Low risk low return

Feb 8th, 2010 – Comment

A couple of things to keep in mind when you look at products like the CSB and GIC’s. These are designed as retail products for small investors. The way that these products are created is by shaving the yield from an underlying asset reducing your return.


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CSB

Hi Lou

Just retired last November. Now I get the opportunity to listen to your comments on the McArthur Show every morning on AM980 in London.
I have  $100,000 in a GIC maturing this year. My RRSPs have been topped up and want to re-invest into an instrument that can be accessed easily should I need the cash.

Want do you think of Investing all into Canada Savings Bonds?

Thanks

Anonymous

 

Hello My Friend,

Congratulations on reaching the promised land with a nice piece of coin! They say retirement comes at the end because its the best part! Yours is a nice problem to have so lets look at the CSB and maybe another option.

The Canada Savings Bond is backed by the Government of Canada, and is very liquid. But to get those benefits you have to accept a low rate of return. The published rate on the 1 year CSB is 0.40%

A couple of things to keep in mind when you look at products like the CSB and GIC’s. These are designed as retail products for small investors. The way that these products are created is by shaving the yield from an underlying asset reducing your return.

The competing product for a CSB or a GIC is a Government of Canada Marketable Bond with an appropriate time frame. So one year bonds matched with one year CSB’s or GIC’s, a two year bond with two year CSB’s or GIC’s and so on.

The current quote for a Government of Canada Marketable bond is 0.54%. It may not seem like much but on your $100,000 it represents $1400 in before tax income. Even if you are at the highest marginal tax rate that still works out to about $700 which may not pay for everything but it will pay for something. There will most likely be a fee charged in buying the marketable bond so in your research make sure to consider the transaction cost.

The shaving of yield when making offers to small investors is nothing new but with the assets you have you might want to consider looking to the marketable bond market for an alternative that has the backing of the Government of Canada and is as liquid. The other thing you might want to consider is how liquid you really need to be. $100,000 in a standby fund represents a sizable opportunity cost for the comfort of near cash.

I like the fact that you have a GIC ladder that staggers maturities so not all of your fixed income investments are exposed to reinvestment risk at the same time.

MAKE IT A HUGE RETIREMENT AND HAPPY CAPITALISM!

 

 

 

 

 

Hi Bill,

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