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Investor Clinic

Your fixed-income investing questions answered Add to ...

Destruction. Chaos. Heavy financial losses.

The G20 summit? No, the stock market.

With pessimism growing about the global economy and U.S. consumer confidence taking a big hit in June, stocks are suddenly about as appealing as a billy club in the head. That explains the renewed interest in bonds, which surged yesterday even as Canada's benchmark stock index plunged 343.17 points.

"The flight-to-safety trade is back in vogue," declared David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates.

So, with investors once again reaching for their safety blankets, today's Investor Clinic will answer your questions about fixed-income investments.

My wife and I just sold our cottage and we want to invest the money in GICs. Is there a website that provides GIC rates for the top five banks? - N.S.

Is there a website? Are you kidding me? There are tons of websites where you can find GIC rates, and not just for the big banks. You owe it to yourself to shop around - especially if you're going to be plunking down some serious coin - because the banks have some of the most miserly GIC rates around.

One site worth checking out - and we're being completely unbiased here, of course - is globeinvestor.com. From the main page, click on "markets," then "rates." You can then choose from short-term, long-term, registered and non-registered GIC rates. (Tip: Click on the column headings to sort rates in ascending or descending order.)

You can also get someone else to do the legwork for you.

David Trahair, chartered accountant, author and GIC investor, recommends using a deposit broker who can shop the marketplace on your behalf. "Even GICs can get complicated. That's why I'm a fan of finding an independent professional to help you through the maze," says the author of No Bull: How to Retire Well Without the Stock Market, Mutual Funds or Even an Investment Advisor.



More about GICs:

  • Why GICs are better than stocks
  • Related contentIn praise of a much maligned investment
  • Trifling GIC rates? Try a broker
  • Tricks for getting higher GIC rates
  • Buy GICs. Only GICs.


For a list of deposit brokers by province, visit the Registered Deposit Brokers Association website at rdba.ca and click on "directory." Deposit broker websites are also a good source for GIC quotes. At fiscalagents.com, for instance, you can click inside the main GIC box to see what rates are being offered by individual financial institutions.

You'll notice that GIC rates at the big banks are often a full point or more below those at other institutions. Yet many investors take whatever the bank offers.

That's a big mistake, Mr. Trahair says. The banks' posted rates are just a starting point for negotiation. He recommends you take a printout of GIC rates from other institutions and ask if the bank can match them.

"The more money you've got, the better bargaining position you're in," he says.

Government bond yields are lower than GIC rates. So why would an investor choose bonds over GICs? -V.S.

You're right that government bonds pay less than many GICs. The benchmark two-year Government of Canada bond, for instance, was yielding 1.4 per cent yesterday, compared with 2.5 per cent or more for some two-year GICs. The risks are the same, however, given that bonds are backed by the federal government, and GICs of five years or less are protected by the Canada Deposit Insurance Corp. up to $100,000 (see cdic.ca to make sure you're covered).

So why would anyone choose a government bond?

"The main thing is liquidity," says James Hymas, president of Hymas Investment Management in Toronto.

With most GICs (cashable GICs being the major exception), you agree to lock in your money for a certain period. In exchange, you earn a higher return. Bonds can be sold at any time, but you earn a lower return.

"I don't really recommend GICs at the best of times because of the liquidity issue," he says.



Investor Education: Bonds

  • How can I diversify the bonds I buy?
  • How do strip bonds, index bonds, and real return bonds work?
  • Related contentHow do bonds work?
  • Related contentWhat are savings bonds?
  • Seven steps to buy stocks and bonds


Another advantage of bonds is that you can pledge them as collateral for a loan. You can use GICs as collateral, but usually only with the financial institution that issued them, says Brian Smith, president and chief executive officer of the Registered Deposit Brokers Association.

In rare circumstances, an investor might be able to sell or transfer a GIC, but financial institutions are reluctant to allow such transactions. "I have seen it done, but not for many, many years," he says.

Transferable GICs used to be more common, but are rare nowadays. One exception is when the registered owner dies, in which case early redemption is permitted.

Follow on Twitter: @johnheinzl

 

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