Snap out of it, would you?
As if in trance, a huge number of Canadians have parked money in safe investments despite returns that can in many cases be rounded down to zero. Fear of a financial meltdown started the trend. Lingering worries and everyday inertia are prolonging it.
Now is the time to re-engage with your investments. It’s not only possible to ramp up your returns while staying conservative, it’s imperative. Few people can meet their long-term financial goals with returns that don’t even match up to inflation.
Next week, I’ll be writing about how to get better rates on guaranteed investment certificates. For now, let’s look at some broader strategies for ratcheting up returns without venturing into the stock market.
First, though, it has to be said that the best thing for many investors today would be to start up a regular monthly contribution plan that gradually builds up their exposure to the stock markets. No big bets, just a slow and steady rebalancing for portfolios that are tilted too far to safety.
But that’s obviously not on for lots of people. BMO Nesbitt Burns issued a survey this week suggesting that while almost two-thirds of people are optimistic about the stock market, just 13 per cent said they were more likely to invest in stocks.
This explains how the financial analysis firm Investor Economics recently discovered that the amount of money sitting in conservative investments today is at an all-time high of $1.6-trillion, with $900-billion in liquid investments or savings accounts earning pretty much zero.
Earning nada for investors, that is. You can be certain the financial industry is generating copious fee revenue from this money while exerting little or no effort to earn it. Maybe that explains why so much money is so obviously sitting in the wrong place today.
A first step for addressing this is to get out of money market funds, which currently offer yields of between 0.01 and 0.7 per cent. You can get exactly the same liquidity – that means it’s quick and easy to jump in and out – with a new generation of investment savings accounts that trade like mutual funds.
These accounts are covered by Canada Deposit Insurance Corp., a higher level of protection than money market funds offer. One proviso: Make sure your investment dealer does not charge commissions to buy or sell these funds.
The problem of low bond yields is caused by our slow-growing economy and won’t be fixed in the near future. I had a reader ask this week when 5 per cent returns on guaranteed investment certificates might come back. It could be years.
It’s up to you, then, to maximize your bond returns to whatever extent possible. If you have a good relationship with an adviser who is licensed to sell stocks and bonds, put it to use and ask for a better deal on bonds. When you’re quoted a price for buying a bond, it includes a little fat to cover broker commissions. If you can get the price down when buying a bond, your yield goes up.
Whether you’re buying a bond from a full-service dealer or an online broker, you can get a rough idea of how competitive the pricing is by checking the CanadianFixedIncome.ca website. What you’ll find here is a small taste of the bond market pricing data compiled by a firm called Perimeter Financial. Prices aren’t continually updated, but there’s enough info there to allow you to get a rough idea of what investment dealers are paying for some of the more heavily traded federal and provincial government bonds, plus corporate bonds as well.
You can actually buy bonds at these wholesale prices – remember, retail investors pay marked-up prices – through the online brokerage firms Scotia iTrade and Qtrade Investor. Both have recently started selling bonds with a flat commission of $1 for every $1,000 in face value of bonds being traded, with a minimum of $19 at Qtrade and $19.99 at Scotia iTrade and a maximum of $200 at Qtrade and $250 at iTrade.
