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Should You Consider An All-GIC Portfolio?
June 16, 2017
5:45 am
Saver-Mom
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Yes, says David Trahair. I wonder if he still thinks so after two more years of bad rates.

I just read this article now, though it is two years old. Happened upon it after my newly employed offspring began to lecture me about my conservative investing style.

https://www.ratehub.ca/blog/should-you-consider-an-all-gic-portfolio-yes-says-david-trahair/

June 16, 2017
7:28 am
Bill
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He makes some valid points, but as you know there's no shortage of advice from all along the spectrum as to what we should do with our money. To me it's important to do what suits my own temperament, my own nature - what others do is what they do, some like to gamble more than others, some like to play things safe, but to me the peace of mind of doing it "my way" is important.

And people looking at the same situation can come to totally different conclusions. For example, Trahair at the end says if you're all set, got enough money piled up, then sure, why not go riskier and go for higher return, do what you want. But another logical conclusion for the same situation could also be to buy more GICs, that's precisely the time when you don't need to take on any risk, you've just said you've got enough, so why, aside from greed (which I'm not saying is bad), would you bother taking on the time and energy and risk of investing to get even more money that you don't need? All depends what suits you.

And about the "lectures" from our young offspring - ah, yes, we parents have so much to learn from those who have been around these parts about 3 decades or so less than us, don't we?!sf-wink

June 16, 2017
8:00 am
Top It Up
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As one sitting with a pretty high-value nest egg - a laddered regimen of 5-year GICs works for me.

June 16, 2017
9:13 am
2of3aintbad
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Perhaps this is the perfect time to start a GIC ladder. Today you can invest 20% of your capital and get 3.25% at Oaken. Next year, another institution might be in trouble or interest rates have gone up, and you can invest another 20% at 4%, etc. However, this strategy doesn't give you much protection against a surge of inflation, once you have all your capital invested.

June 16, 2017
9:39 am
AltaRed
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2of3aintbad said
However, this strategy doesn't give you much protection against a surge of inflation, once you have all your capital invested.  

Sure it does. A 5 year GIC ladder has an approximate 2.5 year duration (in bond speak). That means all you have to do is to hold for 2.5 years and you will have caught up. That is because this year's maturing GIC captures the new interest rates. You actually get a 5 year rate for a 2.5 year exposure.

Depending on funds deployed a 5 year GIC ladder can consist of 5 GICs (one maturing each year), 10 GICs (one maturing every 6 months), 15 GICs (one maturing every 4 months) and so on..... allowing one to ride the yield curve.

For my fixed income allocation, I pretty much operate a 6-7 year ladder of GICs, corporate bonds and unsecured debentures....all investment grade of course. I have about 15 separate assets, all maturing at different intervals on the curve. Works perfectly fine.

June 16, 2017
10:01 am
2of3aintbad
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AltaRed said

Sure it does. A 5 year GIC ladder has an approximate 2.5 year duration (in bond speak). That means all you have to do is to hold for 2.5 years and you will have caught up. That is because this year's maturing GIC captures the new interest rates. You actually get a 5 year rate for a 2.5 year exposure.

Depending on funds deployed a 5 year GIC ladder can consist of 5 GICs (one maturing each year), 10 GICs (one maturing every 6 months), 15 GICs (one maturing every 4 months) and so on..... allowing one to ride the yield curve.

For my fixed income allocation, I pretty much operate a 6-7 year ladder of GICs, corporate bonds and unsecured debentures....all investment grade of course. I have about 15 separate assets, all maturing at different intervals on the curve. Works perfectly fine.  

I wrote that this strategy doesn't give 'much' (as opposed to 'any') protection against a 'surge' of inflation. I'm not concerned with moderate inflation, I'm concerned with the x% probability of sudden inflation or even hyper-inflation. It seems prudent to me to have a portion of any portfolio invested accordingly, whether it be in stocks, real return bonds, etc.

June 16, 2017
10:36 am
Loonie
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I suspect Trahair would probably say more or less the same thing today. Inflation has been hovering around 1%, so you can still make money. Even after taxes, most people will probably still be ahead if they use their average tax rate, not marginal. It has always been the case that most of the money we accumulate (at least us "little people") is from actually saving it up ourselves. There are stats on that somewhere.

One modification might be to add some 10 year bonds to the mix. It extends the ladder, and can still be equally conservative, depending on whose bonds you buy. I know that some people who are very conservative recommend this. Rates are not too appealing at the moment though.

I like his point about individuals not having the long horizons that corporations etc may have - and, I would add, pension plans. I like pension plans because they allow me to participate in something that I can't do myself, taking the very long view of "forever". I let them do the worrying about the stock market. They also, if large and well-managed, offer a much higher return on my investment than I could ever expect to get on my own. Yes, you forfeit the capital when you die, but I don't care. It's money for living, not for dying.

I figure our investments are already well balanced without getting into the stock market because of the pension plans. They are invested in the market and provide a significant part of our retirement income. No need for me to duplicate that effort with my much shorter horizon. Not everyone has the same income from this source however.

The younger generation will likely go ahead and make the same mistakes that many of us made when we were younger. And that's why we are now in GICs! You can't stop them from doing what they want to do, but you don't have to join them either.

Bill has summed up the options pretty well for someone who doesn't "need" extra income. You can invest in the market for sport if you want. Or you can muddle along with GICs and HISAs. Or you can do some of both.

A third option, if you don't need the money, is to give more of it away, either to charities near to your heart or to family and friends who can benefit from having it now rather than later. Then you will be free of the decision about where to invest it!

I wish Trahair had given more details of his 50 year analysis. I have read this elsewhere before but don't have any sources to cite. I know that some have challenged this view. I also know that I personally don't even have 50 years, so not willing to take the chance.

As Top it up suggests, a lot of people have done very well with unspectacular conservative investing over many years. They also tend to be careful spenders, I think. This is an unglamorous fact which doesn't get much attention from the media, and none from investment advisors etc. It's of no interest to the latter because they can't make any money off it. It's just not the business they're in. From a media perspective, the excitement is in the speculating, the gambling, the imagining of what might happen or has happened, and the catastrophes of what did not.

June 16, 2017
2:06 pm
AltaRed
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2of3aintbad said

I wrote that this strategy doesn't give 'much' (as opposed to 'any') protection against a 'surge' of inflation. I'm not concerned with moderate inflation, I'm concerned with the x% probability of sudden inflation or even hyper-inflation. It seems prudent to me to have a portion of any portfolio invested accordingly, whether it be in stocks, real return bonds, etc.  

I tend to disagree somewhat. I recall in high inflation days of 1979-1982, my parents were getting as much as 18% (I think) on their GICs. Certainly very high rates. Was a gravy train for them having just retired and lasted 5 years. Now had they only bought long term nominal bonds then.

The point really is that fixed income interest rates will also rise quickly with sudden and rapid inflation. It just takes awhile for the maturing GICs in the ladder to catch up (2.5 years). It's not perfect, but I'd suggest the stock market would crater, in the short term, under highly inflationary events. All that debt becomes more expensive and the dividends would be lower than interest income. Indeed, capital intensive stocks could really freefall.

June 16, 2017
2:43 pm
2of3aintbad
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AltaRed said

I tend to disagree somewhat. I recall in high inflation days of 1979-1982, my parents were getting as much as 18% (I think) on their GICs. Certainly very high rates. Was a gravy train for them having just retired and lasted 5 years. Now had they only bought long term nominal bonds then.

The point really is that fixed income interest rates will also rise quickly with sudden and rapid inflation. It just takes awhile for the maturing GICs in the ladder to catch up (2.5 years). It's not perfect, but I'd suggest the stock market would crater, in the short term, under highly inflationary events. All that debt becomes more expensive and the dividends would be lower than interest income. Indeed, capital intensive stocks could really freefall.  

In those years (1979-1982), I was newly married and there was no easy way to buy long term bonds. If there were, I probably would not have a house or a spouse. I understand that if you have a regular inflation-adjusted income, you might be OK. But if not, in a period of high inflation, then you are going to need that maturing GIC to buy groceries, not to reinvest at the prevailing rates. No one knows how things will play out next time.

June 16, 2017
7:48 pm
Loonie
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AltaRed, could you explain the 2.5year thing a bit more. I'm thinking that the apparent loss of having low-paying GICs in a rising interest environment would be balanced at the other end. Right now, for instance, many of us probably still have 5-yr GICs that are paying about 3.5 or so from a few years back.

Also, what does capital intensive stocks mean? Is that the same as large cap?

thx.

June 16, 2017
8:43 pm
Norman1
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Loonie said

I wish Trahair had given more details of his 50 year analysis. I have read this elsewhere before but don't have any sources to cite. I know that some have challenged this view. I also know that I personally don't even have 50 years, so not willing to take the chance.

Bill mentioned Trahir's analysis last year. I added where Trahir's article in CPA Magazine was published and where Trahir has made his data available in an Excel spreadsheet.

I was not convinced by Trahir's argument involving 3.86% average inflation rate versus 6.78% average five-year GIC rate. Inflation floats year to year. But, the return on a five-year GIC does not. The rate of a five-year GIC is locked in at the beginning of the five-year period.

I did my own analysis with the data comparing the locked-in return of a five-year GIC and the inflation during its term. There are 53 five-year periods from 1958 to 2014. I found the following:

  1. Inflation during the GIC term exceeded the GIC return in 4 of those 53 (7.5%) periods.
  2. Inflation during the GIC term exceeded the after-tax GIC return in 11 of those 53 (20.8%) periods when 25% income tax needs to be paid.
  3. Inflation during the GIC term exceeded the after-tax GIC return in 19 of those 53 (35.8%) periods when 40% income tax needs to be paid.
    June 16, 2017
    8:59 pm
    Jon
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    The bottom line is, if you have many capital, you can speculate, if you only have just enough capital, DO NOT speculate.

    If have not enough capital, YOU MUST SPECULATEsf-surprised, in order to try to gain more capital.

    June 17, 2017
    12:58 am
    Loonie
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    thanks, Norman. I feel dumb for not remembering what has gone before, but that's the way it is alas.

    Those are really high tax rates that you are citing though. We don't pay anywhere near 25% as an average tax rate, let alone 40%, and we have a six figure total family income, which is more than we need, and we gave away several thousand last year. We are just careful in how we organize our income, splits, and tax credits. (This would be more of a challenge if we weren't seniors.) Neither do we have tax benefits from Cdn dividends or capital gains. I did the math, and I'm pretty happy with the percentage of our income that goes to CRA - less happy about municipal though! I will be less happy when some additional income kicks in probably, over the next few years, but it still won't be anywhere near 25%.

    No doubt there is some kind of argument to be made for using marginal rates but, to me, it isn't important as long as my average rate is acceptable. Who's to say which item of income is the last one in? One could decide that the GIC income was the part on the first tier, and then there would be low or zero tax on it.

    The one thing that does bother me though is the mandatory RIF withdrawal rates, which have no relation to what has been earned in the RIF or to inflation. I think we should be allowed to make our own decisions as CRA is going to get theirs in the long run regardless. They are trying to protect us against ourselves, but I don't think it's working very well. Once you get into a GIC in an RIF, you are stuck with whatever rate you choose as long as it's at least the minimum. You can get around this to some extent with laddering, as some of it comes due every year and you can decide how much of it to reinvest, but you still can't go below the minimum, which is quite steep compared to current GIC rates. It's not the end of the world, but I would like the freedom to make my own decisions. You have to take it out of each and every GIC if you don't use a brokerage. Thus, if you have a great rate at one FI, you still have to lose that rate on a portion every year by forced withdrawals. You can't just decide to take the money out of another GIC which is not paying as well, which would be the sensible thing to do.

    June 17, 2017
    1:15 am
    Loonie
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    Jon said

    If have not enough capital, YOU MUST SPECULATEsf-surprised, in order to try to gain more capital.  

    You're not serious, are you?

    June 17, 2017
    4:44 am
    Top It Up
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    Pretty hard to get all lathered up in a discussion regarding GICs and inflation when every individual's basket of goods and services differs from the government's "official" basket of goods and services, other than it's a good way to help ward off early onset Alzheimer's, much the same way as crossword puzzles do, I guess.

    Clearly, this discussion is not on the minds of many Canadians when you constantly read headlines like

    "Canadians owe $1.67 for every $1 of household disposable income, StatsCan says."

    If this is a REAL concern for savers and spenders going forward, there are a number of options available to them - all of them involving a degree of risk with an uncertain return, including this one, which most certainly beats the current inflation rate (just be sure to read the fine print) -

    https://www.meridiancu.ca/personal-banking/ClassA/default.aspx

    June 17, 2017
    8:28 am
    Norman1
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    Loonie said
    thanks, Norman. I feel dumb for not remembering what has gone before, but that's the way it is alas.

    Everything works out as long as one of us, this web site, or Google remembers! sf-laugh

    Those are really high tax rates that you are citing though. We don't pay anywhere near 25% as an average tax rate, let alone 40%, and we have a six figure total family income, which is more than we need, and we gave away several thousand last year. …

    These are the results for more tax rates. I corrected the count for the 25% tax rate; missed two periods on first scan:

    Tax rate 0% 5% 10% 15% 20% 25% 30% 40%
    Periods lost purchasing power 4/53
    (7.5%)
    5/53
    (9.4%)
    9/53
    (17.0%)
    10/53
    (18.9%)
    10/53
    (18.9%)
    11/53
    (20.8%)
    14/53
    (26.4%)
    19/53
    (35.8%)

    The odds of a 5-year GIC keeping up with CPI inflation changes quite a bit with how much tax one pays on the interest. Odds have been pretty good at lower tax rates. Not as good at the higher ones.

    Not so bad: People with not much taxable income can likely keep up with inflation with 5-year GIC's, without having to involve a financial advisor. Those with much more taxable income can probably afford to hire an advisor.

    June 17, 2017
    9:03 am
    Norman1
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    Saver-Mom said
    Yes, says David Trahair. I wonder if he still thinks so after two more years of bad rates.

    I don't think he has changed his mind. His position wasn't really dependent on the rates themselves. It was more dependent on the 5-year GIC rates exceeding inflation.

    I just read this article now, though it is two years old. Happened upon it after my newly employed offspring began to lecture me about my conservative investing style.

    https://www.ratehub.ca/blog/should-you-consider-an-all-gic-portfolio-yes-says-david-trahair/ 

    GIC's are good for savings. That is, accumulating money for short to medium term purchases and offsetting some of loss from inflation during that time.

    For long-term investing (trying to grow the money meaningfully above inflation), I would side with the kids. I would have left much on the table if I had used GIC's for that. I also gave my parents a similar lecture many years ago. sf-laugh

    June 17, 2017
    9:55 am
    Top It Up
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    Jon said

    If have not enough capital, YOU MUST SPECULATE, in order to try to gain more capital.  

    Or, as they say in Vegas, "reaching deep."

    June 17, 2017
    11:18 am
    Jon
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    If you are young and do your research before hand, what's the problem with speculation.

    June 17, 2017
    11:27 am
    Loonie
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    No matter what age you are, if you don't have very much money, you need to first consider how you will access what you have for emergencies, and you might also want to be using it to save up for something important. This precludes speculation in my view. Speculation is just that, no matter how much research you do.
    The only exception I can think of is if you can count on mom and dad to look after you if you get into trouble.

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