How to invest conservatively without bank GICs

Q: We are maxed out on our RRSPs and TFSAs and our remaining funds are in joint guaranteed investment certificates (GICs). Due to our age, we are risk adverse and like to maintain GICs. However, the bank rates for GICs are relatively low and more importantly, the banks are covered under the Canadian Deposit Insurance Corporation (CDIC) for only $100,000.

This means that we have to spread our funds over various institutions – and this is becoming cumbersome.

We recently heard about credit unions covered by the Deposit Guarantee of Manitoba. Their GICs rates are more appealing and their limits are unlimited.

1. How safe or risky are the credit unions covered by the Deposit Guarantee of Manitoba?

2. Are there any other avenues to take?

3. Typically, what do corporations, business and/or private people do with their money if they have large sums of money to invest (more than $100,000)?

–Jack

A: Yours is a good problem to have, Jack. Although having too much money is better than the alternative, it never ceases to amaze me how the wealthy worry about money too – just in a different kind of way.

I’d like to challenge your focus on risk adversity in light of your age. I think that age is a poor reason on its own to invest conservatively. The rule of thumb to have your fixed income allocation equal to your age may not apply universally – especially in the current interest rate environment.

I would focus first and foremost on when you need the money. Older investors generally are more likely to need their money sooner, but wealthy older investors may very well never touch their investment capital or even their investments, depending on their retirement income sources. In a case like yours, you may be investing for your children or grandchildren and no doubt they are much younger than you, Jack.

Furthermore, investing in GICs* may seem conservative, but I’d also counter that earning a return that is less than inflation even before taking taxes into account could be also considered risky.

If you’re investing in GICs because you’re not comfortable with the ups and downs of stock markets, that’s another thing. I think that should be independent of your age though, Jack.

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The Canadian Deposit Insurance Corporation (CDIC) insures deposits held at banks and trust companies up to $100,000 in the event of failure. Most banks have various affiliates that are all CDIC members, allowing them to offer multiple $100,000 coverages under the same institution. For example, the country’s largest bank, RBC, offers GICs from Royal Bank of Canada, Royal Trust Corporation of Canada, The Royal Trust Company and Royal Bank Mortgage Corporation.

If you work with a GIC deposit broker or an investment advisor, they may be able to source you GIC rates from multiple institutions across Canada and streamline your efforts.

You mentioned the Deposit Guarantee of Manitoba, Jack. It’s similar to CDIC coverage but applies to Manitoba credit unions and has no limit. In theory, 100% of credit union deposits in Manitoba are backed by province in the event of the failure of a member institution. I’d say the CDIC coverage backed by the federal government is more reliable than the provincial coverage that Manitoba offers its credit unions, but all of Canada’s financial institutions made it through the financial crisis smelling like roses, if that’s any indication.

As of November 30, Fiscal Agents reported the highest 5-year GIC rate amongst the big banks at 1.50%, while Manitoba credit unions like AcceleRate and Achieva are paying 2.50%.

Beyond GICs*, higher returns are available at higher risks. Bond exchange-traded funds (ETFs) and mutual funds are generally yielding in the 2% range for lower risk options, while higher yields can be earned from less credit-worthy bond portfolios.

The mortgage investing market has grown significantly in recent years, with mid-single digit returns available on first mortgage investments and even higher for higher risk commercial or second mortgages.

Stocks, stock ETFs and stock mutual funds offer even higher return potential, at the expense of more volatility. Long run stock returns have approached double-digit territory depending on the country or the time period.

What do other people do, you ask, Jack? It depends. Everyone is an individual and has to build their investment portfolio based on a consideration of all factors. Direct or indirect real estate investing is an option for those who are averse to investing in stocks. Insurance can provide a reasonable “investment” return for a conservative investor who is a steward for their children’s inheritance. Annuities – which are products of the insurance industry – can be worth considering for a conservative investor, though delaying a purchase until rates rise may be advisable.

Finally, do your kids have debt? Chances are they’re paying at least as much to the bank as the bank is paying you on your GICs, if not more. You could always consider being the bank and cutting out the middle man as a viable investment alternative and a way to help out your kids.

Manitoba’s credit unions may be an option for you, Jack. But first, take the time to consider what – and who – you’re investing for. If it’s for your kids, there may be better alternatives than GICs*.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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