David Trahair: Good questions Beth. I think to some degree inflation is used as a paper dragon/red herring to convince people they need to be in the stock market to beat it. I don't buy that argument. If I had $100,000 in June of 2008 I'd rather have $102,000 today in a GIC than $75,000 in some equity mutual funds. $102,000 helps me fight inflation better. You also make a good point - if inflation rears its ugly head, interest rates will almost certainly rise to offset it so GIC rates would rise too.
Not sure about how much dealers make off stocks versus bonds as I am not a licensed broker/dealer. I have, however, seen that those that charge a percentage of market value (instead of commissions and DSC fees) will charge more for stocks than bonds.
Tom: Should I withdraw from or borrow from my investment funds to pay off existing debt (currently $10,000@ Prime)? I don't have any mortgage other than secure line of credit?
David Trahair: Assuming it's outside an RSRP and the DSC (Deferred Sales Charges) fees (if they are mutual funds) aren't too onerous it may make sense. You'll also need to consider the tax effect. If there is going to be a capital loss remember it can only be used against capital gains this year or carried back to any capital gains over the last three years.
Of course if you believe the investments are going to do well going forward (i.e. better than prime) you may want to hold on.
Vela: I'm a young professional and want to start saving some of my money for travelling, retirement and whatever other "joys" life brings. I was thinking of a short and long term investment plan because I want my money to be easy to access without penalties and have a chance to earn interest. Recently at the bank they suggested mutual funds and RRSPS. What do you suggest?
David Trahair: I would suggest GICs in a Tax Free Savings Accounts (TFSAs - up to $5,000 per person over 18 per year starting in 2009) for the short term things and GICs in your RRSP for long term goals. I am not a huge fan of mutual funds for many reasons including high fees and the risk of a negative return if the timing is wrong on equity funds.
Doug: Please ask your guest to comment on the risk due to the lack of diversification particularly globally of having all of your money in one asset class, in one country and in one currency over the long run of 10+ years.
David Trahair: The main reason people diversify is to reduce risk. Usually that is the risk of a negative return. But diversification did not work too well over the last year or so did it? I have heard from many people who followed "the rules". They diversified by asset class. They diversified geographically. They even diversified by financial institution and by using more than one investment advisor. But they still got slammed financially. A lot of them are seniors with little time to recover. What should they do now?
Since we live in Canada and seem to have the strongest banks in the world, I'm not too worried about having my money invested in simple Canadian Dollar GICs that are 100% guaranteed by the Canadian Federal Government through CDIC.
Claire Neary, Reportonbusiness.com: That's all the time we have for today. Thanks very much for joining us, David, and thanks to all of our readers who sent in questions. Sorry if we didn't have time for yours - we received many, many questions on this topic today.
David Trahair: Thanks very much for all your questions - they've made me think!
One last point: When it comes to personal finances, remember it's not so much about whether you make 6% or 8% on your investments, it's more about the big thing - avoiding personal financial disaster.
Before doing anything that affects your finances - think "Could this lead to personal financial disaster of one type or another?"
If so, run like .... heck.