GICs | Financial Crooks

As I mentioned in another article, I don’t believe I can guess which way the equity markets are moving. So I rely on keeping a fairly fixed percentage in equities and in fixed income investments. That forces me to “buy low” whenever the markets drop and to “sell high” whenever they are surging upwards. Being very, very conservative, though, I keep about 50% of my portfolio in fixed income investments although where I keep it varies from year to year.

Are GICs are Great Investment? Where Did I Keep My Fixed Income in the 1980s?

I’ve heard many people dismiss the value of having a GIC in the 1980s when interest rates got frighteningly high because they said that inflation was also ridiculously high. I’m not so sure. All I know for sure is that the RRSP money I put in GICs in those years earned 9-15%. I’m not at all convinced that my *personal* rate of inflation in those years was 7-13%. In fact, my rent, which was my greatest cost, dropped twice due to oil patch layoffs and a need to keep paying tenants happy.

Nowadays, of course, it’s difficult to get a GIC paying even 3%. That doesn’t mean I’ve abandoned them though. I keep some of our emergency fund in a rotating series of 1-year GICs—each month 1/12 of the emergency fund GICs mature. If we still have jobs, I re-invest the money for another 12 months. I’m doing that because (a) it keeps the money out of sight so it doesn’t get accidentally spent (b) it helps if interest rates fall instead of rise in that 12 month period and (c) it ensures we would have enough money each month for a year to pay our essential costs.

I also keep some of our fixed income money in our retirement accounts in GICs. I used to keep quite a bit, but now that we have a non-registered investment account balance growing as well (because our TFSAs and RRSPs are maxed out) I’m keeping some of our fixed income dollars in the non-registered part of our portfolio, so that I can try to save the most tax. It’s tricky to decide where to keep which assets!

What About Bonds and Bond Funds? Am I Investing Any of My Fixed Income In Bonds?

For well over 5 years, everyone has told us to get out of our PH&N Bond Fund. I’m glad that so far we haven’t. Although there was one year (2015) when we lost 1.2% rather than gained anything on it, we’ve made a good return all of the other years, including 2016. Instead of selling our entire position, I just keep selling off a chunk each year to remove the growth of the fund and re-invest it elsewhere. For example, if I had 100,000 in the fund on January 1, and on March 17 it was worth 107,000, I would sell enough units to get $7 000 cash, which I invest elsewhere. I’ve done this “gains harvesting” 8 times in the last 5 years. I’m also have not invested any new money in this fund since 2010.

Other analysts recommend that if you are going to invest in a Bond fund, you should pick one that buys and holds bonds to maturity, not one that plays with Bonds, buying and selling them to try to make capital gains. If you buy units in a fund that holds the bonds to maturity, and if the term to maturity is short (say 1-3 years) you don’t have to worry about a huge decrease in the value of your investment. You might have to accept, though, a quite low return on your investment.

Historically, many people bought actual individual bonds or their coupons as investments. What commission you are paying on the purchase, though, is not transparent, and most financial institutions aren’t offering great prices for small buyers. If the value of an individual bond suits your needs, by all means buy it, but for me, it’s not worth the time to find a good deal.

Real Estate Investment Trusts, REITS, are NOT Fixed Income

I recently read someone say that they had invested their Fixed Income dollars into REITs. Sorry but that is NOT a fixed income investment. REITs can provide a good source of income but they are a type of equity. If their business struggles, the share price of the REIT can fall dramatically. They are also risky if interest rates start to climb, according to some analysts, because the often depend on borrowing money directly or on their tenants borrowing money.

I own some units of REITs but I count them in my Equity column, not my Fixed Income column.

Only Some Preferred Shares Offer Fixed Income

I only tried investing in Preferred Shares once. When the share price started to drop a bit, I got very nervous. I realized with the type of preferred I had purchased, I could lose money: if interest rates rose, the dividend would not seem high enough to justify the capital cost per share so someone would only buy my shares if I sold them at a lower price per share. I waited till the shares re-bounded to generate a small profit and sold them.

From what I’ve read so far, some preferred shares should be considered Equity and a very few could be considered Fixed Income. I don’t claim to understand them well enough to make a recommendation for or against investing Fixed Income in Preferreds. I have chosen not to, for now.

High Interest Savings Accounts Can Provide a Reasonable Fixed Income Return

Surprisingly, I’ve made a decent rate of return on my fixed income investments held in High Interest Savings Accounts, HISAs. In particular, I have been able to keep some of our non-registered money bouncing around between Tangerine, PC Financial, EQ Bank, Oaken Financial and others to ensure it earns at least 1.7% and often up to 3.1%.
Unfortunately, that interest is taxable. Still it helps keep the money at close to not losing ground against inflation. And it’s very easy to move the money—it just takes a few clicks of a mouse.

HISAs inside our brokerage accounts at BMO InvestorLine, CIBC Investor’s Edge, and RBC Direct Investing pay much less. Currently, they are paying about 0.5%. It’s still better than leaving it as “cash” in your account and earning nothing, but it’s not keeping up with inflation.

No Easy Answers for Fixed Income Investing

Between GICs, HISAs and the Bond fund, I’m averaging about 3-4% a year return before tax on my fixed income investments. (That’s why I’m staying in the Bond Fund.) It’s not much but it is probably almost keeping up with inflation.

It does mean that my true growth in the year has to come from the 50% of my investments in the equity markets. That is quite a responsibility for some stocks and index funds to provide. It’s been fine for the past few years because the capital value of our equities has been growing and many of them pay growing dividends. If we move into a “bear” or declining market, though, without interest rates improving, things could get painful quickly.
I don’t’ see any way that I am going to be able to control the market direction or interest rates, though, so I’ll continue with my asset allocation plan, re-balance regularly, and hope for the best!

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Do you use asset allocation to help decide whether to buy or sell fixed income investments? Please share your strategy with a comment.

Managing an RESP is easy for the first dozen years. You have to make some decisions at the beginning. (Family plan? Individual plan? Bank? Brokerage? 100% safe savings accounts and GICs only? Some risk with equity investing in stocks through ETFs or mutual funds or individual blue chip investments?) After a while, though, you fall into an investment pattern and just stick with it. But as your child (or eldest child) nears the age of starting post-secondary school education, you need to make some decisions again.

First: Move the Money for First Year Into Risk-Free Investments

If your child is going to attend a university and live in residence for their first year after high school, you can estimate that they will need at least $20 000. Programs like Engineering will cost more. Living at home might cost less. But $20 000 is a good starting estimate and it’s likely they will actually need more than that for a university program, unless you live in and they want to attend university in Quebec.

You may have that $20 000 invested in equities. It may be in a mirror-the-stock-market ETF, a mutual fund, or shares in specific companies. If, the week before you need to take it out in cash to pay for residence or fees, the stock market has a sharp pull-back you could be in trouble. A 10% drop in the equity market might drop your $20 000 to $18 000.

Many people who have RESPs with over $20 000 in them could probably delay liquidating the equities in the RESP for a while. They could find the money to pay for residence and tuition in other places, like their emergency fund. But that might not be a great idea: it can take a year or more for the market to rebound. And, of course, there is no “stop limit” that guarantees it will only decline 10%. It could crash like it did in 2008-2009 and take years to claw its way back up.

So if you’re risk averse like I am, you will probably want to get that $20 000 for first year into something risk free before it’s needed. When your child reaches the age of 15 or 16, you may want to put that $20 000 into a cash account or a GIC or term deposit of some kind. I’ll be checking the rates offered by various investments at BMO InvestorLine soon.

Next: Consider WHERE You Want to House Your RESP While Your Child Is Making Withdrawals

According to the CRA information for RESP providers (like banks and brokerages) once your child starts making withdrawals from the RESP, you cannot move the RESP to another institution!

So in the year or so before your child graduates from high school, you should evaluate your RESP provider. Are there fees to make withdrawals from the RESP? What type of paperwork will the provider require to make the withdrawals? Would it be easier to move the entire RESP to another provider with lower fees or less paperwork?

Reading about some of the strange requirements for RESP withdrawals that others have experienced in the past makes me nervous. Soon, I will start looking at the rules at BMO InvestorLine and deciding if they are acceptable. If not, I will need a few months to get the investments transferred elsewhere. So I’ll want to make the decision long before my child is in final year at high school.

Finally: Develop a Strategy for the Next Few Years for the RESP

If you have more than one child, you also may need to plan a strategy for the RESP. When will you liquidate any equity holdings? Will you sell them when a certain profit is achieved? Or will you sell them based purely on the time at which the money may be needed? Will you buy a series of GICs with 5, 4 and 3 year terms, or only use 1-year terms?

How will you make the division of the loot equitable? What if you liquidate the equities for your eldest child when the market is high but when you go to do the same for your youngest child the market has been down for years? Do you “owe” each child the same number of dollars for their education? Will you “hold back” some of the money from the eldest child in case you need it to keep things even for the youngest of several children?

It’s better to develop a strategy before the first child starts using the money. Which means my husband and I have some thinking to do!

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How much money do you expect your child to need for their first year of post-secondary school education? Will you try to set that amount aside in cash or fixed income investments a year or two before they finish high school? Please share your views with a comment.

Financial Crooks

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Tag Archives: GICs

If I Keep 50% of My Portfolio in Fixed Income What and Where Do I Keep It?