Norma Walton: Money Styles

I have twin boys, fraternal, who are 10 years old.  One is a saver and the other a spender.  My eldest (by a minute) has saved $400 while his brother has a mere $90.  My youngest told me the other day he wanted to buy a Kindle on Kijiji for $80 because he could afford it whereas his brother decided he was going to wait until we had our garage sale to determine whether he wanted to spend any money to buy one.  Both are athletic and love to trash talk.  My frugal son will wager conservative amounts on games whereas the other refuses to risk any of his money on a game of chance.

spender and saver

Each of us, even those raised in the same environment, will have a unique money style.  Identifying your money temperament is critically important to determine the sort of money decisions you should make in your life.  If you are a saver, you may not want to put your capital at risk in an investment.  You may only want to continually add to that savings year over year.  If you are a spender, you may have nothing to invest and if you do happen to inherit some money, you may be more comfortable with risk because having savings is not as important to you.  If you have some money to invest, it is likely a good idea to determine your money style before choosing an investment.

My husband once worked with a fellow named Carlo.  Carlo invested $5,000 with a broker in the late 80s and asked the broker to buy Dell stock.  Every day he checked the stock price and would fret and panic if it went down or he thought it might go down.  Every day he called his broker to ask his advice on whether to hold or sell.  Every day he lost at least two hours of his day focusing on his investment and worrying about what might or might not happen.  After about 30 days he sold it all and decided never to invest in the stock market again.  I am sure his broker was relieved.


I started buying real estate with investors in 2003.  It did not take long to notice that of the 20 investors in that project, some had a stomach for the risk of the investment and others did not.  The plan had a three year timeline yet some of the investors would call me every week for an update and it was obvious they were losing sleep.  When a healthy profit was paid out inside of three years, some were happy, some were disappointed, and some were just relieved to have their money back in the bank where they knew it was safe.

Over the years I have met the following investor types:

  1. The conservative: This person needs to keep her money in cash in the bank or in GICs or savings bonds.  Otherwise she worries about losing her capital.  Her goal is capital preservation above all else and the amount of interest she earns is almost irrelevant.  She is uncomfortable with any degree of risk that has any possibility of decreasing the amount of money she has saved.
  2. The seasoned investor: This person is knowledgeable about various types of investment and has been investing his money for many years. He is comfortable taking some risk with his money provided he understands that risk and feels he can evaluate and assess the nature of the risk and the possible returns and the possible outcomes.  He may invest in long standing public companies, in REITs, or in private rental real estate properties.  He generally will have an advisor with whom he consults and will generally follow that person’s advice.
  3. The investor in a hurry: This person wants to get rich quick.  He believes in investments that are too good to be true.  He is constantly disappointed by the failure of his investments and his loss of money but he is incapable of changing the way he invests the next time.
  4. The entrepreneur: She is comfortable with risk and runs her own successful business.  She evaluates an investment opportunity based on her business experience and her assessment of the character and competence of the person running the investment.  She will often invest in other small businesses or projects that she understands due to her experience running her own business.  She wants something she has some control over in some capacity.

There are many types of investments.  For your own personal peace of mind, you should determine what is most important to you in making an investment before you consider putting any of your money at risk.  It might be the potential rate of return on project completion; perhaps it is the safety of your principal investment.  It could be that you know the person who is investing the money and trust that person.  Maybe you want an income from your investment to top up your existing income.

risk 2

Once you determine your primary objective for investing and you assess your personal tolerance for risk, you can evaluate possible investments to determine if they meet your criteria.  If you match your personal money style to the investment, you will likely sleep easy no matter what happens.

GICs, RRSPs and TFSAs – what make sense for you?

As usual for this time of year, financial institutions across Canada are trying to find a way to separate you from your money – not actually stealing it but rather asking you to give it them (lend) in return for some interest over some period you select.

There are traditional GICs that pay a fixed rate for each year in the term you choose.  There are “rate-riser” GICs where the nominal annual rate increases each year – usually contained in 3-year versions.  Some are cashable before maturity, others are locked-in (unless you happen to die of course).  Some companies issue and promote index-linked or equity-linked GICs and even use words such as “risk-free” to try and confound potential purchasers.

The traditional parts of the banking system (banks, trust companies, credit unions and caisse-populaires) generally restrict their offerings to those with maturities of 5 years and less.  The only reason being that they can then promote “your capital is fully guaranteed or protected” by deposit insurance through CDIC (Canadian Deposit Insurance Corporation) or the CUDIC (Credit Union Deposit Insurance Corporation) or some other provincial or territorial equivalent body.  All true, of course, but what does that really mean to you and I?  Nothing, quite frankly.

On the insurance side of the fence, these same products are available but terms can (if you so choose) stretch up to 20 years and are also protected to similar limits by ASSURIS – the insurance industry equivalent to CDIC and CUDIC coverage.

GIC ladders are increasingly popular as people are reluctant to lock in large sums for a single term since no-one is able to predict future rates – and if rates go up, everyone wants in!  A ladder works quite simply.  You divide your investment into say 10 equal pieces. With 1/10th, you purchase 1 year GIC, with 1/10th you purchase a 2-year GIC – then repeat until all 10 pieces are used.  You now have 1/10th of your money coming due every year so you can catch rising rates and are protected from dropping rates.  As each matures, you then just buy 10-year GICs.  Do this with each years’ deposit to your RRSP and TFSA, and in a short time, you have a well-balanced GIC portfolio.

No doubt you have heard or read about Equity- or Index-linked GICs.  Many financial institutions market variations of these products.  The intention is to provide the guaranteed return of your principal and give you the potential of higher returns based on some external equity fund or market index.  There are no options for early withdrawal.  Let’s visit with Sarah and Lee.  They are making plans for their annual contributions and are frustrated with the choices available for several reasons.

This product is not always available.  Many institutions only offer these products during “RRSP Season”.  In addition, sales of new issues are sometimes suspended because of periods of poor market performance.

Limited choice of terms.  Usually these products are only offered for a 3 or 5 year term.  If Lee and Sarah want a different term, they are out of luck.

Limited choice of equity or index links.  The company offering the product makes the investment choice.  All issues have a maximum rate of return that they will pay – a cap on returns.  Clients are in a take-it or leave-it position.

Lee and Sarah are looking for greater choice and control over their investment, both in duration and the investment performance portion of the GIC.  They are looking for a better way to invest and get the best of both worlds.  There is good news for them – it can be done and without the restrictions of the other products.

Lee and Sarah, together with their financial advisor designed their own equity-linked GIC with no restrictions, full flexibility and no cap on returns.

First, they choose their own term.  In most cases, a longer term – say 5 to 7 years at least, is preferable.  Time is their friend since it gives the equity portion of their investment a higher probability of good returns.  A term of 10 years or more is even better!

Next, they buy a plain, regular, off-the-shelf redeemable GIC to guarantee their full principal. After discussing things, they decide a 7-year term is appropriate and they have $75,000 to in their current plans.  After pushing a few buttons on a financial calculator and knowing the 7-year GIC rate is 4%, they need to deposit $56,993 today so it will be worth $75,000 in 7 years.

Finally, they choose their equity investment.  With just over $18,000 left to invest in equities, they now consult their advisor for an appropriate solution.  They can use mutual funds, segregated funds, Index funds, ETFs or individual stocks or bonds.  Their advisor will have them complete a Risk Tolerance questionnaire to determine appropriate choices.  This will be their profit with no cap!

Sarah and Lee are happy to have control of their investment with no upside limits and no restrictions on liquidity or withdrawal.  Shouldn’t you take control of your choices?

Don’t try and make your decisions in a vacuum.  A well-qualified advisor is your friend – particularly one has access to broker-direct services throughout both the traditional and insurance-industry GIC product line.  Check with the Money Magazine, Fall 2014 issue and you can see that sometimes using a deposit broker can increase yields on traditional GICs by up to 40%!

Annuities – how they work and why have one!

Retirement is near or perhaps you are already retired. It’s time for choices. How do you want to receive your income? Is an annuity a good choice?

Annuities can be considered as backwards, long-term mortgages with a couple of twists. Rather than a financial institution giving you a lump sum and you repay them monthly, the annuity does the opposite. The payment to you is normally a level fixed amount that is payable for as long as you live with a minimum payout guarantee. You also have the choice of having payments continue for as long as at least one person is alive in the case of joint annuities.

Annuities can be purchased with both registered and non-registered money. If purchased with registered funds, the payments are fully taxable to you. If you purchase the annuity with non-registered money, then only a small portion will be taxed – most of it will be tax-free.

So what is the attraction of an annuity?
 Guaranteed income for your lifetime (or the lifetime of 2 people for joint annuities)
 You cannot outlive your money
 You want to minimise your income tax payable (from non-registered funds called “Prescribed Annuities”) compared to other investments such as mutual funds or GICs
 You do not have to worry about the ups and downs of investment markets – no management needed
 You want to minimise the impact of lifestyle income reducing your OAS payments under the clawback rules in the Income Tax Act
 The principal of the annuity is protected from claims by your creditors
 You can name a beneficiary (or beneficiaries) for the remaining payments if you pass away before the end of the guaranteed period

Nothing is perfect, so what are other considerations?
 Once purchased, it cannot be cashed
 You cannot change the level of income or other terms after it is purchased
 You no longer have control of the money or how it is to be invested or managed

Some of the choices you will need to make include:
o Single life or joint life?
o Do you want a guaranteed payment period and if so, for how long?
o If you chose a guaranteed payment period, who should be the beneficiary if you pass away before the end of that period?
o Do you want level or increasing payments?
o Should you replace the capital used to purchase the annuity with life insurance so your heirs can still get the full value of your estate?

Could an annuity be the best choice for you?

Why so much ado about interest rates?

Mal Spooner
Mal Spooner

Why the popularity of shorter-term interest-bearing securities among Canadians, in particular GIC investments?  In fact, we in Canada are not the only investors who seem satisfied investing our money knowing that the rate-of-return might just barely cover the rate of price inflation, with a significant risk of actually losing money if inflation should rise even modestly.  And it is not just people who are content with the arrangement between ourselves and the borrowers of our money – banks, insurance companies and credit unions alike – corporations have been hoarding cash since the Financial Crisis too.

This past summer, Statistics Canada reminded us that corporations in Canada continued to grow their cash hoard rather than invest the funds in their businesses.  Of course, like people, companies don’t actually hold cash, but rather invest the money in low risk short-term interest bearing securities, often in Government of Canada T-bills and bonds, as well as commercial paper offered by financial institutions.

At the end of the second quarter of 2008, corporations held $373.4 billion in cash balances (Statistics Canada November 17th, 2009 study: Indebtedness and liquidity of non-financial corporations).  By the first quarter of this (2014) year the number had grown to a whopping $629.7-billion. So why the stubborn tendency to tolerate a near-zero rate-of-return?

There are at least two factors at work in my estimation.  One has to do with the economics of interest rates in the current environment, another with human nature and demographics.

First of all, what is an interest rate?  It embodies three important expectations-related factors: Real returns, inflation and risk.  We all are reluctant to part with our cash unless we’re able to earn what economists call a ‘real’ return.  Ask yourself, what rate-of-return would make you happy if there was essentially no risk (default, volatility) to speak of and no price inflation.  Whatever you buy today, will in theory cost you the same price next year and every year after that.  Most agree that the very long-term real rate of interest is somewhere between 2% and 4%.  Real Rates Canada 2004 to 2014However, you can easily see from the graph that the real rate of return provided by Government of Canada (as low risk as you can find) long-term real return bonds over the past ten years has been driven down since the Financial Crisis, as all governmental central banks strove to fight disinflation by dampening the general level of interest rates.

Has the return we expect from lending our funds really adjusted downward, or is it that the availability of securities providing the returns we normally demand has changed?  My guess is most folks would agree that the adage ‘once burned, twice shy’ aptly summarizes our tendency to be  biased by recent experience.  It is human nature to be sensitive to bad or good things that have just happened and to oftentimes unreasonably expect them to continue.  Also, we are confronted by a lack of options.  Securities available to us are not promising the rates-of-return we want, given the amount of risk we are prepared to stomach.

In fact, a quick look at one of many high-dividend oriented ETF’s, the iShares Core S&P/TSX Composite High Dividend Index ETF suggests that a collection of dividend paying stocks yielded 4.31% (as of October 2, 2014) over the past (trailing) 12 months.  As a bonus, the tax treatment of dividends is more generous than it is for interest income.  Indeed the stock market has done perhaps too well over the last few years, but judging by the massive dollars invested in short-term securities those equity returns have not been earned by everyday people. The issue is people just don’t seem to want the volatility that comes with investing in stocks; even when the selection of stocks is less risky than the overall stock market.  A real return with some risk is less attractive than no return at all, and it has been like this for quite awhile now. The second ingredient to interest rate levels is inflation expectations.

Source: Bank of Canada
Source: Bank of Canada

Admittedly, we haven’t seen a whole bunch of price inflation have we?  Central bank policy around the world has been more interested in creating some inflation, fearing that disinflation would prove devastating to our economic welfare.  These efforts are in fact evidenced by the historically low level of administered interest rates we have.  If our collective expectations concerning future price inflation are significantly different from what we are experiencing then our behaviour will reflect it. Could it be that the extraordinarily high commitment to GIC’s and equivalents is that Canadians, and Americans are doing it too, are content to simply keep their money (even at the risk of a small loss) intact until rates of inflation and returns get back to levels they think they can believe in?

The third important determinant of interest rate levels is our toleration for risk, and it exists in many different forms.  Our appreciation for the risk of default was certainly modified during the Financial Crisis; and in short order we’ve been willing to tolerate none of it.  We’ve turned a blind eye to significant stock market appreciation and even bond returns preferring to ‘check’ rather than ‘raise’ and ‘all in’ has certainly been out of the question.   But this intolerance to take risk has become very sticky at the individual level and at the corporate level.  This might have more to do with demographics than anything else.

Younger people are quite surprised to learn that real interest rates got as high as 6% – 9% during the mid-1980’s, and during the 90’s and up to the turn of the millennium ranged around the 4% level. (Source: I was there!)  There is a large proportion Canadians who lived through those times.  According to Statistics Canada there is roughly an equal number of young people as there are older people.  Ratio of old to young in CanadaHalf of us in Canada might consider those times ancient history (or have no interest at all in history), and the other half feel as if it was just yesterday that mortgage rates were in the double digits.

These more seasoned citizens look at the rates of return offered by the bond market and similar investment vehicles and say to themselves: “Hey, if I buy a longer term bond, I’m earning next to nothing anyway, so I’ll just put money into shorter term GIC’s and term deposits that are effectively earning nothing and avoid the risk of having my money tied up.”  Having experienced periods of rising inflation and higher real rates, they (and yes, I’m a member of that distinguished group) are inclined to wait until more generous returns come back – if they ever do come back.  And don’t forget, these same folks might actually have to spend their savings sooner rather than later suggesting that any risk of a big loss in the stock or bond market is simply untenable.

Most people when they think of Canada bonds, immediately think of Canada Savings Bonds.  They are not the same at all.  Normal Government of Canada bonds, held in mutual funds and pension plans for example, rise and fall in value as interest rates change.  Although we’ve been through a very long stretch of falling interest rates, which made bond prices steadily go up in value, there have been and will be periods when interest rates rise and people lose money in bonds.  It is smart to learn how the time value of money works and how and why bonds can make or lose money.  There is a plethora of online videos that can help you understand bond valuation and the investment in your time to learn bond dynamics is well worth the minimal effort.

The yield curve is simply a plot of interest rates corresponding to varying maturities at a point in time.  Ordinarily, we expect to earn higher returns the longer our money is lent to someone else.  GIC rates are lower when the hold period is 3 months than they are when your money is tied up for 3 years.  The same should be true for bonds.  But consider where we’ve come from:  US Treasury Dept. Yield CurvesThe graph shows the yield curves for US Treasury bonds as of October 2007 compared to the same today.  The 2007 yield curve reflects the uncertainty at that time about, well almost everything.  We didn’t know if we should accept lower rates for shorter investments or high rates for longer term bonds so the curve was somewhat flattish.  What would inflation be?  Which financial institution would be solvent?  Would the US government even be solvent?  Many questions but few answers in the midst of the financial turmoil.

The more current yield curve reflects today’s reality.  The only interest rates we can earn in the short-term are hovering close to zero, and since longer-term risk-free bonds are paying us barely one percent over inflation why assume the added risk.  If interest rates do rise from these low levels, then you will certainly lose money owning the longer-term bonds.

In a nutshell, people have doing what they should be doing – seeking shelter and waiting it out.   A side-effect of this behaviour is that our willingness to tolerate no return for lots of safety has stalled the return to financial market normality.  By stubbornly remaining in GIC’s, term deposits and money market funds we are inadvertently delaying what we desire – a decent return for taking some risk.  It’s only when money moves freely and to a large extent greedily that financial markets function properly.  This presents quite a conundrum for policy makers around the world, who’ve been praying that businesses invest in business instead of hoarding their cash, and people begin spending more and taking on more risk by investing their savings in more diverse ways.

There are many pundits who have suddenly jumped on the bandwagon predicting a stock market meltdown and impending bond market rout.  If they are right and this happens then we might finally get what we want after-the-fact; returns that compensate us fairly for inflation and risk.  In fact the stock market is suffering of late, and a shift (or rather, twist)  in the yield curve is already causing some havoc for bond managers.  The longer-term rates have declined rather than risen as expected, and mid-term bond yields have surprisingly risen – causing grief even for gurus like Bill Gross, who co-founded PIMCO and until recently managed one of the world’s largest bond portfolios.

If investors have been doing the right thing to feel secure, what should they be doing next?  Over my own lengthy career I’ve found that at some point it is important to combat inertia and begin moving in a different strategic direction.  As stock prices adjust downwards, take advantage of what happens.  The dividends paid on the increasingly lower stock prices become more attractive quickly, and remember they are taxed at preferential rates.  The world economy may continue to grow at only a snail’s pace, so why not test the waters so to speak and begin putting some funds into longer-term interest-earning bonds.  If inflation does creep up and interest rates increase some, then put even more funds to work at the higher yields.    Having done the safe thing during turbulent times, perhaps it’s time to do the smart thing.  Experience teaches us that the best time to be doing the smart thing is almost always when it is most difficult to do it.  The longer you earn nothing, the poorer you get.


Has Modern Portfolio Theory (MPT) outlived its’ usefullness?

In the early 1950s, Dr. Harry Markowitz was awarded the Nobel Prize in Economics for his work in defining the relative relationship between risk and reward when analysing investments. Considering that he did all of this work without the benefit of modern computers, this was truely ground-breaking research – and up until recently, has stood the test of time. MPT evolved into a resulting concept of plotting investment portfolios along an “Efficient Frontier” based on Harry’s formulae. The theory is that each point on the curve of the Efficient Frontier represents the greatest potential return for a given level of risk acceptance.

However, is it still valid today? I am not going to go all mathematical on everyone – I assure you – but the relationships charted and modeled by Dr. Harry were from the late 1940s and early 1950s. I think we can all agree that the economic environment today is vastly different in size, scope, volume of transactions, new products, regulation, more exchanges and other factors such as the use of arbitrage to name but one.

While I still believe there is a correlation between risk and reward, I am having increasing doubts that this relationship can be accurately modeled any longer.

Again, to avoid going into crazy formulas few would even try to follow, I decided to examine how some very large portfolios are being managed – such as the Canada Pension Plan, the Ontario Municipal Employees Retirement System (OMERS) and the Harvard University Endowment Funds. All of the data for these funds is publicly available – very easily too – and all make very interesting reading.

To quote from the OMERS website: Investing Globally
“Our goal is to diversify OMERS assets on a global basis to capture investment returns from economies that move on a different cycle than the Canadian economy and to reduce the home market bias of “too many eggs in one basket” (recognizing that Canada is less than 3% of world investment markets).”

Their investment report goes on to say “In order to satisfy its obligations and secure the pension promise, OMERS has implemented prudent and evidence-based investment strategies in public and private markets that target positive absolute returns.”

The CPP Investment Board (CPPIB) 2014 Report states: “Our distinctive investment strategy, known as the Total Portfolio Approach, ensures that we can maintain – or deliberately change – targeted risk exposures across the entire portfolio….”

The Harvard Management Company (HMC) report for 2014 includes the statement: “The Policy Portfolio differs from a traditional stock/bond portfolio, including allocations to less-traditional and less-liquid asset categories, such as private equity, real estate, and absolute return strategies.” All of HMC’s investment decisions also follow the United Nations Principles for Responsible Investment (Socially Responsible Investing in other words).

None of the reports mention a single thing about MPT. So, I decided to take their portfolios and plug them into an Efficient Frontier calculator – guess what? None of the portfolios from these well-known, and arguably leading, investment management teams fit anywhere close to the EF curve! The largest distance, interestingly, was HMC.

This is a blog – not a research paper to be sure – so I won’t bother including the graphs and numbers. To really understand this you need to do your own research and analysis – don’t take anyone’s word for it – you need to take personal responsibility in the management of your investments. But don’t let an advisor push a bunch of graphs and numbers under your nose and quote MPT and the Efficient Frontier – they are both more than 60-years old and they do not take into account the realities of markets in 2014 and beyond!

What is a GIC? And why would I want one anyway?

Written by Ian R. Whiting, MONEY® Canada Limited || MONEY® Magazine

 GIC is an acronym for Guaranteed Investment Certificate. These are available to Canadian investors through banks, trust companies, credit unions, caisse populaires and some life insurance companies. When an investor buys a GIC they are loaning the financial institution a sum of money for a pre-determined period of time and in exchange will be paid interest. The “guarantee” behind a GIC is that the principal (the initial amount invested) is protected by the seller and will not lose any value over its term.

When it comes to investing, there is no “one size fits all” solution. Investment options – like Guaranteed Investment Certificates (GICs), mutual funds, bonds, and stocks – all have different growth potential and risk. Investments range from totally secure with limited growth to highly volatile with maximum growth.

GICs are on the safer end of the spectrum, in terms of protecting your principal and a fixed rate of return. Any money you deposit in a GIC is guaranteed by the issuing financial institution to provide a known rate of return, which makes it easy to figure out how much money you’ll have when the term is completed. GICs have a wide range of terms and flexibility. Some are non-redeemable, which means that you can’t move the money out until the end of the term. Generally speaking, the longer the term, the better the interest rate available.

GICs are also available in registered investment vehicles such as RRSPs, RESPs, or TFSAs. If you invest in a GIC within one of these registered plans, you may benefit from tax savings and/or deferring tax payments until you withdraw your money from the plan.

3 reasons to choose a GIC:

  1. If your savings goal is short term (like within the next 1-3 years, or sometimes more).

You can’t predict when markets will rise or fall, so if you won’t have enough time to ride out a potential market slump, a GIC—with its guaranteed rate of return—is a safe investment option.

  1. If you absolutely cannot tolerate any drop in value of your investment.

With some savings goals, you know how much money you will need and when you’ll need it—for example, you want to buy a car in two years and that car will cost $15,000. With the right initial contribution and rate of return, a fixed-term GIC will ensure you build that savings amount. A guaranteed rate of return is also good if any kind of risk makes you extremely nervous—a GIC may be what you need to sleep at night.

  1. If you want to take advantage of tax savings (in an RRSP, for example) but aren’t ready to commit to a more aggressive savings strategy.

In most cases, GICs aren’t a great vehicle for retirement savings—with long-term goals, the rates of return just aren’t high enough to allow for the real benefits of growth to take effect. But if you can’t handle even a minor fluctuation in the market and want to use GICs as part of your RRSP, you may want to consider a laddered strategy—which involves purchasing GICs of different terms and renewing them when they mature. An investment advisor can explain this strategy in more detail.


Keep inflation in mind

If you are earning a lower rate of return over a longer, fixed period of time, you should consider the effect that inflation may have on the value of those savings. Recently, Canada’s inflation rate has averaged about 2 per cent. That means that something for sale in 2014 will have a price tag 2 per cent higher in 2015, 4 per cent higher in 2016 and so on. If you’re saving for retirement, you may be saving for purchases that you’ll make 20, 30, or even 60 years down the line. Imagine the impact inflation will have in that amount of time. To keep up with inflation, your long-term investments need to grow at least 2 per cent every year.

Inflation and your portfolio

To make sure the money you invest will have greater purchasing power in the future, you have to understand the impact of inflation on your portfolio. For example, its common sense that a 6% annual return is better than a 3% annual return, but the difference between the two is even more significant when you consider recent inflation of about 2%. That means that the first 2% of real purchasing power on your investment dollars will be lost to inflation – and, as such, the lower-paying investment returns just 1% more than the inflation rate itself. Over the long term, if your investment returns barely cover the inflation rate, the compounding effects of 2% annual inflation translate to more groans at the gas station and grocery store.

To have greater purchasing power in the future, your investments have to outpace inflation. By building a portfolio with investments that resist the effects of inflation, you can hold on to your purchasing power. Investing in the stock market has its risks, and for “risk-free” investment products (like holding cash), the biggest risk is inflation. As a result, when it comes to reaching your retirement goals, playing it safe isn’t usually the best strategy.

In short…

Depending on your savings goals and attitude towards risk, a GIC may be a good addition to your investment portfolio. Their guaranteed rates of return provide stability and a reliable source of funds at the end of your term. Most people are familiar with the concept of going to a bank and asking for a loan. That loan will come with a set of conditions such as the amount of interest that will be charged and the date by which it must be repaid. Purchasing a GIC is essentially the same thing but in reverse. Instead of someone borrowing money from a bank, in this case the bank is borrowing money from you.

GIC Minimum Purchases and Interest Rates

Usually a minimum of $500.00 is required to purchase a GIC, although there may be exceptions depending on the term and the financial institution involved. The interest rate is determined at the time of purchase and may be fixed or be varied over the term. The rate is generally better than a regular savings account but usually offers a lower rate of return than many other kinds of less secure investments. This will be clearly defined at the time of purchase and will likely vary among different financial institutions.

Terms of GIC Purchases

The term of a GIC can be as little as one day or as long as 10 years, depending on the financial institution involved and the products they offer. In most cases the term is pre-determined at the time of purchase. The final day of the term is known as the maturity date and in most cases, the longer the term the higher the interest rate.

Generally speaking, once a GIC is purchased it must be held until maturity and can only be redeemed early under special circumstances. Early redemption may result in the loss of any interest earned to that point and may also be subject to a penalty fee. One exception is a cashable GIC which can be redeemed within the term at the discretion of the holder, but while they offer greater liquidity they also tend to offer a lower interest rate.

Advantages and Disadvantages of Investing in GIC’s

GIC’s are a low risk and simple investment to own. In most cases they provide stable and predictable income and are not greatly affected by market fluctuations. The principal is also usually guaranteed by the financial institution selling it and even in the event of default, the CDIC (Canada Deposit Insurance Corporation or similar such entity for credit unions, caisse populaires and life insurance companies) offers additional insurance of up to $100,000.00 (however be sure to confirm this before any purchase is made because it is not always the case).

On the down side, most GIC’s do not offer a great deal of liquidity and it can be hard to free up those funds in the event of an emergency. As well, although the interest rates offered are usually superior to a regular savings account, this type of investment may still give back a relatively low rate of return, and if held outside of an RSP, the interest is subject to income tax rate.

There are many different types of GIC available in an effort to cater to different investor needs and goals and it is important to fully understand the conditions attached before making a purchase. Remember to always consult a professional investment advisor or financial planner before making any kind of investment.

The many benefits of GICs
Whether you’re looking for a low-risk investment or an effective way to diversify your portfolio, there are many benefits to GICs:

  • Growth – Your investment is guaranteed to grow, regardless of how the markets perform.
  • Dependability – your interest rate is guaranteed not to fluctuate throughout the term.
  • Security – your original investment will be returned with interest at maturity, guaranteed.
  • Flexibility – inside or outside your RRSP, you can choose the term and interest options that are right for you.
  • Simplicity – an investment that’s guaranteed to grow – what could be simpler?


With courtesy to:
Alberta Treasury Branch
Manulife Financial


Custom-built Equity- or Index-linked GICs

No doubt you have heard or read about Equity- or Index-linked GICs. Many financial institutions market variations of these products. The intention is to provide the guaranteed return of your principal and give you the potential of higher returns based on some external equity fund or market index. The options for early withdrawal are virtually none – except your death! Sarah and Lee are frustrated with the choices available for several other reasons too.

This product is not always available. Many institutions only offer these products during “RRSP Season”. In addition, sales of new issues are sometimes suspended because of periods of poor market performance.

Limited choice of terms. Usually these products are only offered for a 3 or 5 year term. If Lee and Sarah want a different term, they are out of luck.

Limited choice of equity or index links. The company offering the product makes the investment choice. All issues have a maximum rate of return that they will pay – a cap on returns. Clients are in a take-it or leave-it position.

Lee and Sarah are looking for greater choice and control over their investment, both in duration and the investment linked to the GIC. They are looking for a better way to invest and get the best of both worlds. There is good news for them – it can be done and without the restrictions of the other products.

Lee and Sarah, together with their financial advisor designed their own personalised equity-linked GIC with no restrictions, full flexibility and no cap on returns.

First, they choose their own term. In most cases, a long term – say 5 to 7 years at least, is preferable. Time is their friend since it gives the equity portion of their investment a higher probability of good returns. A term of 10 years or more is even better!

Next, they buy a plain, regular, off-the-shelf redeemable GIC to guarantee their full principal. After discussing things, they decide a 7-year term is appropriate and they have $75,000 to invest. After pushing a few buttons on a financial calculator and knowing the 7-year rate is 4%, they need to deposit $56,993 today so it will be worth $75,000 in 7 years.

Finally, they choose their equity investment. With just over $18,000 left to invest in equities, they now consult their advisor for an appropriate solution. They can use mutual funds, segregated funds, Index funds, ETFs or individual stocks. Their advisor will have them complete a Risk Tolerance questionnaire to determine appropriate choices. This will be their profit with no cap!

Sarah and Lee are happy to have control of their investment with no upside limits and no restrictions on liquidity or withdrawal. Shouldn’t you take control of your choices?

Is there such a thing as the “perfect” asset?

If you found an asset that met all 13 of these criteria – would you purchase it? What about if the asset made 12 out of 13? What about 6 out of 13? Or 3 out of 13?

◊ Safe harbour against the vagaries of market turmoil
◊ Welcomed by lending institutions as “Grade A” collateral – welcomed everywhere
◊ Excellent liquidity
◊ Can’t lose money through market movement once it has accumulated the values
◊ Tax-deferred or tax-preferred growth
◊ Competitive return on investment after set-up
◊ Guaranteed internal loan options without recourse
◊ Deductible contributions or deposits
◊ Creditor-proof to the greatest possible extent
◊ Unstructured and optional loan repayment plans
◊ High contribution limits
◊ Tax-free distribution to named heirs
◊ Survivor benefits many time greater than accumulated internal values

Chances are if you could purchase such a product, you would do everything in your power to acquire as much as you could!

I haven’t found one single product that matches all 13 – can you? I have one that meets 12 of the criteria. Can you guess? Stay tuned to a future blog – or you can email me at [email protected] for the answer if you are impatient!

How to Tell the Difference Between Investing and Gambling!

gamblingI saw a question posted on a popular social network. The question was: ‘What is the difference between gambling and investing?” I’m inspired to reproduce (edited with permission) the following excerpt from A Maverick Investor’s Guidebook (Insomniac Press, 2011) which I believe provides as good an answer as one might find.

How to Tell the Difference Between Investing and Gambling!

“How do you develop ‘smart thinking’ and when do you know you’ve got ‘avarice’?”

My instinctive response would be: “You always know when you’re being greedy. You just want someone else to say that your greed is okay.” Well, I’ll say it then: greed is okay. The proviso is that you fully understand when greed is motivating your decision and live with the consequences. Avarice is driven by desire, which is not a trait of an investor.

Remember, it’s best if investment decisions are rational and stripped of emotion. Greed is associated with elation on the one hand, and anger (usually directed at oneself) on the other hand.

When decisions are motivated by greed, I call it gambling. In my mind, there are different sorts of gamblers. Some gamblers place modest bets, and if they win, they move along to another game. For me this might be roulette. There are those who enjoy playing one game they’re good at, such as blackjack or craps, hoping for a big score. Finally, there are those who are addicts. I can’t help those folks, so let’s assume we’re just discussing the first two types.

It’s okay to do a bit of gambling with a modest part of your disposable income. In fact, investors can apply some of what they know and have fun too. Unlike the casinos, financial markets have no limits or games stacked in favour of the house. It’s the Wild West, and if an investor understands herd behaviour and the merits of contrarian thinking, and does some research, the results can be quite lucrative. Whether using stocks, bonds, options, hedge funds, domestic mutual funds, foreign equity or debt funds, or commodity exchange-traded funds (if you don’t know what these things are and want to know, buy a book that introduces investment theory and the various types of securities), applying investment principles will help you be more successful.

gamblerTo put it plainly: counting cards may not be allowed in a casino, but anything goes when it comes to markets. Just don’t forget that most of the financial industry is trying to make your money their money. There’s a reason why a cowboy sleeps with his boots on and his gun within reach.

The fine line between gambling and investing is hard even for old cowhands to pinpoint. Investing also involves bets, but the bets are calculated. Every decision an investor makes involves a calculated bet—whether it’s to be in the market or not at all, biasing a portfolio in favour of stocks versus bonds, skewing stock selection in favour of one or several industry groups, or picking individual stocks or other types of securities.

I met a lady once in line at a convenience store. She bought a handful of lottery tickets, and I asked her, “Aren’t the odds of winning pretty remote for those lotteries?” Her reply was, “The odds are good. There’s a fifty/fifty chance of me winning.” Confused, I asked, “How do you figure?” I laughed aloud when she said, “Either I win or I lose; that’s fifty/fifty, isn’t it?”

A maverick investor knows there’s always a probability that any decision to buy or sell or hold can prove to be incorrect. The objective is to minimize that probability as much as is feasible. It’s impossible to make it zero. This is why financial firms have sold so many “guaranteed” funds lately. People love the idea, however impossible, of being allowed to gamble with no chance of losing. Whenever there’s a promise that you won’t lose or some other similar guarantee, my senses fire up a warning flare.

There’s usually a promise of significant upside potential and a guarantee that at worst you’ll get all (or a portion) of your original investment back. Many investors a few years ago bought so-called guaranteed funds only to find that the best they ever did receive was the guaranteed amount (extremely disappointing) or much less after the fees were paid to the company offering the product. If you think this stuff is new, trust me, it’s not.

guaranteedA fancy formula-based strategy back in the ‘80s called “portfolio insurance” was popular for a brief period. An estimated $60 billion of institutional money was invested in this form of “dynamic hedging.” It isn’t important to know in detail how the math works. Basically, if a particular asset class (stocks, bonds, or short-term securities) goes up, then you could “afford” to take more risk because you are richer on paper anyway, so the program would then buy more of a good thing. If this better-performing asset class suddenly stopped performing, you simply sold it quickly to lock in your profits. The problem was that all these programs wanted to sell stocks on the same day, and when everyone decides they want to sell and there are no buyers, you get a stalemate.

The “insurance” might have worked if you actually could sell the securities just because you wanted to, but if you can’t sell, you suffer along with everyone else—the notional guarantee isn’t worth the paper it’s printed on. Remember these are markets, and even though you see a price in the newspaper or your computer screen for a stock, there’s no trade unless someone will step up to buy stock from you. The market crash that began on Black Monday— October 19, 1987—was, in my opinion, fuelled by portfolio insurance programs. The market was going down, so the programs began selling stocks all at once. There weren’t nearly enough buyers to trade with. By the end of October ’87, stock markets in Hong Kong had fallen 45.5%, and others had fallen as follows: Australia 41.8%, Spain 31%, the U.K. 26.4%, the U.S. 22.7%, and Canada 22.5%.

Minimizing the Probability of Stupidity

If you’re gambling, follow the same steps you would as if you were investing. If it’s a particular stock you are anxious to own, do some homework, or at least look at someone else’s research available through your broker or on the Internet. When I was a younger portfolio manager, there were limited means to learn about a company. I would have to call the company and ask for a hardcopy annual report to be sent to me. When it arrived after several days, I’d study it a bit so I didn’t sound too ignorant, then I’d call and try to get an executive (controller, VP finance, or investor relations manager) to talk to me. If asking questions didn’t satisfy my need to know, then I’d ask to come and meet with them in the flesh. Nowadays, you have all the information you need at your fingertips. is a PRIME example of just one such source of valuable information available to investors today!

Mal Spooner
Mal Spooner

Is the General Practitioner a dying breed of Financial Advisor?

In my last blog, I introduced the concept of “strike teams” as a potential solution to the solo advisor trying to be “all things to all eople at all times” – which is, of course, an impossibility.

So what is a “strike team”? STs are groups of advisors – each with their own specialty or specialties – that work together as a team with EVERY client they each bring to the table. Clients and prospects are introduced to the entire team and the engagement is for the entire team. In the ideal world, this team would include specific formal business arrangements with an accredited mortgage broker, a business and personal banker, one or more CAs or CGAs and lawyers (or law firms) that cover all needed areas of professional practice.

I believe that both eisting clients and prospective clients have the right to expect full service from their advisors with the exception of those advisors who choose to hold themselves out as specialists in only 1 area of practice – and the clients know this and understand they have to go elsewhere for the balance of their financial needs. I believe advisors do a dis-service to themselves, their clients and the industry when they try to convince everyone they can do it all – it just isn’t possible, so why pretend?

I don’t see this as a need for every advisor to run around and find like-minded colleagues with whom they can immediately form this type of team. However, I firmly believe this is the way forward for advisors who wish to be at the leading edge of this profession. In closing, I am reminded of a statement I heard about the difference between generalists and specialists (from a few decades back I am afraid but it is even more true today):

A generalist learns less and less about more and more until they know nothing about everything while a specialist learns more and more about less and less until they know everything about nothing.