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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 10, 2016 | The Lost Cause

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

HUSBAND MARKER modified

Let’s say you bank at the green one and have $30,000 to save and grow. “The TD High Interest Savings Account (HISA) product aims to provide a premium interest rate,… sez [email protected], quoting the web site as you sit obediently in her cubicle. “For a minimum balance $25,000 we’ll waive the transaction and the rate is calculated on a daily balance.…

Great, you say, your heart racing as she moistens her lips and smooths her skirt. So how much does it pay?

“0.55%,… she says. You crush.

Oh, but can I get more if I lock the money up for, say, a whole year?

“You betcha, stud,… she replies professionally. “The TD Non-Cashable GIC product has an interest rate that is applicable for a 1 year / 12 month term, paying a premium amount.…

Again you are aroused. You stammer out between shallow breaths: how much will you give me?

“0.85%,… she replies, looking up, licking a finger.

Okay, so what if I just leave the money in my daily interest chequing account, but double the amount, like to fifty grand? Surely you have a better return on that amount of cash?

A small smile forms. She looks up. “On balances of $25,000 through $59,999.99,… the words tumble out, “we are prepared to offer a yield of 0.05%.…

And what comes after that? How ’bout if I turn over $600,000 to you?

“Then,… she says. “it will be 0.05%.… You crawl from the branch. Rejected.

Savers, needless to say, are screwed these days. It might get worse. There’s now a one-in-four chance the Bank of Canada will be cutting its key interest rate later this year. The ten-year government bond rate has plunged below 1%. In order to find a savings vehicle whose yield actually exceeds inflation, you must turn your cash over to some rinkydink online trust company, or an unknown credit union which hands out too many mortgages and is backed by the awesome financial muscle of Manitoba.

In Europe, it’s worse. Following the Brexit mistake, the Bank of England is set to chop its key rate next month and German bonds went negative weeks ago. Japanese government bonds return less than zero, and US Treasuries have plunged following the UK vote and in the lead-up to the Presidential election. Thus, if you invest in the safety of bonds — intending to hold them to maturity and clip the coupons — do it soon, since it’ll take a few hundred years for your money to double. And, of course, the interest is 100% taxed at your marginal rate.

All this is sobering for people afraid of risk, or retirees wanting to just sit on whatever they’ve accumulated. If you don’t already have a brimming pot of money, the risk you face is running out of it by playing things safe. The traditional old-guys portfolio of 60% or 70% fixed income could mean years of making absolutely nothing, after inflation and taxes are factored in.

Why have yields on safe stuff collapsed? Demographics is a part of it. The world’s getting a lot older, fast. The demand for non-volatile assets is growing right along with the grey hair, and that continues to push yields lower. Second, we have scary stuff like Trump and Brexit, ISIS and Adele. Investors flee from equities to fixed income after folks do silly things like vote to leave the world’s premier free trade zone, or put an isolationist buffoon on the path to lead the biggest economy and military machine. As demand for bonds increases, prices are inflated and yields depressed.

Already things are rough enough. Once again this year global growth will be anemic, causing central banks to push rates into the ditch in an attempt to stimulate demand, while buying up reams of government bonds. At the same time, an embattled and aging middle class electorate, saddled with low returns and stagnant incomes, poor job prospects and increasing household debt, fuels the rise of right-wing politicians preaching anti-immigration, protectionism and eat-the-rich tax policies. That makes it all worse. Trade barriers, tariffs, walls and taxes always restrict growth and depress national net worth. So rates fall.

What to do?

Not saving would be one option. Buying a bond ETF instead of a bond — where returns are based on bond prices and not yields — would have been a smart move this year. For example, while Canadian government bonds sink, a fund holding them has delivered a 5.04% return so far in 2016.

And investors who shun equities because they perceive volatility fail to understand the world is still growing, while crashing bond yields just drive more money into stocks where dividends are higher. So while deposit accounts and GICs impoverish savers, the TSX so far this year has returned 9.6%. And despite the Brexit turmoil, both the Dow and the S&P have gained more than 4% in the last six months.

The conclusion is pretty simple. Unless you already have millions, you probably need to grow your portfolio in order to finance the rest of your life. Eschewing risk, saving money and throwing yourself into the arms of the bank babe will not cut it. The best defence is a 60/40 balanced and diversified portfolio of low-cost, high-liquidity, tax-efficient ETFs that you build, rebalance once or twice a year, then forget about.

Oh yeah, and never watch BNN. Or read blog comments. They’re all nuts.

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July 10th, 2016

Posted In: The Greater Fool

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