Don’t be scared off by the credit market. It belongs in every portfolio
Credit investing is often misunderstood, but it is a fundamental and valuable component of every portfolio, offering returns through lending to governments, corporations, or individuals. While many investors conflate all credit types or avoid them due to fear, well-selected segments like mortgages and securitized credit can be lower risk than assumed. There are seven distinct types of credit—ranging from government debt to emerging market bonds—each with unique risk and return profiles that deserve thoughtful allocation.
- ▪Credit investing involves lending money for a fee and is one of the oldest financial activities.
- ▪Bond yields consist of government bond yields plus a credit spread reflecting borrower risk.
- ▪Mortgages, often underestimated, can be as secure as investment-grade bonds due to collateral and conservative loan-to-value ratios.
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Open this photo in gallery:A real estate sign in Vaughan, Ont., in September, 2024. Collateral backing puts well-selected mortgages closer to investment grade than most people assume.Paige Taylor White/The Canadian PressShareSave for laterPlease log in to bookmark this story.Log InCreate Free AccountCredit investing is having a moment – mostly for the wrong reasons. The headlines are real but narrow. The opportunity is much broader and the frightening bits more isolated than most investors realize.Within investments, credit is an oft-used yet inexact term, which leads to confusion. When investment professionals talk about credit, they mean something specific and valuable: Lending money to governments, companies, or individuals and getting paid for the risk of doing so.
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