How to get some bang for your safe bucks
Snap out of it, would you?
As if in trance, a huge number of Canadians have parked money in safe investments despite returns that can in many cases be rounded down to zero. Fear of a financial meltdown started the trend. Lingering worries and everyday inertia are prolonging it.
Now is the time to re-engage with your investments. It's not only possible to ramp up your returns while staying conservative, it's imperative. Few people can meet their long-term financial goals with returns that don't even match up to inflation.
Next week, I'll be writing about how to get better rates on guaranteed investment certificates. For now, let's look at some broader strategies for ratcheting up returns without venturing into the stock market.
First, though, it has to be said that the best thing for many investors today would be to start up a regular monthly contribution plan that gradually builds up their exposure to the stock markets. No big bets, just a slow and steady rebalancing for portfolios that are tilted too far to safety.
But that's obviously not on for lots of people. BMO Nesbitt Burns issued a survey this week suggesting that while almost two-thirds of people are optimistic about the stock market, just 13 per cent said they were more likely to invest in stocks.
This explains how the financial analysis firm Investor Economics recently discovered that the amount of money sitting in conservative investments today is at an all-time high of $1.6-trillion, with $900-billion in liquid investments or savings accounts earning pretty much zero.
Earning nada for investors, that is. You can be certain the financial industry is generating copious fee revenue from this money while exerting little or no effort to earn it. Maybe that explains why so much money is so obviously sitting in the wrong place today.
A first step for addressing this is to get out of money market funds, which currently offer yields of between 0.01 and 0.7 per cent. You can get exactly the same liquidity - that means it's quick and easy to jump in and out - with a new generation of investment savings accounts that trade like mutual funds.
These accounts are covered by Canada Deposit Insurance Corp., a higher level of protection than money market funds offer. One proviso: Make sure your investment dealer does not charge commissions to buy or sell these funds.
The problem of low bond yields is caused by our slow-growing economy and won't be fixed in the near future. I had a reader ask this week when 5 per cent returns on guaranteed investment certificates might come back. It could be years.
It's up to you, then, to maximize your bond returns to whatever extent possible. If you have a good relationship with an adviser who is licensed to sell stocks and bonds, put it to use and ask for a better deal on bonds. When you're quoted a price for buying a bond, it includes a little fat to cover broker commissions. If you can get the price down when buying a bond, your yield goes up.
Whether you're buying a bond from a full-service dealer or an online broker, you can get a rough idea of how competitive the pricing is by checking the CanadianFixedIncome.ca website. What you'll find here is a small taste of the bond market pricing data compiled by a firm called Perimeter Financial. Prices aren't continually updated, but there's enough info there to allow you to get a rough idea of what investment dealers are paying for some of the more heavily traded federal and provincial government bonds, plus corporate bonds as well.
You can actually buy bonds at these wholesale prices - remember, retail investors pay marked-up prices - through the online brokerage firms Scotia iTrade and Qtrade Investor. Both have recently started selling bonds with a flat commission of $1 for every $1,000 in face value of bonds being traded, with a minimum of $19 at Qtrade and $19.99 at Scotia iTrade and a maximum of $200 at Qtrade and $250 at iTrade.
This no-markup pricing advantage was verified in a test this week in which the yield on six different government and corporate bond issues was compared simultaneously at Scotia, Qtrade and three competitors. Scotia's yields were the highest in all cases, with gaps of as much as 0.27 of a percentage point. Qtrade hadn't introduced wholesale pricing when the test was done, but it was already very close in the way it priced bonds.
Another strategy for maximizing your returns from safe investments is to look at replacing bonds with GICs from credit unions, trust companies and small, alternative banks. Advisers generally have access to a variety of third-party GICs, and online brokers offer them, too.
Thanks to deposit insurance, GICs offer comparable security to government bonds. And yet, the returns can quite often be better than you can get even through wholesale pricing at Scotia iTrade and Qtrade. For example, Qtrade had a 3-per-cent, five-year GIC available this week from the B.C. credit union Coast Capital Savings (unlimited deposit insurance is available through a provincial credit union plan backed by the B.C. government).
There's little chance for the average individual investor to get a 3-per-cent yield these days in a five-year government bond, federal or provincial. Corporate bonds may offer more, but there's a higher level of risk.
One drawback with GICs is that unless they're cashable, they can't easily be sold before maturity like a bond. Then again, a price decline in a bond will be reflected in the value of your overall investment account, whereas a GIC remains impervious. For investors who are hyper-sensitive to losing money, that's a significant psychological advantage for GICs.
Whatever safe investments you've been using, it's time to stop being a passive consumer who turns his or her brain off after hearing the phrase "low risk." In investing, it's possible to be both safe and sorry.
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UP FROM BONDAGE
When interest rates are as low as they are now, investors need to do all they can to maximize the yield they get from bonds. One way to do that is to ensure you're getting a competitive yield when buying bonds from your investment dealer. Here's how the yields on six government and corporate bonds compare at four online brokerage firms. Each is compared to the wholesale yield, which is what big institutional investors get. Wholesale data was supplied by the CBID marketplace operated by Perimeter Markets Inc., which gathers bond prices from a wide number of dealers.
Methodology: Bond yields at each firm were compared simultaneously for orders of $5,000.
How to Read Bond Info: The issuer of the bond is mentioned first, then the coupon or annualized interest payout at issue. Next is the year, month and day the bond matures.
|Yield available to buyers %|
|Government of Canada 2.5% 2012-June-01||1.93||1.93||1.75||1.81||1.91|
|Canada Housing Trust 3.6% 2013-June-15||1.67||1.67||1.4||1.48||1.63|
|Ontario 3.25% 2014-September-08||2.08||2.08||1.89||1.94||2.05|
|American Express Cda 5.9% 2013-April-2||2.62||2.62||n/a||2.28||2.58|
|Sherritt Int. 7.75% 2015-October-15||5.5||5.5||n/a||n/a||5.48|
|Cameco 4.7% 2015-September-16||3.16||3.16||n/a||n/a||3.13|
|Broker's best 5-Year GIC rate available online||n/a||n/a||2.85||n/a||3|
|Best 5-Year GIC rate on Globeinvestor.com: 3.6 (from Maxa Financial)|
REPLACE MONEY MARKET FUNDS
Investment savings accounts that trade like mutual funds are an ideal replacement for high-cost, low-return money market mutual funds. Here's a rundown on some of the options out there:
|Fund Name||Rate (%)*||Fund Code||Minimum Deposit|
|Manulife Trust Investment Savings Account||1.25||MIP710||None|
|B2B Trust High Interest Investment Account||1.2||BTB100||None|
|Renaissance High Interest Savings Account||1.2||ATL5000||$1,000|
|RBC Investment Savings Accounts||1.2||RBF2001||$1,000|
|Dundee Investment Savings Account||1.2||DYN500||None|
|*as of mid-week|