The 2-per-cent savings account rate that looked so good in March lost its allure in June.
This reversal of investor sentiment was highlighted in a recent e-mail from a reader whose 80-something dad has $500,000 in the bank. “When the market bottomed out in March he wanted to put his money in a diversified portfolio,” this reader said. “I told him to keep his money in the bank. He is not impressed with my financial advice. What would you advise him to do?”
I also like the bank account over the markets. Stocks rebounded from the alarming lows of March. Looking back, that was a monster buying opportunity. Now, even with Thursday’s selloff, not so much. Without the economy quickly getting back to where it was earlier this year and the pandemic fading, it’s difficult to see markets continuing the incredible momentum we had been seeing in recent weeks. As Thursday’s market action proved, stocks are vulnerable to a pullback if there are hitches in the economic recovery or a COVID-19 flare-up.
This reader’s 80-something dad has an annuity to cover month-to-month expenses, so he conceivably could handle stock market volatility without his standard of living being affected. But is this senior willing to risk a sizable loss of capital in order to potentially beat the gains from a savings account? Stocks were down by more than one-third in the worst of the market crash. That would have turned his $500,000 into $330,000 or so.
Stocks rocketed back from their lows this time. The next big market drop could conceivably take three, four or five years to heal over. Does an 80-something investor really want to be in this position?
Let’s assume markets normalize from here. A portfolio for someone in their 80s would be conservatively built and likely have most of its assets in bonds. Interest rates are quite low today, which constrains portfolio gains. Stocks might also be subdued after their mega rally. A conservative portfolio after fees might earn 3 per cent to 4 per cent.
Rates for savings accounts have been falling lately, but several alternative banks, trust companies and credit unions still offer 2 per cent. Staying within the coverage limits of Canada Deposit Insurance Corp. ($100,000 per eligible account in combined principal and interest) will require the use of multiple banks. An alternative is to use credit unions, which have their own provincial deposit insurance plans and often higher (or unlimited) coverage.
One more thought: Invest some or all of the $500,000 in guaranteed investment certificates with terms of one or two years. Several GIC issuers were offering 2 per cent over one and two years as of mid-June. With inflation running at minus 0.2 per cent as of the last reading, a 2-per-cent return with no risk of losing money looks pretty good.
-- Rob Carrick
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Stocks to ponder
Douglas Dynamics Inc. The students of value investing professor Dr. George Athanassakos felt this stock could be undervalued as it fits the mold of the names Warren Buffett would gravitate to. Douglas operates two segments: work truck attachments and work truck solutions. Its intrinsic value was found to be much higher than its current trading price. Read more about the stock pick here. (for everyone)
The Rundown
Why you should be wary of buying this dip in TSX energy stocks
Canadian energy stocks are in trouble again, as sharp declines on Thursday outpaced a meltdown by the broader market. But be wary of buying this dip: The share prices of large energy producers had been reflecting an optimistic scenario for oil prices in recent weeks – and this scenario is withering. David Berman explains (for subscribers)
After jolt, investors still see stocks as long-term bet
An interruption to a searing rally gave a jolt to equity investors who had been getting used to weeks of steadily rising U.S. stocks. But long term, even with the rocketing valuations that equities have commanded and the risk of another fall, investors say stocks would still be a winning bet. Underpinning that confidence is the force of unprecedented moves by the Federal Reserve to support the financial system and buy assets, which had propelled some stock indexes to fresh highs. Read more from Kate Duguid and Megan Davies of Reuters (for everyone)
Others (for subscribers)
The week’s most oversold and overbought stocks on the TSX
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Number Cruncher: Nine global pharma stocks for investors seeking sustainable dividends
Chinese companies put U.S. listing plans on ice as tensions mount
Others (for everyone)
Tesla at $1,000: too much too soon for some analysts
Globe Advisor
Two ETFs offer exposure to fast-growing robotics industry
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What’s up in the days ahead
Ian McGugan this weekend takes a look at what’s next for markets as investors recalibrate views of the economic rebound.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff