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Welcome to the third edition of In Your Best Interest. In this edition, I have added a lot of new content, including a chapter on Exchange Trade Funds (ETFs), a new section on forecasting interest rates, and beefed-up sections on preferred shares, convertible bonds, and real return bonds (RRBs). I have also included an update on Canada’s ABCP fiasco and what has happened in the income trust sector. The core principles of this book remain unchanged; individual investors, through a laddered portfolio of individual interest-bearing bonds or zero coupon bonds, are able to preserve their principal while obtaining satisfactory returns. The events of the past three years certainly underscore the importance of maintaining well-balanced portfolios with the fixedincome portion designed to avoid the four biggest risks to fixed-income portfolios: 1. Maturity risk (also known as reinvestment risk) 2. Credit risk 3. Inflation 4. Currency All of these factors can be mitigated using a laddered approach; I have long favoured ladders with maturities from one to ten years. This allows investors to capture the extra yield available in the six- to ten-year maturities, while at the same time the average term of the portfolio is only just over five years. Ten-year maturities allow for greater credit selection while a steady parade of maturities ensures that, should inflation become a problem, money will be available for reinvestment at higher yields. Most Canadians will retire in Canada and will need Canadian dollar income. It is imprudent, in my view, to diversify a fixed-income portfolio out of the Canadian dollar, since, with today’s low nominal yields, a small adverse currency move can wipe out any extra yield. The explosion in ETFs has not swayed my view on owning individual bonds; there is such a bewildering array of choices that investors end up guessing again. I think that specialty ETFs such as high-yield or emerging-market bond funds might have a role to play, but for regular investing, I prefer individual bonds and GICs. While it is true that ETFs have lower fees than do mutual funds and are designed to merely track an index, they share the same major fault that mutual funds do: they never mature and you don’t know what their future value will be.