Sunday, September 8, 2013

What are you doing with your money while you wait?

Assuming you are waiting to buy or have decided not to, then you have a nice pile of cash building up. What are you doing with it in this forced low rate era?

None of the Central banks (UK, Canada, Euro), despite talking tough about soaring consumer debt have had the balls to increase rates. We are STILL sitting with rates at emergency levels and below inflation.

So what options do we have for our money?

Well a few and none are that enticing.

There is the GIC. Rates are pretty low at the moment. The banks still haven't budged much from the 1.0-1.4% for a one year fixed. You can get a little more by bargaining with your advisor. This has always irked me BTW. Why not just post better rates for everyone. Our banks, like our telecom carriers either need competition or serious regulating.

I just picked up 1.8% for a one year at ING direct which is owned by Scotia now. I got this from a brokerage account and was better than their posted rate. Other institutions with lower credit ratings offer up to 2%for a one year and 3% for a five year fixed. The CDIC will insure up to $100,000 if the GIC is under 5 years.

Either way you slice it, it isn't a big chunk of money. After taxes, it is below inflation. It used to be that a one year GIC matched inflation after tax and a two year beat it. Not now that the Central banks are trying to force us to speculate (and then complain when we do)

So what else is there?


You can buy bonds via any brokerage account. The rates are not much better than GIC rates at present for high credit companies and Government of Canada bonds are even lower. You can tweek things by buying stripped bonds which have a lower tax rate (capital gains instead of interest taxation). You can google this if interested.

Preferred shares.

These are shares that behave like bonds. They come in several flavours, some pay a steady % until maturity, others reset the rate depending on the Bank of Canada rate or rates for a ten year bond, others maybe convertible into the shares of the issuer. They pay higher rates as they are considered 'long bonds'. However as they are shares too, they are taxed better than bonds and so a 5% yield in preferreds would be the same as getting almost 7% in a bond if you pay tax at the highest rate.

Here is a good site which explains and tracks them. Though he also writes of other stuff in his commentary which I usually skip over.

Garth Turner used to be a big proponent of them on his site Greater Fool. They have done very well for the last few years and then got slaughtered recently as rates have been rising. He has not mentioned them recently :)

Then there is the stock market. You can buy stocks directly, or mutual funds or index funds etc. Bank shares have done very well as they have been in the sweat spot.

They have borrowed short (from all the people having one year GICs or getting near zero interest in their savings account) and lending out several % higher to mortgage borrowers. Even though rates are low, the spread between the short end and then long end of the rates curve has been widening and therefore the banks have been making even more money than before.

The best thing is that they have been doing this risk-free. Anyone with high leverage or poor credit risk they passed off to that garbage can of risk - the tax-payer back CHMC. A scandal IMVHO.

However this circus is slowly coming to an end, as outsiders from the World Bank to Investment houses to independent economists have told our Government how poorly risk is managed at the CMHC, they seem to be finally getting the message.

The stock market was a good place to be for the last four years, especially the US market. But I am too leery to put new money unless there is a good correction. Rising rates are usually bad for the earnings of companies

That's about it. Can't think of many more options.

What are you doing out there?