Cash or Fixed Income (GIC's): The Ultimate Question....

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As an experienced Wealth Advisor and former Bond Trader, the aforementioned question is asked of me daily.  Clients are stressed to see high cash levels in their 'investment' accounts and a typical conversation I have follows this path.....

 

Interest rates are at historic lows and will likely remain low for the foreseeable future. 

 

“Hi Tim.  I know we discussed maintaining cash in my portfolio.  I was wondering about the other low risk options available.”

“Yes, Bob, we are holding a relatively large amount of cash on which you are earning only 1.30%.  There are no fees, therefore, you are netting 1.30%.  Factoring inflation and taxation, (for non- registered accounts), holding a cash position results in no generation of wealth.  Governments around the world are trying to force you to invest in Equities vs Cash, or GICs.” 

 

So, let us look at the alternatives:

 

“We can reach out and lock-in an interest rate of 2.7% for five years via a GIC.   Keep in mind this is locked.....you cannot touch it.....and a bond mutual fund will most often net out less than 2.7%, after fees.”

“Wow, I can get a mortgage for that rate of interest.” 

 

The term I use most often with clients is 'optionality.'  By giving up 1.4%, (2.7%-1.3% from the example above), you are allowing yourself to make any financial decision you want.  “Do I buy a rental property with a low rate mortgage?  Do I loan the money to my daughter?  Do I invest in a profitable company with a healthy and stable dividend?”

 

“Is 1.4% annualized going to change your life, Bob?”  I will answer that....”No.”

“We can invest in Canadian Bank common shares with a dividend of 3.5-4% and have significant potential long term capital appreciation.....but....what if?”  

“What if the share value declines by 20%?”  You have to be honest with yourself and ask yourself these questions:  “What would I do if that happened?  Sell/Hold or Buy more?”

   

My career is based on advising people to invest their money and I am advising my clients to be very careful.  Work hard, don't spend a lot and be very careful with what you have and have informed discussions with your Financial Advisor to determine the best financial plan for you based upon your current life situation, risk tolerance and objectives.

 

Another core message that I communicate to my clients is this:  Don't expect your hard earned savings to grow rapidly.  No advisor on the planet can do that consistently with any certainty.  The farther you reach, the greater the risk.  

 

 

Tim Wilson, CFP, CIM

Investment Advisor

 


Note: The opinions expressed here are Tim Wilson's.  Cornwall Wealth Management Group/Manulife Securities Incorporated are not responsible for the accuracy of any of the information supplied here.