GICs: The problem with playing it safe

Will corporate bonds give her the boost she needs?

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From the September/October 2014 issue of the magazine.

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Heather Walker, 59 (Photo by Philip Cheung)

Heather Walker, 59 (Photo by Philip Cheung)

The problem

As a 59-year-old training administrator for a mining company, Heather is a member of her company’s defined contribution pension plan. She’s also mortgage-free. But in 2008 she suffered a 40% loss in her stock portfolio and has since slowly sold off all her high-fee mutual funds, putting her 100% in cash. “I have to pay more attention,” says Heather, who has started managing her own finances. After reading up on investing, she’s ready to rebuild her $200,000 portfolio—split evenly between registered and non-registered investments. She plans to add corporate bonds, but isn’t sure what to do about equities. “I have a low risk tolerance.”

The fix

Portfolio_Makeover_Sept_Oct_2014

Vancouver money coach Annie Kvick says losing 40% of your portfolio when you’re five to 10 years from retirement is stressful. But investing her entire portfolio in GICs and bonds is risky because Heather could lose her nest egg to inflation, or even outlive her money entirely. “Even though she wants safety, Heather needs some growth from equities for her portfolio to last,” says Kvick.

She wants Heather to keep 35% of her portfolio in cash, 25% in equities and 40% in fixed income. “By using exchange-traded funds (ETFs) and keeping fees low, she’ll get a 3.8% average annual real return,” says Kvick. She also wants Heather to think of her money in terms of three “buckets” of income. She’ll need one-third of her portfolio, or $70,000, between ages 65 and 75. So this first bucket will hold Heather’s ultra-safe all cash investments. The second $70,000 portion of her portfolio has a 15- to 25-year time horizon and will be used between ages 75 and 85; it can be structured 70% fixed income and 30% equities. The final $70,000 portion will be needed in 25 years or more, after age 85; it can be invested 50% in income and 50% in equities.

So Heather’s portfolio today should allocate $70,000 to cash, $79,000 to fixed income and $51,000 to equities. The cash can go into a one-year GIC, the fixed-income portion into the iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO) and the equity portion in low-fee equity mutual funds, like those sold by Mawer or Phillips, Hager & North..

Do you want a portfolio makeover from MoneySense? If so, send an email describing your situation to letters@moneysense.ca.

8 comments on “GICs: The problem with playing it safe

  1. It is stupid to put $70,000 for Heather into a GIC. GIC’s pay nothing. While the investment is protected in a GIC it would be much better for Heather to put this money into a high interest savings account. There are some firms that are offering 3.1% which is much higher than a GIC which you are locked into and this money is protected as well. The return on a GIC does not even keep up with inflation, so you are losing purchasing power by putting your money into a GIC. It is also much better idea to put this money into bank stocks like TD, Royal or BNS which also pay you a dividend while you wait. Bank stocks will not tumble overnight unless we have another event like 2008/2009 which does not appear to be on the horizon. Heather should also look into using DRIPs while she is still working and put some money every month into the DRIP stock(s).

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    • David, those are very ignorant comments… As much as it is painful to see someone invested so conservatively, the solution to a conservative investor is not just buy bank stocks… the whole point of being conservative is to reduce risk exposure regardless of what the market does…

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    • My credit union is offering 3% on a 3 year GIC. This is good enough for me. I sure wouldn’t invest in any bank.

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  2. Sigh. C’mon – you can’t say “she’ll get a 3.8% average annual real return” because you have no idea what the real return premiums on stocks and bonds will be in the future – past performance/ risk premiums does not guarantee future results. Also, GICs are AAA-rated and currently are yielding higher than investment grade corporate bonds. They are tax-favourable relative to the corporate bonds since they aren’t trading at premiums like the CBO portfolio is. The CBO has a weighted average YTM of 2.12% whereas a five-year GIC ladder, once in place, will get the average 5-year rolling rate. My two cents? You get what you pay for – deal with a qualified advisor.

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  3. Wow. International equities for her. Good luck. I believe she would be better off if she saved everything in saving accounts. But it is too late for her. So the advisor wants her to gamble one more time. LOL.

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  4. The client says she is a “low risk” client. The above portfolio makeover would be an epic fail as far as any Compliance Department is concerned.
    Never fall in the trap of wishing our clients to be more aggressive than they are.
    Low risk is exactly that – low risk! No equities. Even fixed income would be suspect.
    G.H is correct – GICs would be the most suitable and appropriate investment recommendation.

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    • Moderator can you please correct my whole post above to:

      David’s suggestion of DRIPs especially if he meant those that come with an attached SPP (Stock Purchase Plan) can be a good one. The very nature of DRIPs + SPPs are conservative by nature allowing cautious investors to risk small amounts at virtually no cost while taking advantage of income averaging. While I wouldn’t advocate putting everything in to one DRIP + SPP it is a simple matter to build a small portfolio of Blue Chip DRIPs + SPPs at virtually no cost. Disclosure: I have DRIPs + SPPs with 4 Canadian banks offering them BMO, BNS, CIBC & National Bank (I believe Laurentian instituted a PLAN in the recent past). As an example, on an entirely optional basis, I can submit a cheque as low as $0.01 (one penny) once a month to BMO’s transfer agent (Computershare formerly Montreal Trust) and they will purchase $0.01′s worth of a share calculated to seven decimal places for me in an account. I will also receive a proportional dividend reinvestment on that $0.01. All of this is commission free except for the cost of a stamp. As Dale Ennis, former editor of Canadian MoneySaver magazine put it, “The best investment you can make after your home is a DRIP + SPP.” Why don’t you hear about them? Nobody makes a commission off them and companies offering them are restricted from advertising them except to shareholders of record (that is shareholders who do not hold shares in a brokerage). Besides the banks above I have DRIPs + SPPs with BCE, Telus, BA, MBT, ENB, TA, TRP, HR.UN, REI.UN, EMA, FTS,etc. All of them allowing direct commission free monthly or quarterly investing with the vast majority allowing minimum investments of $100 or less.

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  5. I wish GIC rates were 3.00% or 3.10%. All my GICs matured just last week and all I could find as the highest rates are 2.25% to 2.55%. Looking at the bright side, myself and my husband have no debts, no mortgage, relatively modest expenses and have much more than $200,000.

    Our $525,000 in RRSP GICs, $83,000 in TFSAs, $250,000 in GICs does not need to be touched at all. We put them all in compound interest for 5 years in many different financial institutions and will at least make $106,000 by 2020. Hopefully, fingers crossed, GIC rates will be higher in 5 years.

    Good thing our C.P.P., OAS is $3,100 a month and our living expenses, property taxes, income taxes are less, $2,300 a month. We do have a $12,000 savings account balance which all our extra money goes.

    Our goal is to have $60,000 in there or about 2.5 years living expenses by 2019.

    Reply

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