINTER 2025 | 31
RkJQdWJsaXNoZXIy MzMzNzMx