Tag Archives: GICs

I Doubt I Will Ever Fully Understand Fixed Income Investing in Bonds and GICs

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We are ultra-conservative investors and are extremely averse to losing money. So while we have some money in the stock market we also have a large amount in fixed income investments. In particular, we have GICs and a Bond fund. And I’m beginning to doubt I will ever fully understand fixed income investing.

Weren’t Bond Returns Supposed to Collapse Last Year or This?

I’ve lost track of how many years in a row I’ve heard that Bonds are about to crash. Several people we know who work in the financial industry advised us to get out of our Bond fund two years ago.

As I’m a major procrastinator and ditherer, we didn’t get out of it yet. We did stop adding new money, though.

In 2011, our bond fund increased in value by about 8.4% after fees and commissions with no new contributions. (This was a surprise.)

In 2012, the decision to leave the money in the bond fund was a good one. (Good because we only need our fixed income to try to match inflation. We get our growth from our stock investments.) Our bond fund increased in value by about 3.75% after fees and commissions, with no new contributions in 2012.

In 2013, it cost us money. Our bond fund decreased in value by 0.93% after fees and commissions with no new contributions in 2013.

Then, something truly bizarre happened. Between December 31, 2013 and January 31, 2014, our bond fund increased in value by 2.46% after fees and commissions with no new contributions. Talk about unexpected!

By the end of February, the bond fund had increased in value 2.8% over its value on December 31. Colour me confused.

Why Don’t I Just Ditch the Bond Fund?

The reason I haven’t bailed on the Bond fund is because it’s part of a Defined Contribution pension plan. There are NO other fixed income choices in the plan, unless you count a Money Market fund that has been known to generate negative returns. So I would have to dump it all into the stock market, something I am very reluctant to do.

I’m hoping instead to slowly shift investments in our TFSAs and RRSPs towards fixed income so that I can gradually move the Bond Fund holdings into the market. But the other factor at play is that the market funds I can go into aren’t the ones I would pick for my RRSP. (E.g. they are not “buy the entire stock market with an incredibly low MER” funds.)

Why are GIC Rates Falling So Sharply In 2014?

I also don’t understand what happened to GIC rates in late 2013 and early 2014.  All through 2011, 2012 and early 2013, I would often see rates for 1 year GICs between 1.75-2.1%.

In 2014, I haven’t seen 1 year’s (on BMO InvestorLine) with rates higher than 1.65%. Even during “RRSP season.”

Does this have something to do with the slow ending of Quantitative Easing in the US? With the minor changes made to the exchange rate between the Chinese Yuan and the US Dollar? With the continuing Real Estate boom in Canada’s biggest cities? The Bank of Canada key rate is about the same. Mortgage rates aren’t hugely different. Is it Jim Flaherty’s fault? If so, now he’s retiring will that help?

I’ve been annoyed to discover that very few people report on fixed income issues. There must be 30 different articles on what the TSX did yesterday but I can’t find one on what Bonds or GICs did.

This is despite the fact that, according to The Ultimate Guide to the Canadian Bond Market, in the first quarter of 2011, the daily average trading volume in the Canadian bond market alone was 38.42 Billion dollars. Daily!

That sure makes my fixed income retirement savings look puny.

What Rate of Inflation Am I Trying to Match?

As I said, we’re hoping during this period of low interest rates for our fixed income investments to hold their own against inflation. We expect our growth (stock) investments, though, may have to help pull them back in the black.

I calculated our overall personal rate of inflation in 2012 at 1.6%. Over the period 2001-2012 our personal rate of inflation was about 2.3%.  Both are probably a bit low as the numbers used to calculate them don’t include the costs of food or clothing. So I’ve been mentally using 2-3% as my estimated personal rate of inflation. Since I lived through the 80’s, though, I wouldn’t be surprised to see 11-20% inflation again in the future.

If our Bond fund doesn’t lose any ground (or gain any) from where it is today in March, it has earned enough this year to match inflation.

So what should I do? Bail on the Bond fund and stick it into the Money Market fund for the rest of the year? You do know that Money Market funds can LOSE money, right? That doesn’t appeal to me much.

Stick it in the Equity Market funds? While markets are at or near all time highs? Seems a tad risky to someone who is extremely risk averse.

Yep, I’m dithering again. I sure wish someone with a crystal ball could tell me exactly what will happen and when. For now, I expect I’ll just leave it in the Bond Fund and get back to work. Maybe I can earn and save enough new money to cover the losses when they happen…..

And I’ll try to work my way through the book In Your Best Interest to see what I can learn. (Science fair projects and Spring Musical rehearsals permitting.)

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Do you have a portion of your portfolio in Fixed Income investments? What information sources do you try to follow to keep up with this changing market? Please share your insights with a comment.

I’m Not Sure What to Do with My RRSP Money—What Should I Do Till I Decide?

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Well it’s January and “RRSP Season” is officially open. Banks will be angling for your business and offering all sorts of promises of high returns and low risks as tantalizing bait. You may be afraid they may hook and land you like a spring migration Sucker. If you’re not sure what to do with your RRSP money but you want to get it in by the end of February, what should you do?

Keep Your RRSP Funds Flexible and Accessible

Check Transfer Fees for RRSP Funds

What you don’t want to do is get rushed into a bad decision by an arbitrary deadline set by the government’s tax department.

Before investing anywhere, ask

  • can you can move your money in the future and
  • how much would a transfer cost

Many banks charge $25-150 to move your RRSP money to another financial institution. A very select few charge nothing.

UPDATE: Please be aware that as of January 2015, Tangerine has started charging a fee if you transfer your RRSP or TFSA from Tangerine to another bank, credit union, brokerage or financial institution.

Choose RRSP Investments That Don’t Lock in Your Money for the Long Term

Until you have time to make a strategy and plan your investment, you shouldn’t sign or buy anything that locks you in for a long term.

Beware of

  • regular GICs
    Most Guaranteed Investment Certificates can NOT be cashed before they mature. Only buy redeemable GICs or short-term GICS (6 months to 1 year) if you are still researching your long-term RRSP investment plan.
  • back-end-load mutual funds
    Some mutual funds charge a large fee if you sell them or transfer out of them within the first 5-10 years that you own units in the fund. These fees may be called Deferred Service Charges, DSC fees, or Deferred Sales Charges, etc. Only buy no-load funds while you are researching your plan.
  • cyclical stocks
    Some types of businesses are prone to boom–and-bust cycles. For example, the Canadian petroleum-producing companies often see their stock prices vary in a wavy pattern depending on the swings of the world price for oil. Be very wary investing in any shares or stocks if you are planning to only stay invested for a short time but be especially cautious with cyclical industries.

What Investments Are Good for a RRSP for a Very Short Term Investment?

If you’re committed to doing some research and making a plan for investing your RRSP money, you may need to park your contribution temporarily until you’re ready to start implementing your plan.

What can you invest in for a very short term?

  • A high interest RRSP savings account
  • A short-term GIC
  • A short-term redeemable GIC
  • A money market mutual fund
  • A money market ETF

None of these investments will give you a great rate of return. You are sacrificing yield to increase the safety and accessibility of your principal.

It’s important to remember that you can lose money in a money market fund. Personally, I would recommend the savings accounts or cashable GICs but not the money markets.

Don’t leave your money parked for too long! None of these investments will pay enough interest right now to keep up with the cost of inflation. They make reasonable spots to shelter your investment in the short term but they are not meant for long term use.

The Drawbacks of Transferring a RRSP Contribution to Another Financial Institution

You may have to pay a fee to transfer out your contribution.

It may take 4-8 weeks to move your money from one institution to another. And during that transit time, your money may be earning no interest, distributions, dividends or capital gains whatsoever.

Where’s the Best Place to Invest my RRSP Money in the Short Term?

I don’t know because I’m not you.

Here are some places to consider, though:

Tangerine, formerly called ING Direct
One place to consider is Tangerine.ca ING Direct.

UPDATE: Please be aware that as of January 2015, Tangerine plans to start charging a fee if you transfer your RRSP or TFSA from Tangerine to another bank, credit union, brokerage or financial institution.

From June 1 till July 31, 2014, you can earn 2.50% (That’s the annual rate!) on cash deposited in a RRSP Investment Savings Account at Tangerine ING Direct that increases your total in all savings type accounts at Tangerine above your balance on April 7, 2014. It has to be “new” RRSP money, not just a transfer from another Tangerine ING Direct RRSP product.

It’s important to understand that you are NOT earning 2.5% on your investment for only investing for 3 months. For example, if you contribute $1 000 to your RRSP on January 1, you will not get paid $25 on May 1; You would get a bit less than 1 /4 of that amount, or about $6.

After July 31, the rate will drop down like a rock, probably to the previous rate of 1.35% or less per year. So you will want to keep working on your investment plan and shift the money once you know where you want to keep it for the long term.

There are no fees or service charges nor is there any fee to transfer your RRSP money out of your Tangerine ING Direct ISA to another financial institution at the time this article was written in January 2014. (Always phone and check for changes to fees and transfer fees BEFORE making an investment! Things can change for the worse.)

I will no longer recommend Tangerine because it will charge a transfer fee.

Peoples Trust
Peoples Trust does have free transfers of RRSP funds to other institutions. (Although you should confirm this again before investing.) It only offers GICs, however. There is a 1-year-term non-redeemable GIC available with a minimum investment of $1 000. If you know you won’t be ready to invest the money elsewhere for a year, it is a possible choice to consider.

Home Trust
Home Trust also appears to have free transfers of RRSP funds. (Again, confirm before investing in case this has changed.) It offers 1-year-term non-redeemable GICs and also 90-364 day short-term investments. The minimum investment is $1 000 for a GIC and $2 500 for a shorter term investment.

PC Financial
PC Financial does not offer free transfers of your RRSP funds to other financial institutions. I won’t recommend them for that reason.

Other Institutions
I’m sure there are other places, especially credit unions or trust companies, that can offer similar benefits. If you use one, please share some information about it with a comment.

Where Do I Park My RRSP Contribution?

UPDATE: I no longer will use Tangerine as previously described because they now charge a transfer fee. I usually do drop our RRSP investment in to Tangerine ING Direct in January, and then move it by transferring it to one of our other planned investment choices. It’s worked very well for me in the past, especially since we can make the contribution online with a couple of mouse clicks, and can print off our official RRSP contribution tax receipts very easily. (No waiting for the mail!)

 

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Do you already have a RRSP investment strategy or are you still researching your options? Do you ever park your new RRSP money temporarily until you can use it effectively? If so, where? Please share your views with a comment.

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