The worst time to put your faith in near-term stock market gains is when everyone’s feeling great about investing.
Like now, for example. Stock markets are up by staggering amounts over the past year and a lot of investors have benefited. There’s no way to tell when the next downturn will happen, but it seems reasonable to suggest that upside potential for stocks is matched by comparable downside risk.
For long-term investors, who cares? If you’re investing for 10 or more years, near-term fluctuations mean nothing. For the reader who recently asked about what to do with savings for near-term home renovations, the outlook for stock market risk should be a deal-breaker.
“We have savings that we would like to access in a couple of years’ time for a home renovation,” this reader wrote. “We are thinking of transferring them to a tax-free savings account and investing in conservative exchange-traded funds, or possibly mutual funds. Is this too short a time horizon? If so, what is the best thing to do with these funds until we need them?”
The best thing to do is put the money in a high interest savings account, where returns today are 1 to 1.5 per cent at best. Conservative ETFs and mutual funds are dicey at the best of times for near-term money, but more so now. The risk-reward outlook for stocks looks iffy, and bonds as well (conservative funds might have all or mostly bonds, with some stocks as well).
Economic growth has held up pretty well so far in the pandemic and is expected to accelerate once lockdowns ease. Interest rates will rise from today’s depressed levels, and this will put downward pressure on returns from conservative funds holding a big position in bonds. Many blue chip dividend stocks would also be vulnerable to a drop in price as interest rates move higher.
Guaranteed investment certificates are an alternative to high interest accounts to keep money safe. The best rates for one-year GICs are in line with current returns from high interest accounts, but the latter could adjust rates lower at any time. In fact, some online banks have recently cut their savings rates. A one-year GIC cannot be cashed without penalty, but it does give you a predictable return.
Longer term GICs offer slightly better returns – up to 2.1 per cent for five years. But having money locked in for that long may not square with the timing of those renovations.
-- Rob Carrick, personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
K-Bro Linen Inc. (KBL-T) Shares of this commercial laundry company are soaring to five-year highs after the company announced a contract win out of Alberta this week that prompted some analysts to increase their target prices. Brenda Bouw reports.
Global funds hold equity allocations at over 3-year high
The current run-up in stocks has at least another three months to go, according to fund managers in Reuters polls who kept their recommended equity exposure at last month’s more than three-year high and trimmed suggested bond holdings further. Tushar Goenka reports.
U.S. companies are worried about inflation, equity investors less so
A growing chorus of U.S. companies are raising concerns about the rising costs of everything from labour to components, yet stock investors appear unfazed by the prospects of higher inflation as the economy bounces back from the coronavirus pandemic. David Randall of Reuters reports.
Trading stock tips on TikTok, newbies are deeply invested in learning
Newbie investors have been pouring into the market for more than a year now. And although the frenzy that surrounded GameStop was stoked in part by the You-Only-Live-Once attitude of many novice traders, it also obscured an important fact: Some of them are quite serious. The New York Times takes a look at the new generation of investors who are learning everything from chart patterns and building portfolios to last.
In opposing climate and diversity proposals, Warren Buffett risks looking out of step
Executives across corporate America, from Silicon Valley to Wall Street, have begun to heed calls from investors to disclose more about their companies’ actions on climate change and workforce diversity. Warren Buffett isn’t among them. Berkshire Hathaway, the $630 billion conglomerate he runs, is opposing two shareholder proposals that ask its board to publish annual reports on how it is tackling environmental and diversity issues. The New York Times explains why.
The trouble with ‘bubble’: Why Canada’s red-hot housing market is defying the burst
Maybe, just maybe, we should be cautious about throwing around that bubble label when it comes to housing in this country. Have Canadian real estate prices surged upward at an unsustainable pace in recent months? Absolutely. Are lofty prices leaving the economy vulnerable to future threats, such as unexpected interest rate increases and other possible shocks? For sure. But is Canada’s housing market an epic bubble on the verge of popping? Not so fast, says Ian McGugan, who takes this indepth look at what may lie ahead for the real estate market.
Others (for subscribers)
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
Ask Globe Investor
Question: I just read an article about closed-end funds, which is the first time I’ve ever heard of them. The writer claimed that they pay 7 per cent on average, which I believe in this day is amazing! Some people compare them to ETFs but with a higher risk. Why do we not hear more about them?
Answer: If it sounds too good to be true, it probably is. Closed-end funds have been around for many years and were once very popular. Then people began to discover some things they didn’t like. For one, many of them trade at a discount to their net asset value, and sometimes that discount is substantial. For another, a fund may not earn enough profit in a given year to sustain its distribution. Instead of cutting the payout it pays back part of your capital. That said, some of these funds are worth a look. Canoe EIT Income Fund is a recommendation of my Income Investor newsletter. It was selected in January, 2019, at $10.95. At the time of writing, it was trading at $11.51 and paying a monthly dividend of 10 cents a unit, or $1.20 a year. That’s a yield of 10.4 per cent. The risk is that this is an all-stock fund. If the market crashes, the value of the units will follow.
What’s up in the days ahead
David Berman this weekend looks at ways to diversify fixed-income risk as inflation poses a threat to bond returns.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff