Thursday, November 10, 2011

Feeling risky?

If you're in the game to win, then you won't mind a little risk.

However, if you're like MOST of the people I work with, then you don't know, or don't want to know, or don't care, or would rather have it NOW than have it * 10 later.

Lets start with the basics:

Inflation is inevitable.  This means your $10 today will not get you squat 30+ years from now.  So if you want to "save your money" then don't go to that bank that uses that as their slogan.  Their interest rate doesn't keep up to inflation.  Why not try their funds?  I don't like expensive mutual funds and theirs are surprisingly expensive. The Bank of Canada attempts to keep the rate of inflation between 2-4%  Which is very reasonable and fiscally responsible.

So if you want ZERO risk than I have bad news for you my friends...  There isn't ANY type of currency, commodity, or investment product that has ZERO risk.  Even the cash you have in your pocket has risk.  Washing machines, holes in your pockets, sticky fingers, and of course drunken rampages.  Also, if you did manage to put it under your mattress, if you did manage to find it years later, thanks to inflation you wouldn't have as much buying power.

So how do you climb up the "risk" ladder to keep your money at least matching inflation?  You have to "buy" something, or lend your money to your bank (or a bank).  This has some risk.  Bank robberies don't count.  But the bank's fiscal prudence does.  But remember, our banks (in Canada) were hailed as the world ideal for fiscal prudence.  They decided (thanks to LEGISLATION) from the government to establish what they can and can not do with your money.  And guess what?!?!  It works!  No Canadian banks exploded during the 2008/2009 credit crunch and NO Canadian banks are going to have trouble now with the European debt problems.  Even if the euro-zone exploded and broke apart back to it's original currencies, Canada would be hurt financially (along with the rest of the world) but our banks would still stand.

So yes, there is "some" albeit a near infinitesimal risk associated with lending Canadian banks money you are insured by the Bank of Canada up to $100,000.  So if you are foolish to have $100,000 of CASH or GICs even if your bank explodes (which it won't) you'll get a nice cheque from the government to compensate you.

That said, if you invest your cash in a GIC at any of the big banks, you would be hard pressed to get a rate higher than inflation.  The best GIC for us poor slobs with only $10 to your name is currently available from  2.75% for a 5-year GIC.  So you might beat inflation or you might not.

So is that right for you?  It's not for me.  I want to do better than that.  I NEED to do better than that.  There are ETFs (Exchange Traded Funds) that supply you with more yield with a very tiny amount of risk and much better yield.  For example the Claymore 1-5 year laddered government bond ETF and the Claymore 1-5 year laddered Corporate bond ETF use government and corporate bonds to make their product go.  Now these aren't the bonds that you might have had as a child.  These are BIG boy bonds.  They pay 3-7% interest for various terms on various amounts.  The long and the short of it, Claymore does the work and you get about 4.5% interest paid out to you monthly.  Now remember, you've stepped up the risk ladder buying government and corporate bonds.  The price of these bonds goes up and down, but only a small amount.  Go take a look at these two ETFs on google finance right now to see what I mean.  They do go up and down a bit in price, but seriously it's only a few cents in any one direction.  Also, if the stock markets are plunging, they generally go UP, and if the stock markets go up they go down, but they don't move much in value in any direction.

Take a look at CLF.  When the stock market lost half of it's value in 2008/09 This fund went up 5%.  As the stock market returned, it went down to where it started and then continued to drop another 5%.  All the while PAYING you to hold it.  Since then it's essentially back to where it was before in the $20.25-20.50 range.

If you're looking for something that will beat inflation, this is a good bet provided you like expect the government of Canada to be able to continue to pay it's bills in the next 1-5 years.  And as our finance minister did recently update our status returning to a balanced budget 2015-2016 this means yes.

Disclaimer:  I'm trying to help you dammit!  If you bet your lot in life on anything I suggest and lose it, then it's your own damn fault for not exercising better judgment.  I always advocate for a diverse portfolio of stuff so all your damn eggs aren't in the same damn basket!  Plus, if you do try to sue me for your own crappy judgment, you can tell your lawyer I have a net worth of about $37.50.  Don't waste his/her time!


  1. Bond ladders are great. They beat GICs any day of the week. And the good thing about ETFs is it's more tax efficient than buying individual bonds. I've heard good things about REITs as well. They are relatively stable, pay a nice dividend, and the extra risk investors take on (compared to bonds) is compensated by the potential of capital appreciation which doesn't exist in the debt markets. Do you recommend holding both kinds of investments in a balanced portfolio? Nice background by the way. I guess artist minds think alike.

  2. Absolutely! If you take a look at my "humble holdings" page you'll see I do own many positions of both types of things.