I’ve never heard so much interest in GICs before this year, but with stock and bond markets down and interest rates up it’s no surprise that investors are looking for a safe and profitable place to park their savings.
Just two years ago, a five-year GIC was paying a paltry 1.5% interest, while a two-year GIC was paying just 1.05%. Fast forward to today and you can find a five-year GIC paying 5.2% interest and a two-year GIC paying as high as 4.88% interest (source: https://www.highinterestsavings.ca/gic-rates/).
Meanwhile, investors are reeling as stocks and bonds have suffered significant losses this year. A balanced 60/40 portfolio is down around 15% so far this year and an all-equity portfolio is down nearly 17%.
Investors want to stop the bleeding in their portfolio and are considering short-term GICs as a temporary solution. Those with new money to contribute don’t want to throw good money after bad, so they’re looking to GICs as a source of decent returns today.
GICs are a perfectly sensible investment for someone with a short-to-medium time horizon who is looking to maximize their return without taking on any risk (besides the risk of tying up your money for 1-5 years).
But the trouble with GICs as a market timing investment strategy is their lack of liquidity. We don’t know when stock and bond markets will turn around, but we know throughout history that returns after a bear market have typically been strong. If your capital is tied up in a GIC, even for a year, and markets start to rise quickly, you miss that opportunity to recover your losses and/or participate in those gains.
Consider my own experience with GICs.
Back in early 2009 I received a $7,500 bonus from work and decided to put that amount into my RRSP before the March 1st deadline. I was naive about investing, but knew enough that the mutual funds in my group RRSP were down substantially. With the RRSP deadline looming, and knowing that I had to put the money into *something*, I chose a 5-year GIC at TD Bank that paid 5.5% interest.
I still kick myself for this decision, because the Great Financial Crisis bottomed on March 9th, 2009 – shortly after I purchased that GIC.
The result? The five-year GIC turned my $7,500 into about $9,800.
Had I invested the $7,500 into a Canadian equity fund (let’s use iShares’ XIC as the proxy), I could have turned that $7,500 into nearly $16,000 thanks to the roughly 16% annual compound growth rate in Canadian stocks from March 2009 to March 2014.
Now that’s an example using a relatively small sum of money. But I’ve had conversations with investors who want to put several hundred thousand dollars of their portfolio into GICs.
Some of these investors think we’re headed for many years of poor returns, so let’s assume they invest $200,000 in a five-year GIC paying 5.2% interest. After five years they’ll have about $257,700.
Maybe investment returns over the next five years won’t be as strong as they were from 2009 to 2014. But let’s make a not so unreasonable assumption that stocks return 10% annually between November 2022 to November 2027. That would turn your $200,000 into about $322,100.
I don’t have a crystal ball to see how this will all play out, but I do know that every bear market ends and that stocks and bonds will eventually reach new highs. It’s just a matter of when.
This Week’s Recap:
We had a wonderful time in Paris earlier this month. I’ve always heard mixed reviews about Paris – the negatives being that it was dirty and full of rude people. I didn’t find that at all. The city was clean and the people were lovely, despite my poor attempts at speaking French.
Our apartment overlooked the Eiffel Tower, which made for great views but the neighbourhood was a bit too touristy for us. We wandered over to the 2nd arrondissement where we found some amazing vegan bakeries and restaurants. We’d definitely stay in that area next time.
I know I revealed in my anti-goals post that I did not want to ever go to Disney, but with eight days in Paris we decided to take a short train to spend a day at Disneyland Paris (for the kids!). It was fine. Lots of waiting in line, lots of overpriced souvenirs, but the kids had a blast in the Marvel and Star Wars areas (ok, Dad had fun there too).
We saw the Louvre, spent a fabulous day in Versailles, and even took the kids to a Michelin star restaurant for dinner. Out of all of our travels this year, Paris is definitely at or near the top of the list.
I managed to update and repost a reminder to fill out a T1213 form so you can crush your RRSP contributions next year.
And, the Canadian Financial Summit took place last week and I hope you got a chance to catch my session on retirement readiness planning.
Weekend Reading:
The biggest financial news story from this past week was the CBC Marketplace expose on real estate agents facilitating mortgage fraud for a fee. This practice of falsifying income through fake employment records, bank statements, and T4s helped unqualified would-be homebuyers get into the housing market.
Another big story is the fall out from a class action lawsuit against Visa and MasterCard, the result of which means businesses in Canada can add a surcharge to customers who choose to pay with a credit card.
This opinion piece on the credit card surcharge topic sums up a lot of my thoughts as well:
“The Canadian government needs to step in and cap interchange fees. With the cost of living already so high, it’s unreasonable to add an extra one to three per cent to our bills. This lack of consumer protection is massive negligence on the part of the Canadian government.”
Erica Alini writes, as interest rate hikes continue is it time to lock-in your variable rate mortgage? (subs)
PWL Capital’s Ben Felix says that investing in your own financial literacy might be one of the best investments that you can make:
Michael James on Money looks at instances of the inevitable masquerading as the unexpected.
Jason Heath addresses something I wrote about in the intro of this post – is now the time for long-term investors to abandon stocks – with a similar response.
Want to retire earlier and stay healthy? Andrew Hallam shares an investing strategy to do just that (tl;dr it’s VBAL, XBAL, or ZBAL).
I love these first-person retirement stories in the Globe and Mail. Here’s one who’s struggling with the new-found freedom that retirement brings:
“But who was I these days? No longer a professional and yet not ready to embrace the “retiree” label, either: I don’t golf. I don’t yearn to travel. I don’t have grandchildren. Maybe the classic retirement profile of family and leisure activities doesn’t fit everyone, but it sure didn’t fit me.”
Retirement can mean a loss of identity — how to bring happiness to your next act.
Most rich-looking people are just folks with high salaries who spend a lot. Discover how the fake rich and your work colleagues could be hurting your wealth.
Travel expert Barry Choi reports that Aeroplan is now freezing accounts due to travel hacking.
Finally, a great episode of the Freakonomics podcast on whether personal finance gurus are giving bad financial advice. Some economists apparently think so.
Have a great weekend, everyone!
The Canadian Financial Summit is a three-day virtual conference featuring 35+ Canadian personal finance experts (including yours truly) speaking on a wide range of topics from investing and retirement, to pensions, real estate, financial planning, inflation, and much more. It’s Canada’s largest personal finance and investing conference.
This year’s conference takes place October 12th to 15th and boasts an all-star line-up of speakers, including Ben Felix, Jason Heath, Rob Carrick, Fred Vettese, and Dr. Wade Pfau. You’ll also find interviews with popular personal finance bloggers such as:
- Boomer & Echo’s Robb Engen (<–that’s me)
- My Own Advisor’s Mark Seed
- Mixed Up Money’s Alyssa Davies
- Tawcan’s Bob Lai
My interview with co-host Kyle Prevost is on a topic that I’m passionate about – retirement readiness. We talked about my retirement readiness checklist, along with the dangers of what I call the retirement risk zone – the period of time between retirement and taking your government benefits. Then we got into housing and what I’ve seen Canadian retirees doing with their home equity to ensure a comfortable retirement.
You can watch my session with Kyle on October 13th (or at your convenience if you purchase the All Access Pass).
There will be a LOT of other topics covered, and you can check out this link to view all the speakers and talks that will take place.
Once again – this event is completely FREE to attend. However, if you can’t make it for the scheduled date/time, you will be given the option to purchase a special any-time, anywhere, All Access Pass that will allow you stream the entire conference at your leisure.
This Week’s Recap:
We’re currently on the last stop of our revenge travel trips for 2022. I’m writing this from an apartment in Paris that overlooks the Eiffel Tower – not too far from this gorgeous spot pictured below:
It was a heck of a long day getting here but we’re feeling rejuvenated this morning and ready to explore this amazing city.
Last week I wrote that investors are ready to capitulate after nine months of poor returns, and then went on to share all of the good reasons to stick to your investing plan.
Many thanks to Erica Alini for including my thoughts on her terrific front page feature in the Globe and Mail on how incredibly expensive it is for young adults to start out on their own in 2022.
Weekend Reading:
Author Mike Drak, who wrote an excellent three-part series here on designing your retirement lifestyle, has written a new book called Longevity Lifestyle by Design – redefining what retirement can be. He graciously offered a free download of his new book to Boomer & Echo readers, which you can get here.
Does active investing work in the information age? Portfolio manager Markus Muhs has the answer.
Retirement expert Fred Vettese says that thanks to a rare event, deferring CPP to 70 may no longer always be the best option.
Indeed, he found another case where taking CPP this December leads to a better outcome than waiting until 2023.
The tl;dr version is that for those who are not yet taking CPP, the expected benefits are adjusted by wage inflation, whereas those who are already receiving CPP get an increase that’s based on price inflation. Since price inflation is expected to be much higher in 2022, and the inflation adjustment for CPP recipients goes into effect in January, a 69-year-old who was planning to wait until 2023 to take their CPP would be better off taking it in December.
Of Dollars and Data blogger Nick Maggiulli wrote a great piece on why you shouldn’t try to optimize your life:
“Unfortunately, your life isn’t a math equation. You have to accept that you can’t maximize every experience. You will make mistakes. You will behave sub-optimally. And that’s okay.”
Here’s My Own Advisor Mark Seed on how to split money with your partner. My wife and I have a joint account where all the bills are paid and then separate accounts for our own guilt-free spending.
Many young people shouldn’t save for retirement, according to research based on a Nobel Prize-winning theory. This lines up with Fred Vettese’s recent book, The Rule of 30.
PWL Capital’s Ben Felix explains the Private Equity Pitch – an asset class that comes with fees estimated at 6-7%:
Scared about running out of money in retirement? This doctor’s repeat prescription for bear and bull markets means you’ll never have to worry about it ever again.
Scared about how you can protect your wealth while the global stock market crashes? The answer lies 2000 years ago in ancient Greek mythology.
Andrew Hallam is the best.
Mortgage broker David Larock explains why central bankers must now let the fires burn.
Fee-only planner Jason Heath looks at when it makes sense to withdraw money from your corporation to invest personally.
Finally, Rob Carrick on what to say when someone asks the most dreaded question in personal finance: Will you be my executor? (subs)
Have a great weekend, everyone!
Investors are ready to throw in the towel. To cry uncle. To capitulate.
Can we blame them? This year has been brutal for both stock and bond markets. A global all-equity portfolio is down 16.87%, while a global balanced 60/40 portfolio is down 15.22% as of September 30th.
But it’s not just the double-digit losses we’ve endured this year that have investors ready to give up. It’s the non-stop barrage of negative economic sentiment that stems from persistently high inflation, the sharp rise in interest rates without a definitive end in sight, and the increasing possibility of a global recession.
How low can your investments go?
I get emails from readers and clients all the time looking for investment advice or asking me to peer into my crystal ball to let them know when it’s safe to get back into the investing waters.
The sentiment was pretty negative at the end of June, after six months of investment losses and at the height of inflation. But that was nothing compared to what I’m seeing now from investors who can’t take it any more.
This email from a reader I’ll call Nick nicely sums up what I’ve been hearing lately from investors:
“Following all the news on poor stock and bond performance, we can’t help but be concerned about a global recession that might be a lot worse than we’ve seen in recent decades. I understand the theory of staying the course but are we risking too much by staying idle?
Should we cash out the vast majority of our portfolios now, parking the funds in a 1-year GIC, and then possibly reinvest if and when all goes to shit?”
As an aside, global stocks were up roughly 5% in the two trading days since I received that email. A 1-year GIC pays 4.5% for the year. That’s how quickly things can turn around and why we stay invested for the long-term.
But I get it. Behavioural psychology teaches us that the pain of a loss is felt twice as much as the pleasure of an equal gain (loss aversion). Investors were feeling euphoric for the last three years in particular, when balanced portfolios were achieving double digit gains and all-equity portfolios were up 20% annually.
We mentally anchor to those high prices and portfolio values, and now that our investments are down 10-20% it feels like we got stung twice as hard.
While we don’t know if we’ve already reached the bottom of this bear market, or how much lower stocks and bonds will fall, we do know this pain will end at some point and that’s usually followed by a period of good returns for investors who stayed the course.
Can you take me higher?
Indeed, if you asked me at the end of 2021 what to expect for stock returns over the next decade I would have said to lower your expectations. It’s not sustainable to experience high double digit returns every year and not expect a period of poor returns to follow.
That’s not to say that I predicted a crash or anything – I’m still fully invested in 100% global equities and feeling the pain this year along with all of you.
Reversion to the mean is a powerful concept. If long-term stock returns average 8% per year, it stands to reason that after three years of 20% returns we’d see a period of underperformance to bring us back to average. That’s what we’re seeing now.
But the reverse is also true. Periods of poor investment returns are inevitably followed by periods of strong returns. We don’t know when or how quickly things will turn around, but there’s good evidence to support the idea of staying invested.
A Wealth of Common Sense blogger Ben Carlson shared why he is getting long-term bullish on stock prices. He said:
“My general investment philosophy is the more bearish things feel in the short run the more bullish I should be over the long run. If I’m taking my own advice right now I should be getting much more long run bullish.”
Carlson went on to share some charts that included periods when the S&P 500 was down 25% or more, and the subsequent 1, 3, 5, and 10 year returns that followed:
Only the Great Financial Crisis, which saw drawdowns of 56.8% from peak to trough, had negative returns one year after reaching a 25% decline. Yes, it took some time for investments to recover but they eventually did (up 209.6% 10 years later).
As Carlson points out, stocks may fall further from here. But expected returns should be higher when prices are lower. That’s been proven after every single bear market in history.
Final thoughts
To address my reader’s point, is this time really different? Is it different than the Great Financial Crisis that nearly collapsed the entire financial sector? Is it different than the early days of a once-in-a-century pandemic when the entire world was shutting down?
Markets always find a bottom. We might not be there quite yet (who knows?) but we will get through this. We always have.
The point is, it’s not the time for investors to capitulate. You didn’t come this far to only get this far. The way you lose this game is by selling now, locking in portfolio losses of 10-20%, and missing the subsequent recovery.
After all, the only way to recover those losses over the next few years is to hold stocks (or an appropriate mix of stocks and bonds). A 4.5% GIC isn’t going to cut it.
It would be great if stocks could just deliver 6-8% a year without the extreme ups and downs. But that’s what makes investing risky (and difficult) – we get years of double digit returns, and then get walloped with a period of double digit losses. Those who stay the course have been rewarded handsomely throughout history. Why should this time be any different?