First, lose no money.
That’s a common investing philosophy these days. Not a good one in some cases, because only by taking on risk can most people achieve the returns needed to reach their financial goals. But lots of investors are petrified these days of a big stock market decline and they’re keeping a big part of their holdings in cash.
Cash is defined in today’s investing world as being virtually 100 per cent safe, very liquid and utterly hopeless in generating investment gains. There are ways to maximize the returns from cash, and we’ll run through a bunch of them in a moment. First, though, let’s check in with Moshe Milevsky, finance professor at York University’s Schulich School of Business, on the role of cash in an investment portfolio.
“Every dollar in cash is a waste,” said the author of such investing books as The 7 Most Important Equations for Your Retirement. “Back in the day when cash was earning 4 or 5 per cent, cash was an asset class. Today, cash isn’t even an asset class.”
One argument for holding cash is that it’s a very good inflation hedge. Prof. Milevsky said rates on government-issued Treasury bills, the standard measure of cash returns, have historically exceeded the inflation rate for the most part. Today, the 12-month T-bill yield is about 1 per cent and inflation is at 1.2 per cent.
Cash is certainly safe, but eventually you’ll probably want to put it to work in something more productive. Think you’ll be able to time that move to your advantage? “All the research out there points in the same direction – we’re horrible at doing that,” Prof. Milevsky said. The latest evidence on this: Cash levels in investors’ portfolios remain high today, even after a strong stock market rally through the summer and early fall.
If the anti-cash arguments don’t sway you, then at least seek out the cash products with the best returns. The old standby for cash is the money market fund, which has been dying a slow death in recent years because of high fees that leave little left over for investors. Example: The $847-million BMO Money Market Fund has a current yield of 0.1 per cent and a management expense ratio of 1.06 per cent, according to Globeinvestor.com.
It’s numbers like this that explain why money market fund assets have fallen to $31-billion from almost $74-billion four years ago. Where has the money gone? One place is the investment savings account, which you buy and sell just like a mutual fund. Consider this product as the definitive money market fund replacement for providing safety, liquidity and, in today’s world of diminished rate expectations, a somewhat decent rate of return.
Just as the banks dominate the fading money market fund franchise, so do they have a big presence in investment savings accounts. Royal Bank of Canada and Toronto-Dominion Bank offer this product, and Canadian Imperial Bank of Commerce offers one through its Renaissance family of funds. Bank of Nova Scotia has two offerings – one through its Dundee division and the other with a Scotiabank brand. Other players include National Bank of Canada’s Altamira brand, Manulife Bank and B2B Bank, which is owned by Laurentian Bank of Canada.
Competition is minimal among these players. Most offered a rate of 1.25 per cent for regular accounts as of late this week, while B2B offered 1.3 per cent.
What makes that low return a little easier to take is the fact that high-interest investment accounts are covered by deposit insurance as long as the issuer is a member of Canada Deposit Insurance Corp. (check CDIC members here). If you keep your holding at $100,000 or less, you’re protected against default by the issuer. Another plus is that online brokerage firms have largely eliminated fees for buying and selling investment savings accounts (it’s still worth checking before you buy).
Some alternatives to high-interest accounts were reviewed in a recent report from National Bank Financial that focused on products in the exchange-traded fund world. The simplest choice is a money market ETF called the iShares Premium Money Market Fund (CMR-TSX). With a much lower MER than money market mutual funds, it has a yield to maturity of about 0.8 per cent, according to NBF data. “It’s plain vanilla – the safest thing you can get,” said Pat Chiefalo, an ETF specialist at NBF.
Note that you’ll have to pay brokerage commissions to buy and sell the iShares money market ETF. If you’re a frequent trader, those costs will overwhelm the benefit of the low MER.
Mr. Chiefalo said the iShares DEX Floating Rate Note Index Fund (XFR), which holds floating-rate bonds, is a tiny bit higher on the risk scale. The yield to maturity from this fund is about 1.1 per cent, but investors should benefit from higher payouts as interest rates rise. This ETF mainly holds government bonds, which adds a level of safety.
More risky is the Horizons Active Floating Rate Bond ETF (HFR). National Bank Financial describes it as using derivatives to convert a portfolio of investment grade corporate bonds into a source of income that would rise if interest rates moved higher. This ETF could fall sharply in value in a market panic, so it’s not directly comparable to a money market fund or a high-interest savings account. The compensation for investors is a yield to maturity of 1.64 per cent, which is the highest of any of the products considered here.
Two other cash alternatives mentioned by NBF are target maturity corporate bond ETFs, which are like actual bonds in that they mature and repay investors their capital. For more information on these ETFs, go here.
The BMO 2013 Corporate Bond Target Maturity ETF (ZXA) and the RBC Target 2013 Corporate Bond Index ETF (RQA) both mature late next year and, if held until then, yield in the area of 1.1 to 1.2 per cent. You can sell these ETFs before maturity, so they’re more liquid than a guaranteed investment certificate. However, a rise in interest rates could result in you taking a loss when you sell.
Mr. Chiefalo added one more consideration in using these ETFs as a cash alternative, which is that you’ll have to reinvest the proceeds on maturity. With most other cash vehicles, you can let your money sit indefinitely without having to take any action.
If none of these cash vehicles appeals to you, there’s always Prof. Milevsky’s approach of just not having any cash in your account. “As soon as I get cash dividends or any cash at all, even minimal amounts, I invest it as quickly as possible.”
Canadian-Dollar Investment Savings Accounts: The Players
|Altamira High-Interest CashPerformer||National Bank||NBC100||1.25%|
|B2B High Interest Investment Account||Laurentian Bank||BTB100||1.30%|
|Bank of Nova Scotia ISA||Bank of Nova Scotia||DYN1300||1.25%|
|Dundee Bank of Canada ISA||Dundee Bank||DYN500||1.25%|
|ICICI Bank High Interest ISA||ICICI Bank Canada||IBN100||1.25%|
|Manulife Bank Investment Savings Account||Manulife Bank||MIP510||1.25%|
|RBC Investment Savings Account||Royal Bank||RBF2010||1.25%|
|Renaissance High Interest Savings Account||CIBC||ATL5000||1.25%|
|TD Investment Savings Account||Toronto-Dominion Bank||TDB8150||1.25%|
|The Top Five Money Market Funds By Assets|
|RBC Canadian Money Market||0.55||0.60%|
|TD Canadian Money Market||0.75||0.40%|
|Scotia Money Market||0.78||0.40%|
|CIBC Money Market||0.51||0.70%|
|BMO Money Market �||1.06||0.10%|
*The fund code is used when placing an order for an investment savings product through a broker.