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Locking up your money can be an investing crime

I don't know about you, but I like to have my money available - just in case.

That's why I can't understand why Canadians voluntarily put billions of dollars into financial "prisons" each year, even though their money hasn't committed any crime.

I don't want my investments locked away in solitary confinement, especially when there are good alternatives available that don't keep me from my money.

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Here are three examples of money prisons that you should avoid:

1) The mutual fund deferred sales charge (DSC): This is a classic. Explain to me as a consumer the advantage of having to hold money in a fund family for seven or eight years for fear of a financial penalty. Why buy a DSC version of a mutual fund when there is usually a no-load fund available that is probably just as good?

The biggest mutual fund in Canada is the Investors Group Dividend fund, with $13.6-billion in assets. It isn't entirely clear how much is held in the A version of the fund, but it is a good percentage of the total. This is the DSC version of the fund. What this means is that if you buy the fund and decide you want to take your money out as cash in the first year, you will have to pay a 5.5-per-cent penalty. You need to invest in the fund for seven years before the penalty decreases to zero.

Why would you agree to such a sentence? You can commit some pretty nasty crimes that won't get you put away for seven years, so why commit this one voluntarily?

As an alternative, you could buy the RBC Dividend fund, with no load and a five-year return that is 2-per-cent better than the Investors Group fund - and best of all, no prison. I am not recommending the RBC Dividend fund, but if you had only those two choices, it is a slam dunk.

2) RESP scholarship funds: If a seven-year sentence sounds long, how about 18 years? That is what you are voluntarily doing when you set up an RESP using a scholarship plan. These plans can be beneficial, but only if you are willing to do the time, meaning that you are committed to a payment every year (often for 18 years). If you want to leave the plan, you face significant penalties.

The question is, what alternative do you have to being locked into a plan that threatens you with such fees and penalties? The answer is pretty much any other type of RESP plan, where once you open an account, you can choose to contribute or not, can choose what to invest in, and have real control over your money. This can be set up at any bank or brokerage firm.

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3) Five-year GICs: This is another very common prison. Now at least this one is a little different in that almost all investors enter with their eyes open and understand that there is some benefit offered for being locked up for five years. Having said that, I don't understand the appeal today.

According to the CIBC website, I can get 2.1 per cent if I lock my money away in a five-year GIC.

An alternative would be to open up a high-interest savings account at Peoples Trust, based in Vancouver, for 2.1-per-cent interest, and take your money out any time. I am not necessarily recommending Peoples Trust, but just pointing out that there are alternatives to GICs that offer the exact same rate. Even if the savings rate today is a little lower than 2.1 per cent at the INGs of the world, you can be pretty confident that over the next five years, the daily interest savings account rate will average out to be higher than 2.1 per cent.

If you've committed any of these investing crimes, you will have to do your time or face a penalty. Just make sure you come out of it a rehabilitated investor.

Follow me on Twitter @TriDelta1

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About the Author
Ted Rechtshaffen

Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm. More

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