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Should You Consider An All-GIC Portfolio?
June 17, 2017
1:40 pm
Norman1
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Research may improve the odds of success dramatically. But, the improvement may not be enough.

Research could improve the odds of success from 1-in-100 to 1-in-20. But, if the payoff is "only" 10X original investment, then each winner will not make up for the money lost on 19 losers. One will end up underperforming someone who just parked their money in GIC's.

June 18, 2017
12:04 pm
gicjunkie
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Very interesting discussion.
One can survive and actually prosper in retirement on an all GIC portfolio if you have saved enough capital to do so and ladder it properly. This portfolio is almost risk free, if done right. One's ability to survive this way may also depend on if you have additional sources of income (pension income) to supplement the GIC interest. But this is a situation which may be far off into the future for most of you younger bloggers.
When you are young, and trying to save, it can be difficult to accumulate capital while paying off a mortgage, buying furniture and providing for children. This is where proper budgeting and restraint come into play.
More often than not, young wage earners go bit crazy with their new found "wealth" of having a job right out of school. For these youngster, buying a new house or condo may also seem like a pipe dream. If you are lucky enough to be able to access a reasonable down-payment for a house, debt reduction should obviously be the first goal on the agenda. Canadian mortgages have no tax advantage, for the most part. If you are a working couple with no kids, sock away one salary or as much as you can (the restraint part). Invest it, but keep some of it reasonably available for emergencies. Don't spend it all on fancy cars and travel. If you are fortunate to have a great, high paying job, your goals will be realized sooner rather than later. Your income, debt load and comfort with risk will dictate how conservatively you invest your money.
Remember at least one piece of investment advice from all of this : don't gamble with money you cannot afford to lose.

June 18, 2017
9:29 pm
slow_n_steady
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My two cents to add to the discussion for what it is worth.

I want to emphasize that whatever your personal strategy for investing is ie. stocks, bonds, GICs, etc. - I am not telling anyone to change. We are all quite capable of making our own informed investment decisions and have different knowledge and experience to draw from.

Saver-Mom - don’t let anyone pressure you into anything. My simple advice would be to figure out “how much am I willing to lose” and that would be the amount to consider investing with. I was moved to write a reply to your post based on “advice from young people” which I am but I am “not with the herd” when it comes to investment strategies. I write the story below to offer a contrast to what I feel is the mainstream championing of aggressive equity investing.

In mid-2007, by chance I spoke with a financial fiduciary about investing (I didn’t pay them for this, just a chance encounter, and I didn't know them prior to our conversation). The financial fiduciary was/is an independent certified financial planner/advisor who works for a set annual fee percentage based on portfolio size and advises you on proper investments, telling you when to sell to get profits prior to risk getting too high, and to buy when things are low risk at good value. You would assume this is what a "financial advisor" is suppose to do but that is not my experience. This fiduciary only use ETFs (and T-bills) to keep fees low - no kickback from the products they sold so their advice was in your best interest, not in theirs (ie. no hidden kickbacks from product (read stocks/funds) to sway their advice, or sell you “products” (ie. stocks/funds) institutions are trying to unload on their clients so they take the loss, not the institution)). This fiduciary managed portfolios of a minimum size 1 million $ - I am definitely not in that ballpark. Prior to being an independent fiduciary, they were a high-up advisor at one of the Big5 investment houses in downtown Toronto.

To get to my point, this financial fiduciary at the time advised me to be only in GICs. They instructed me the market was at a top and to get out of equities NOW (I was in 100% equities at the time in July/Aug 2007). They told me until I had a house paid off, kids out of the house (and if I wanted to pay for their post-secondary too), and after that had amassed at least 500k$ in savings - not till then to consider getting into equities. Clearly this advice was not self-interested on their part.

They also explained to me that of the portfolios they do manage, that most of the “rich” are actually not exposed to that much risk - maybe 20% of their portfolios are in equities. So as an aside, I think the investment firms also try to sell us on this idea of purchasing equities as what-rich-people-do when more than likely the rich are concerned about preserving their principal.

I took their advice to move to GICs only (though it was really hard to tell my “financial advisor” at the time to sell everything who was trying to keep me in) and the timing was impeccable due to the major downturn in stocks that started in the fall of 2007. Saved me a lot of heartache and money.

Afterwards, I came across David Trahair's books and felt his advice made a lot of sense - ie. pay down any debts first (including mortgage), then start building savings and GIC laddering, and finally not investing in RRSPs until ~10 years prior to retirement as you will have a much better picture of how much CPP you will be getting so not to lose out on government clawbacks on OAS etc. Simple and straight forward.

So, though very boring, I have kept with the GIC strategy. It’s really painful at these rates as I am sure we can all agree! But GICs are simple to understand, safe and straight forward. As they say, don’t buy an investment you can’t explain yourself.

I am not near retirement but am still not tempted to get back into equities anytime soon as I have little faith in the honesty of the stock market (referring to high frequency trading, market manipulation, insider trading, disreputable ratings agencies, and irrational exuberance in the market currently). Even worse is the lack of Glass-Steagall in the USA - thank God we don't have that in Canada.

After the market 2007 downturn, I was humbled to the fact that I know I don’t have the time, knowledge or expertise to properly trade stocks/ETFs/funds and when I have, I know that I am speculating at best in a market with forces I can’t control. I also feel I am ill-qualified from understanding economic metrics to foresee market downturns and thus properly evaluate risk of investments. A high tide lifts all boats.

Unfortunately, I don’t think there is a shortcut to diligent saving.

It makes me sad to think of how “financial advisors” tell you to put X% in equities (especially high risk equities) based on your age because you can “afford to make it back because you have the time”. Well, what if you can’t afford to lose? Look at the employment market for young people today... it's not pretty.

June 19, 2017
12:16 pm
Top It Up
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gicjunkie said

Don't spend it all on fancy cars and travel.  

I don't know - the Millennials seem pretty set on getting that 3-series Beamer along with an annual trip to Costa Rica.

June 19, 2017
5:55 pm
Saver-Mom
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Slow-n-steady, you took the thoughts right out of my head and put them on paper! I agree with everything you said. Others have said, and I will repeat, the greatest predictor of how much you will have when you retire is how much you have manage to save rather than spend. Not the interest you make. Also, counting on pensions, OAS etc seems like a risky strategy to me. Slow and steady wins the race.

June 19, 2017
6:15 pm
Top It Up
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Saver-Mom said

... the greatest predictor of how much you will have when you retire is how much you have manage to save rather than spend.  

Somewhere here is a cautionary tale, about becoming so absolutely focused on saving, that you actually forget to spend, or worse, actually deprive yourself of any enjoyment from your labours, due to an on-going uncertainty of how much money you'll need in retirement.

June 19, 2017
7:30 pm
Loonie
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Saver-Mom said
Slow-n-steady, you took the thoughts right out of my head and put them on paper! I agree with everything you said. Others have said, and I will repeat, the greatest predictor of how much you will have when you retire is how much you have manage to save rather than spend. Not the interest you make. Also, counting on pensions, OAS etc seems like a risky strategy to me. Slow and steady wins the race.  

At a certain point, anything and everything becomes risky. Some won't have workplace pension plans but we will all have CPP and most will have OAS without clawback. OAS might get re-jigged, but then so might tax rates. The Canadian dollar might buy a lot less than it does now.
Currency risk is not to be underestimated. If we wanted to protect ourselves more thoroughly, we might consider that as well, and diversify somewhat. Inflation risk can be offset by purchasing real return bonds, but you lose a bit for buying them. There is some degree of risk in absolutely every strategy. Prices are always in flux; tax breaks and rates change regularly; benefits get reconfigured; and so do interest rates and returns on everything we may invest in.

While I have not done it, I do see some merit in putting some of one's assets into something like the Mawer Global funds. This would be to offset some of the above risks. Trahair's analysis, as I recall, does not allow for this. I wouldn't suggest this for someone who is still fairly young and might need the cash, but it would make sense for some older people. The problem, as I see it, is in deciding how much to invest in this way. If it's just a small percentage, it won't make much difference in terms of offsetting other problems. If it's larger, it may introduce too much risk! - and that's why I haven't done it. Yet, currency risk remains an issue in my thinking.

June 20, 2017
4:56 am
Top It Up
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Going forward, it's things like gold-plated public service pension and benefit plans that will be the death knell of this country - a taxpayer burden that hangs like a pall ... now THAT'S a real issue -

Worse Than It Looks:The True Burden and Risks of Federal Employee Pension Plans

https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary_449%20.pdf

Federal government employees enjoy pure defined-benefit pensions that promise relatively generous benefits to a large current and former workforce. Being largely unfunded, these plans impose on taxpayers obligations running into the hundreds of billions of dollars. What is worse, misleading accounting understates the true burden and risks these plans create for Canadian taxpayers.

June 20, 2017
4:31 pm
Bill
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Top It Up, plus the analysis deals only with federal public servants, a relatively small part of the picture - seems to me in most towns other public sector workers (teachers, police, fire, hospitals, other provincial ministry and city/town workers) far outnumber federal public servants.

June 20, 2017
4:54 pm
Top It Up
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Absolutely, no question. Here's a study done on the "bloated" public service in Canada with emphasis on the western Canadian Provinces (minus crown-corporations, which in Manitoba, have truly become a sore point) -

The Size and Cost of the Public Sector in Western Canada

https://fcpp.org/wp-content/uploads/FC17006_SizeCostPSWest_F1.pdf

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