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How to invest $10000 windfall
August 9, 2014
3:59 am
Jon
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Hi Ladies and gentleman, here comes my first post!

I have just been 18 for around half a year and mom recently give me $10000 that she have save for us over the last few decades as present. I just want to ask what will be the best way to invest it? I am not keen to invest them in stock market as I believe it is overvalued because it haven't factors in geopolitical risk and risk in various economic systems in Asia. at the meantime, I also see the price of bonds are already dropping due to the expectation of increase interest rate and I am afraid the yield I get may not cover the inflation rate in the future. so therefore, will it be a good idea for me to just invest in GIC laddering for the moment ?

August 9, 2014
4:32 am
ValueTime
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John (I'm guessing that is your name),
If you don't need the money for something like education which pays off over time then perhaps open a TFSA - tax free savings account or start/top up your RRSP account. Besides GICs as an investment product I can't give you financial advice.

August 9, 2014
5:00 am
JustMe
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Short term - 10K:
- TFSA at Peoples Trust. No term, good interest. But interest is variable and can go up/down at any time. No tax on interest. Yearly 'income' about $300
- 1 year GIC at Peoples Trust. Best interest, CDIC protection up to 100K. Yearly taxable income $240.
- High interest savings account at one of western credit union companies. Unlimited deposit insurance. Interest rate is variable and can go up/down at any time. You pay tax on interest. You can expect about $195 per year.
Long term:
- Tough to say but me personally will go with big bank shares or some utility company. Enbridge, petrol company, electricity, food. People will always need food, gas, etc. In 20-30 years you might see average gain of 5-10%. Maybe.

Open account at Morningstar and create portfolio. Pick stocks or mutual funds and watch how they perform and then make decision. All free. But it will take a year-two to make decision.

August 9, 2014
6:54 am
Jon
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Thanks, but I acturally already max out my TFSA this year in Peoples Trust and my dad have already pay for my university tuition this year. So I guess I don't mind taking more risk with the 10k my mom give me :)

Tough to say but me personally will go with big bank shares or some utility company.

I agree with this statement too, equity in good company are generally very good investment, I just think is too expensive for the moment.

August 9, 2014
4:56 pm
kanaka
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You could look at some ETF's in banks and or oil. You would have to research the best online brokerage. I know iTRADE would charge you annual or quarterly fees foe a balance under 20,000? But free if in a TFSA.

August 9, 2014
10:07 pm
Loonie
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Jon, it sounds to me like you have already made your assessments of the markets and that you don't want to get into them right now. Fair enough.

So, the next question, from my point of view, is what do you envision as the ultimate use of this money? If you don't think you'll need it within the next 1 to 5 years, then I think laddering GICs may be your best and safest bet for now.

I would suggest a ladder of GICs through Peoples, Hubert (credit union in MB) and Accelerate (another CU in MB).
If you think you might need some or all of it within the next year, I would go with the 1-yr special at Hubert, which allows for withdrawals and offers excellent rates in the current environment.
If you think you can hold on a bit longer, than there is the 1yr GIC at Peoples at 2.4
For 2-yr, Peoples at 2.45
For 3yr, Accelerate at 2.5
For 4 yr, Accelerate at 2.75
For 5yr, Hubert at 2.95.
I would also open ordinary savings accounts at all of the above, to make it easier to move your money around.

HOWEVER, and this is a big however, if you think you might not need the money for a long time, then you might consider a ladder of government bonds. I know you said you were afraid of bonds declining in value, but if you hold them to their maturity date you will get exactly what you expected to get. The fluctuation in price is then at the buying end, i.e. in what it costs you to buy them. You might consider a ladder up to 10 years (but not using every year, maybe just every other year, so that you have 5 of them). This will likely bring you better returns than simple GICs. They can be sold on the market at any time, although there is the risk of a temporary decline in value if interest rates have risen in the meanwhile. Nonetheless, you will always get back the face value when the term is up, and that will almost certainly be more than the GIC would bring you, at least in the longer terms. Too bad SD2013 is no longer with us (a former member) as he was a big fan of these bonds and would have been very glad to give you lots of details on how to take advantage of these. To buy these, you would need to set up some kind of account, probably with a discount brokerage, so you would have to see if the costs involved are worth it to you. And I would strongly suggest you get some advice from your dad or someone who has some experience with this. Someone on this forum may be able to help. I am not the right person for that. I am not sure if there are minimum purchases for these things, so that could potentially be a consideration. If there are not, you might want to just put a portion of your money into a 10yr bond and put the rest in the GICs.

You could also consider some Real Return Bonds, to balance off your concerns about bonds devaluing etc., but I am not an expert on this. I am only trying to point you to things you might investigate.

I believe that at age 18 you can start contributing to an RRSP, although it depends on how much money you have earned. It may be that you have to wait til next year. Check your income tax statement for 2013 if you had one, and see if it says you have any contribution room. If not, then you might have it by next year.

Presumably you will want to max out your TFSA again next January, as it's the best longterm place to put your money. I don't know how much you are earning, but it might not be enough to allow a contribution to TFSA. In that case, you will want to keep some of your 10,000 liquid in order to be able to contribute it to TFSA in January. For that I suggest the Hubert 1yr cashable GIC, which you should cash out in 3months (at 2.2% per annum) and then deposit in a savings account with Hubert until 2015, at which point you move it to the TFSA.

I hope I didn't just make it more confusing!

August 10, 2014
8:16 am
kanaka
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Lots of good information. Valuable for me too.
BUT JON ..... Since you mentioned you are going to school and your father paid your tuition......if you do not have any working income.....I would not consider an RRSP.

August 10, 2014
11:35 am
Rick
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If you don't have next years contribution to your TFSA covered, I would put 5500 in a Peoples Trust High Interest savings account. 1.8% is not too bad these days. Set up a transfer for Jan 1 ( it's less than 5 months away!!!) directly into your TFSA and let it sit until something better comes along in the way of interest rates. Right now nothing comes close to their 3% and it's liquid if you need it for emergencies. The rate has been steady for a while now, but there are no guarantees. Take the other 4500 and put it in the 1 year GIC for 2016's TFSA contribution. If the maximum contribution stays the same, you'll be shy of 2016's maximum by about 800.00. Good luck and congratulations on your financial foresight. I wish I was smart enough to start saving when I was 18.

August 10, 2014
1:28 pm
Jack Manning
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Loonie, I used to buy every year government bonds that were compound interest. My adviser told me they are called zero coupon bonds but there are many names that I found out later.

They can also be called strip bonds and residuals. The last time I bought them was in 2007, 2008, 2009, 2010 and 2011.

Back then their rates were pretty good. I bought a few around 7 in total at 4.75% to 5.25% in my RRSP's and TFSA's.

The rates now are much lower in the 3.25% to 3.75% range the last time I checked with my adviser.

I don't see GIC rates and other interest rates like government bonds going up anytime soon. It seems to me that governments and central banks want to keep them down for many years.

August 10, 2014
6:33 pm
Loonie
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I like Rick's point about keeping money available for further TFSA contributions in next couple of years.
You can carve out a few more dollars for yourself using Hubert judiciously in the interim, but not a lot of difference.

Agreed, rates are not likely to go up much in foreseeable future, if at all. Therefore, might as well go long and use strips if no contradicting factors, I suppose, although my sense is that Jon wants to keep his finger on the button in case the markets go down.

Much depends on what he sees as his future over the next few years. For all I know, he's a dot come wiz kid who may have a lot of money in a couple of years! However, if that seems unlikely, there is not much to choose from.

Some would advocate a good Balanced Mutual Fund, but there is much to consider with that sort of decision.

August 10, 2014
9:11 pm
Jack Manning
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Loonie, I have stopped buying longer term government bonds since 2011 and I am just sticking with 5 year GIC's.

The rates right now are not good enough. I was thinking about buying some zero coupon bonds last year but did not because I thought their rates would go higher.

Maybe I guessed wrong and could of bought some rates in the 4.30% to 4.35% range that my adviser quoted me in October-2013.

August 10, 2014
9:53 pm
Loonie
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Jack, my concern is that I am not sure that rates have bottomed. There is another 3% to lose! (Remember Japan.)

In spite of everything, I have not yet read any credible "expert" who disagrees with laddering in principal, simply because we can never really know where rates are going. For someone with more money, more diversification might be in order, but not for Jon, from what he has said.

I assume that you must be concerned that a strip bond at 3.75 or so might not look like a good investment 6 or 10 years from now. Jon doesn't have any GICs at all yet, so any that he may buy now will be in the 2.9 to 3.0 range for 5 years, at best (less for shorter duration). So why wouldn't he be better off putting some of his money in a strip that pays more and has a few years' longer maturity?

I remember quite some years back now when interest rates were about 11-12%, and people thought they were low because they had previously been even higher. At the time, it was hard to interest a broker in selling you bonds of any sort. We bought provincial bonds, the best rate at the time, and they turned out to be our best investment at that time. I wish I'd followed my instincts when the broker responded by telling us that one of his clients had just cashed in ALL her stocks and bought long bonds. It sounded like she had quite a bit of money and that the broker was disappointed but also that he could see the merit in the idea. My instinct was that she was right. It would have been the right decision for us, especially given what he sold us instead.

August 10, 2014
10:08 pm
Jack Manning
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Loonie, I understand what you are saying but the reason why I am sticking with 5 year GIC's is because I already have a lot of longer term government zero coupon bonds and government bonds.

It is more about having money available in 5 years as nobody knows what rates will be. I don't want to be forced to pay a commission to an adviser and risk what the market value of my zeros and government bonds would be.

If someone is comfortable buying 3.75% zero coupon bonds or strip bonds then they will have to live with their decision as time will tell what rates will be.

August 10, 2014
10:12 pm
Loonie
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Ah, yes, I hear what you are saying, Jack.
I guess the issue for Jon, since he doesn't have any older strips to fall back on, is whether he can get any better rate at all from strips, after commissions or whatever. I don't know the answer to that.

August 10, 2014
10:31 pm
Jon
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Loonie, you guess it right and I am currently waiting for a 25% + adjustment in stock market before I turn to equity. Stocks of good companies can generally give out better yield than medium term bonds while having a chance of getting capital gain. So I think the 1 year special from Hubert seems to be my best bet.

I ask my dad about real return bonds and it seems like you will get interest in addition to your capital and interest being adjusted according to CPI. This seems like something that is bad to keep outside of register plan as you will be tax as both income and capital gain. I will seriously consider this for my TFSA if it have enough money in the future as they are scarcely traded and banks do not want to help you buy them if you don't want to buy a lot at once.

I also have to say you may as well be right about your prediction of interest rate, it appears that People's bank of China/PBOC (aka the central bank of China) are, for the first time in 2 or 3 years, buying 10 or 30 years US T-bond and selling some of its short term US T-bill which is the opposite of what it did previously. However, just like what my dad say, as interest is so low, the risk of rising is going to be significantly higher than it continue to drop. So only float-rate bonds really worth considering in the next few years, or even decades (which is what my dad already did to his family trust after cashing in the profit from convertible bonds he buy in 2010 to 2012 :P )

In terms of saving account, I already have one in Canadian direct financial which give me a better interest rate (1.9%), so I am not keen to open another one in People's trust. At the same time, as the market generally are able to factor in things that will cause change in price in a speedy manner (Efficient-market hypothesis), it really isn't a good option to buy actively managed mutual fund as it is very difficult for most people to out-run index. So I prefer index ETF as it have lower management fee and you can trade easily just like stocks, but I will stay very far away from synthetic ETF or ETN as they involve credit risk of the issuer (ETN) or credit risk of counterparty (synthetic ETF). (My dad learn this lesson after buying in Lehman Brother's ETN :( )

Lastly, I think kanaka is right, RRSP contribution is link to taxable income of a person, according to Wiki, is 18%

August 10, 2014
11:24 pm
Loonie
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I agree that "actively managed" mutual funds don't always work out to one's advantage. A good balanced fund can do better than GICs or other shortterm investments, and is less likely to tank than a more specialized fund, but it is a longer-term strategy, and I am not particularly recommending it. A little research will tell you if there are any fund managers who might do better than the ETFs, but it also depends on what is the mandate of the fund.

You obviously can get some good help from your dad because he has seen the markets ebb and flow, and has learned from his successes and his mistakes.

I only mentioned RRSPs in case you had earned income and were eligible. You should only ever do it when your tax return says you can.

Hubert sounds good for you. Please remember that it's a credit union, not a bank, therefore is not insured by CDIC. But it is insured by Deposit Guarantee Corporation of Manitoba. Some people feel that their insurance might not be as good, but I don't have any problem with it, and I think that most people on this forum do not have a problem with it. I haven't noticed anyone say that they would not invest with them for this reason.

Good luck!

August 11, 2014
5:29 am
xxxx
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My comments are:
- don't try to time the market regarding common shares. There are ups and downs due to the economic cycle and psychological factors (i.e. when people panic and sell for no logical reason) but if one invests, for the long term, in good companies which have paid regular dividends, you will most likely do fine.
- if you don't have employment income now, income tax seems to be a non-issue since your tuition fees are deductible on your tax return. Your investment income on the $10K will likely be tax free - even without a TFSA.
- from what I read, balanced mutual funds are out of favour right now - returns are quite low - and probably not appropriate for an upwardly mobile 18 year old.
- I think the CDIC (federal govt guarantee) is a higher level guarantee than the DGCM (not a govt guarantee), but hopefully adequate if required.
- I think the Oaken 1 year GIC 2.0% (cashable after 90 days) or the 1 year Peoples GIC 2.4% are good rates at this time and both have the CDIC guarantee too. Hubert has the 2.20% cashable quarterly, with the DGCM coverage.
In your case it is likely the interest will be tax free too which is even better.

August 11, 2014
6:42 am
Jon
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Brian said
- I think the CDIC (federal govt guarantee) is a higher level guarantee than the DGCM (not a govt guarantee), but hopefully adequate if required.

Isn't DGCM guarantee by Manitoba government, assume I understand it correctly.

I get what you meant, but I think is still safe enough for me as I believe if such plan fail, the federal government need to step in anyway, but I can see where you are going and understand your concern.

August 11, 2014
6:57 am
xxxx
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Jon said

Isn't DGCM guarantee by Manitoba government, assume I understand it correctly.

I get what you meant, but I think is still safe enough for me as I believe if such plan fail, the federal government need to step in anyway, but I can see where you are going and understand your concern.

Go to the DGCM website Q&As - that will give you good information, so you have the picture. The DGCM does not have any "guarantee" from the Manitoba govt. The federal govt has no involvement in provincially chartered credit unions. Perhaps the Manitoba govt might intervene if required; I don't think the federal govt would have any involvement if a Manitoba CU went under.

August 11, 2014
9:59 am
Jon
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Brian said

Jon said

Isn't DGCM guarantee by Manitoba government, assume I understand it correctly.

I get what you meant, but I think is still safe enough for me as I believe if such plan fail, the federal government need to step in anyway, but I can see where you are going and understand your concern.

Go to the DGCM website Q&As - that will give you good information, so you have the picture. The DGCM does not have any "guarantee" from the Manitoba govt. The federal govt has no involvement in provincially chartered credit unions. Perhaps the Manitoba govt might intervene if required; I don't think the federal govt would have any involvement if a Manitoba CU went under.

I see what you talk about, I still believe Manitoba government or even federal government will step in when DGCM ran out of cash, but it is a concern because I am currently having my checking account and a long term GIC in a Ontario credit union which is under DICO, nevertheless, the redeemable feature of Hubert is still very appealing to me. However, I will also think about Oaken as it is CDIC covered and it is also redeemable.

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