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rob carrick

A smart phone shows a stock chart with stock charts on a large screen in the background.TERADAT SANTIVIVUT/Getty Images/iStockphoto

A mom writes to say she's worried about her adult daughter's precarious financial position.

The daughter lives in Toronto and is barely able to save because of her high rent and other basic living costs – nothing extravagant. What savings she does have is an investment is an investment made through an online broker in the iShares S&P 500 Index ETF, a U.S.-listed exchange-traded fund with the ticker symbol IVV.

The mom wonders – is this the best place for her to make decent returns while keeping money available for emergencies?

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Answer: No. IVV is a great long-term wealth-building investment, although Canadian investors are arguably better off with TSX-listed ETF for tracking the S&P 500. But for the near term, IVV and all other investments with exposure to the stock market are a bad bet.

The better alternative is a high rate savings account with deposit insurance. Returns on these accounts top out between 1.9 and 2.3 per cent, which is modest but bullet-proof against all financial market shocks thanks to deposit insurance offered either through federally backed Canada Deposit Insurance Corp. or provincial credit union plans.

An investment with exposure to stocks can outperform a high rate savings account by miles. In fact, IVV's one-year return through early August was 14.9 per cent in U.S. dollars and the cumulative three-year return was 28.6 per cent. Results like this are why so many people are flirting with stocks for their short-term savings rather than opting for a safer, more prudent alternative.

Can't abide the low returns of high rate accounts right now? OK, how about having your stock market investments fall by 10 or 20 per cent in a short period of time? That's easily possible. And forget any ideas you have about getting your money out of the markets before the worst. Sharp downdrafts tend to hit like train.

If you're investing for five or more years, preferably 10-plus, this kind of volatility is acceptable because you'll have time for market up cycles to counter the down periods. In the short term, keep your savings well away from the stock market.

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