I would question how we can discuss these things when you do not know how to calculate the after-inflation return on anything. You do not know what a real-return bond is? Why?

Thanks for illustrating that every accusation is an admission. Bye. Ignore.

You said:

“Sorry, the point is that we know the actual real return for the last 5 years, which is negative on 5-year GICs. I have zero idea what the real return will be on your 2-year GIC, so it’s completely useless for the purpose of illustrating inflation risk. We are not talking about current rates; we are talking about current risks.”
--------------------------------------------------------------------------------------------------------------------------------------------------------

If you go with the 5-year GIC under those specific conditions, that is one thing. But it is not a real-world example, as I stated before, if you manage the portfolio well.

You have zero idea what the after-inflation return is on a 4.25% GIC when the latest inflation reading was 3%. The after-inflation return is 4.25% − 3% = 1.25% for this year.

As I said, a real-return bond is a government bond that adjusts for inflation. I gave you the bond number and maturity date. It provides a return plus inflation protection.

I would question how we can discuss these things when you do not know how to calculate the after-inflation return on anything. You do not know what a real-return bond is? Why?

You raised a concern about inflation and GICs (bonds). This solves that problem.

I consider myself an average investor, and I know enough to be able to speak about the effects of inflation on a portfolio.

It is impossible to discuss these things with someone who does not understand or agree on the basics of economics. Without that understanding, how do you invest?

zgic said

I saw that and I am saying that I am getting today:
2 year GIC for 3.90% from RBC Direct Investing. 5 years still higher. So those are outdated numbers.  

Sorry, the point is that we know the actual real return for the last 5 years, which is negative on 5-year GICs. I have zero idea what the real return will be on your 2 year GIC, so it's completely useless for the purpose of illustrating inflation risk. We are not talking about current rates, we are talking about current risks.

mordko said

Please see post 33 from which you are quoting.  

I saw that and I am saying that I am getting today:
2 year GIC for 3.90% from RBC Direct Investing. 5 years still higher. So your numbers are not relevant today.

Government of Canada 4.00% 1 Dec 2031, 135087 HK 0.

It solves the inflation problem you speak of with GIC by passing the risk off to the government. But it is hard to get a quote from a broker as to what the yield would be at retail.

Peter, I thought of making this a private message, but this topic is already so confused I thought I'd share with the participants this once.

The most important for you is probably [b-quote], which creates the shaded box like this line.

Also:
[b] is bold
[i] is italic
[u] is underline

You can stack them, too.

zgic said

@mordko:
I can get a 2 year GIC for 3.90% from RBC Direct Investing. 5 years still higher. What is this 0.8%–1.36%??  

Please see post 33 from which you are quoting.

mordko said

The main and most obvious risk is that you lose purchasing power.

A 2021 MoneySense article discussing GICs available through RBC Direct Investing reported 5-year rates mostly in the 0.8%–1.36% range. https://www.moneysense.ca/save.....gic-rates/

If you bought a 1% $1M GIC from RBC, then in December 2026 you will get $1,000,000 plus $51,000 interest in 2026 dollars or $885,000 in 2021 dollars. That’s a real loss of about $115,000, or 11.5%, despite receiving $51,000 of nominal interest. And that's before the income tax.

I would estimate the risk of losing purchasing power on buying a 5-year RBC GIC today at 50%. Ok, that's just a guess but it's in the ballpark. Ignoring this while focusing on events with the likelihood of occurrence which is several orders of mag less is a mistake.

Apart from that, I also see a risk in having numerous 100K GICs. Yes, one could have a large spreadsheet but it's still a pain. Things get lost or forgotten over the years, and if you pass away it becomes a bit of a nightmare to the poor sod who has to deal with it.

And then there is risk that you actually need that money. Unexpected things do happen. If most of your net worth is stuck when you need it then it's a major problem, what was the point of saving all that money if you can’t use it in time of need?

And then there is risk of RBC or an issuer going bankrupt and CDIC not being honoured. The probability is non-zero but tiny compared to all the other risks.  

@mordko:
I can get a 2 year GIC for 3.90% from RBC Direct Investing. 5 years still higher. What is this 0.8%–1.36%??

What’s more, you are very unlikely to end up with a sizeable pot if that's your main/only method of investing and you are in the accumulation phase. That's the real risk of not meeting your financial objectives vs hypotheticals like CDIC vs CIPF.

That's why asset diversification comes before getting into the details of insurance.

This is where inflation-protected government bonds get interesting, like:

Government of Canada 4.00% — 1 Dec 2031 — 135087 HK

With these bonds, the government takes the risk of inflation. But I find it hard to get a quote on them or know how much I might get from the bond plus inflation.

zgic said

@mordko:
One can have many GICs with RBC Direct Investing each with 100k total with each separate CDIC member institution? What is the risk in that?  

The main and most obvious risk is that you lose purchasing power.

A 2021 MoneySense article discussing GICs available through RBC Direct Investing reported 5-year rates mostly in the 0.8%–1.36% range. https://www.moneysense.ca/save.....gic-rates/

If you bought a 1% $1M GIC from RBC, then in December 2026 you will get $1,000,000 plus $51,000 interest in 2026 dollars or $885,000 in 2021 dollars. That’s a real loss of about $115,000, or 11.5%, despite receiving $51,000 of nominal interest. And that's before the income tax.

I would estimate the risk of losing purchasing power on buying a 5-year RBC GIC today at 50%. Ok, that's just a guess but it's in the ballpark. Ignoring this while focusing on events with the likelihood of occurrence which is several orders of mag less is a mistake.

Apart from that, I also see a risk in having numerous 100K GICs. Yes, one could have a large spreadsheet but it's still a pain. Things get lost or forgotten over the years, and if you pass away it becomes a bit of a nightmare to the poor sod who has to deal with it.

And then there is risk that you actually need that money. Unexpected things do happen. If most of your net worth is stuck when you need it then it's a major problem, what was the point of saving all that money if you can’t use it in time of need?

And then there is risk of RBC or an issuer going bankrupt and CDIC not being honoured. The probability is non-zero but tiny compared to all the other risks.

mordko said
Different people have different objectives for different pots of money for different reasons. Also, CDIC only covers up to 100K and having numerous accounts with different institutions creates a risk all by itself. GICs remove access to money and ability to rebalance for very little return (I do have some but it's immaterial).

Ultimately, keeping a large proportion of money in cash isn’t a good choice for some of us, so “capital security” for 1% of the assets isn’t on the top of ones list. Convenience becomes priority. And I personally evaluate the risk for this particular account as low enough but to each his own.  

@mordko:
One can have many GICs with RBC Direct Investing each with 100k total with each separate CDIC member institution? What is the risk in that?

To pretend there is no risk when there is some risk is misleading. I can recall seeing a statement like, “The stock market has never had a 10-year period where it did not outperform the bond market in any living person’s lifetime.” I am paraphrasing. When I asked AI to check the record, it was untrue.

I never said that. Look back in the appropriate forum. In fact, your 'paraphrase' is almost the reverse of my initial statement, which I THINK you were trying to cite:

It's not true that equities always beat fixed earnings over ten-year windows; in the last fifty years, half the sliding ten-year windows - and several longer periods - have seen equities fall behind. It's true that overall, equities do make more than fixed deposits, but that's not true for most investors.

95% of retail investors in Canada lose money on their equities and cash out with less than they invested. While the market makes more, that is concentrated in a small segment of the investment population.

And I agree with others who say please don't post AI slop in the forum. If AI finds something, ask for the sources and check them, then post those originals.

mordko said
I would start by carefully reading the terms and understanding what each “insurance” actually covers. That's the key step you haven’t taken yet.

Then identify each event which could lead to loss of funds. Then build all scenarios and an event tree (eg both your credit union and Manitoba would go bankrupt, credit union goes bankrupt and the province refuses to pay up, etc). Then assign annual probability of exceedance to each event and run the model. Then you’ll have your answer.

Good luck. I see this as an interesting but hypothetical exercise because it deals with a small portion of the overall portfolio and a small portion of the total risk for this portion.

Best way of handling actual meaningful risks is to diversify ones asset classes and holdings.  

If a credit union were to go bankrupt, the DGCM would refund the depositors and then sell off the assets of the bankrupt credit union to recover some of the money. That is essentially how the system works. No credit union has ever gone bankrupt in Manitoba; they usually arrange a merger or another solution. If you were to call the DGCM and speak with them, as I have, they would tell you that.

If the fund were exhausted, the government might or might not step in. That would depend on the politics and circumstances at the time. I noticed that the Ontario insurance fund used to state on its website that the guarantee was limited to the size of the fund—I am paraphrasing.

This is also where doing your due diligence matters. If you actually investigate how the DGCM and CDIC work, read their terms, and speak directly with the organizations, you can find out how the coverage and resolution process actually works instead of building hypothetical scenarios based on assumptions.

Before you invest in something, do you do your due diligence? If you had done that research, you might have discovered some of this information yourself by speaking with the DGCM or CDIC. That is what due diligence is for. It would bring all of this to light, as it has for me.

As for diversification, when it comes to government agencies or government guarantees, I don’t need to go into riskier things just to get security. The government is the best security.

Then identify each event which could lead to loss of funds. Then build all scenarios and an event tree (eg both your credit union and Manitoba would go bankrupt, credit union goes bankrupt and the province refuses to pay up, etc). Then assign annual probability of exceedance to each event and run the model. Then you’ll have your answer.

Good luck. I see this as an interesting but hypothetical exercise because it deals with a small portion of the overall portfolio and a small portion of the total risk for this portion.

Best way of handling actual meaningful risks is to diversify ones asset classes and holdings.