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Dear Rob: 'Am I headed for financial ruin?' Add to ...

Rob Carrick: Stephen, a very good question. I wrote one of the articles to which you refer and my point was not so much to criticize the fact that people are saving, but rather to highlight how much money is being saved in the wrong places. Let's start with money market mutual funds, which people are using to park money they've taken out of their investment portfolios.

Money market funds are providing returns of well less than 1 per cent on an annualized basis today. Most of these funds are charging far more in fees than they're returning to investors. It's scandalous. Other rotten places to save are conventional bank accounts, where the interest is minimal at best.

If you want to keep some ready, safe cash around because of the economy, go ahead. But be picky. Find a high-interest savings account paying 2 per cent (Ally, Peoples Trust, Maxa Financial). Investors willing to move a fair bit up the risk ladder might consider some dividend-paying blue chip stocks. Dividend yields on these stocks could easily be 3 or 4 per cent, and you get the benefit of the dividend tax credit in non-registered accounts. Sure, these stocks can fall in value. But with the worst of the recession over, dividends paid by rock-solid companies seem safe.

Mike: Hello Rob, when will you be publishing your survey about online trading? I am about to move some money to one of these and I'd like to use this information. Thanks.

Rob Carrick: Hi Mike. Glad you asked about the next edition of The Globe and Mail's annual ranking of online brokers. We're looking at publishing it later in October. Stay tuned. And, let me urge all online brokerage customers to drop me a line if they have something good or bad to point out about the firm they deal with.

Mutual funds and ETFs, income trusts and REITS

Christian in Ottawa: Are you a fan of mutual funds? Or the fashion nowadays are EFTs?

Rob Carrick: ETFs are not a fashion. The are an evolution. First, we had mutual funds, which to this day remain a sensible, practical way for the average person to invest. Exchange-traded funds give you most of what mutual funds do, but they do it better. ETFs cost less, they're more flexible for building portfolios, they're more tax-efficient in non-registered accounts and, in an age of justifiable investor skepticism and suspicion, they are more transparent. Where ETFs fall down a bit is in the fact that you must have a brokerage account (full service or discount) to buy them. Mutual funds are way more accessible -- you can buy them at the local bank, for God's sake. So, investors, buy mutual funds if you're just not ever going to get yourself a brokerage account, or your adviser simply isn't licensed to sell ETFs. Carefully chosen, funds are just fine. But if you can get over the brokerage account hurdle -- and many investors are, if you judge by the flood of new accounts being set up at online brokers -- then you owe it to your portfolio to give ETFs a long look.

Peter: I am working on creating a passive ETF portfolio. Two questions, are there good ETFs that I can use for holding cash, like a money market fund and still get some kind return? For foreign content I have a hard time putting my money in US or international ETFs when you look their 10 yr track record and how the investments have been hurt by the rising CND dollar and poor performing U.S. market. So I have left this in a couple value based mutual funds that have relatively low fees. Is this a good strategy in your opinion?

Rob Carrick: Peter, there is in fact a money market ETF. It's called the Claymore Premium Money Market ETF (CMR-TSX) and it has a super-low MER of 0.25 per cent. The problem with this ETF is that you have to pay a brokerage commission to buy or sell it. These commissions could well obliterate all your gains at a time when interest rates are so low. As for your decision to leave your international holdings in value-oriented mutual funds, I like your thinking. Even die-hard ETF people concede that a mix of passive investments (tracking indexes) and actively managed funds (where a manager chooses the stocks) can make sense. I think you've hit upon just such a situation. If you've chosen well, your value managers may be able to scout out stocks that have been pounded in the past year or two but have good long-term potential.

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