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David Trahair, author of Enough Bull (Deborah Baic/The Globe and Mail)
David Trahair, author of Enough Bull (Deborah Baic/The Globe and Mail)

Earlier discussion

Buy GICs. Only GICs. Add to ...

  • 10 years to August 31, 2009 - 4.54%
  • 20 years to August 31, 2009 - 5.11%
  • 30 years to August 31, 2009 - 6.39%
  • 40 years to August 31, 2009 - 6.15%
  • 50 years to August 31, 2009 - 6.08%

S&P/TSX Composite Total Return Index

  • 10 years to August 31, 2009 - 9.41%
  • 20 years to August 31, 2009 - 8.86%
  • 30 years to August 31, 2009 - 10.76%
  • 40 years to August 31, 2009 - 9.77%
  • 50 years to August 31, 2009 - 9.80%

GICs

  • 10 years to August 31, 2009 - 3.35%
  • 20 years to August 31, 2009 - 5.11%
  • 30 years to August 31, 2009 - 7.28%
  • 40 years to August 31, 2009 - 7.71%
  • 50 years to August 31, 2009 - 7.35%

As you can see GIC returns seem to be competitive - in the long term not much lower than the TSX Composite Total Return Index. There are a few important differences however.

One, there is no risk. You will never get a minus 30%, 40% or 50% return with a GIC like you can in the stock market.

The second issue is fees - if you take off 2% MER for a mutual fund you are down to near GIC territory.

The last issue is you would need to be 100% in equities (in the stocks in the index) to achieve the Total Return rates.

The last point is emotions - were you able to hold on when your equities lost almost 50% of their value from June 18, 2008 to March 6, 2009?

Robert: Are most people saving enough to reach their goals by going it alone (no advisor) and avoiding growth? Sure, no stocks avoids the common mistake of buying high (on the way up) and selling low (after a crash), but it doesn't necessarily help people be disciplined in increasing savings and reducing debt. What do you suggest?

David Trahair: It seems most people aren't saving enough but figuring out what "enough" is can be quite difficult. I think the bigger issue, as you mention, is the other side of the balance sheet - how much debt are they in? I always tell people to aim for debt-freedom by retirement - they will need MUCH less saved if they don't have to continue paying the mortgage and other debts. People with credit card debt at 20% interest should not be making RRSP contributions - making a 20% after-tax rate of return is simply too tough to beat. But the more important issue is that someone in credit card debt has most likely been spending more than they make - in many cases for years. How is someone with this over-spending habit ever going to be able to afford to retire?

If they continue to do that their entire life, they are going to be in serious financial trouble later on in life. They spend more than they make now - forget the 70% of pre-retirement income to maintain their standard of living after they retire - they'll need 100%+.

Put bluntly - if you spend more than you make, you'll never get ahead financially unless you win the lottery - or maybe are lucky enough to get a large inheritance. And don't bet on the stock market to make up for your over-spending either, you could end up in worse shape than ever if the markets don't co-operate - remember stock market investments may crash but loans don't!

Online commenter Lance UpperCut: Why would you wait until you are 50 to save for retirement? This seems to go agaisnt the very simple financial principle of compound returns.

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