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Home Capital awakens Canadians to all kinds of investment risks

Home Capital's troubles have had a beneficial effect on the complacency of Canadian investors.

Rather than taking safety for granted, they're asking smart questions about deposit insurance for their guaranteed investment certificates and protection for their other investments if a brokerage firm goes under. Just recently, a reader asked about the $1.3-million in accounts he manages at one big bank's online brokerage arm. "Would it be more prudent to split all accounts and spread them across banks?" he asked. "Or should I keep on trusting [my bank]? Though, the splitting part bugs me, as it will be harder to manage."

If a Canadian Investor Protection Fund member firm becomes insolvent, client losses in cash and registered accounts would be each covered for up to $1-million. The directory of CIPF members includes all the brokers covered in my annual ranking of online brokerage firms (bank-owned firms are there), as well as other firms such as Interactive Brokers.

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This reader's accounts are worth $1.3-million, but that doesn't necessarily mean he's over the CIPF limit. The individual accounts he manages for he and his wife may all qualify for coverage up to $1-million. If it turns out that there is an account with more than $1-million, it makes sense from a safety point of view to move some assets to another firm. Arguably, this is over-cautious. But the inconvenience of keeping tabs on an additional account is outweighed by the security of knowing your brokerage assets are safe from insolvency. That said, the risk of a bank-owned brokerage firm in Canada going under is remote.

Readers who manage multiple accounts often ask if they should treat these accounts separately, each with its own stocks/bonds mix. It makes more sense to come up with a master asset allocation plan that encompasses all the accounts as a whole. If you decide on an overall 50-50 mix of stocks and bonds, the total amount of each in all your accounts viewed in aggregate should be 50-50.

Canada Deposit Insurance Corp. covers principal and interest combined in GICs to $100,000, while CIPF covers brokerage account assets to $1-million. Play it safe by diligently following these limits in your investing.

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