Yesterday some posters with more money than ingenuity asked a question: where should you park half a mill or so for two years, after selling a house? Of course they want it to be 100% liquid and accessible, in case they wake up horny for a garage in Vancouver or a former grow-op in Mississauga. They also demand safety and security, with virtually no risk, because they’re special. And, naturally, they expect a high rate of return. Guaranteed.
If those basic, simple conditions are not met, it obviously shows the financial system is corrupt, manipulated, riddled with systemic corruption and rigged in favour of banksters. Oh yeah, and this information should also be provided online, at no cost. Immediately.
Besides house lust, this nation has a withering case of financial illiteracy. If it ain’t offered to you by [email protected], or found within the moist reassurance of the orange guy’s shorts, then it’s suspect – some scam cooked up by Bernie Madoff’s Canadian cousin.
We’re an interesting bunch. We buy houses at inflated values with virtually nothing down, using extreme leverage and loans destined to reset at unknown higher rates. And yet we freak out when a portfolio of liquid assets temporarily falls 5%. We buy stuff shooting up in value, then dump it after it declines. It’s why there are bidding wars for Toronto real estate, when it’s never cost more. It’s why retail investors trampled each other to exit equities on March 9, 2009, when they hit bottom. At least we’re consistent.
So where to put $500,000 for two years until your spouse can’t go five more minutes without ragging you yet again to grow a set and buy a house?
You could stick it in a HISA, but this is a dumb move. High-interest savings accounts pay (even if you get some hinky online bank in Moosejaw) barely enough to cover inflation, which is 2%. And you must shoulder tax on that miserable yield, at your full marginal rate, which can suck off a third or half. That means you lose money. But at least you lose it safely.
Ditto for a money market fund. These are completely-liquid funds which invest in baskets of safe government securities, and pay even less, typically 1.5%. Also fully taxable. More secure, dependable, guaranteed losses.
There’s always a GIC, but sadly this choice also sucks. You can achieve an annual return of 2.5%, but for that you have to lock the money up for a couple of years and invest with some dingdong outfit, like AcceleRate Financial, apparently related to the gum people. Yes, this money is also taxable as interest, which means your capital will buy less when you end than when you began.
There are always bonds, and these come in many different forms. T-bills are bought at a discount to face value, then mature on a certain date at 100 cents on the dollar. But don’t expect anything more than a high-yield savings account rate. Strip bonds work similarly, since you’re buying a small piece of a larger bond from which the interest coupons have been ‘stripped’ and sold separately. So, again, you buy an asset guaranteed to be worth more on maturity date (like me). But not much more. Worse, you have to pay tax each year on money you have not yet received.
A better choice would be preferred shares in a few banks or insurance companies. These things look and act like bonds, but pay dividends instead of interest – which means the tax bill is slashed since you can claim the dividend tax credit. While companies like the Royal Bank have common shares which fluctuate widely in value, their preferred shares barely move, steadfastly maintaining their value. Only if interest rates spike surprisingly (which will not happen in the next two years) would capital values be impacted, but the dividend yield – now at 5% or slightly above – would not. Preferred dividends must be paid before common stock dividends, and these shares are completely liquid, so long as you own creditworthy companies. Why everyone does not possess these is beyond me.
Finally, two years is a relatively long time. Given the steady but glacial improvement in the US economy, more stability in Europe, the inevitable growth in BRIC countries and the resolve of central banks, why wouldn’t you want a piece of it? Combining some preferreds, for example, with a few good ETFs giving exposure to large-cap companies in North America, plus emerging markets, plus financials and energy, plus commodities, and a few REITs tossed in, makes sense to me. Now you almost have a balanced and diversified portfolio. Your gains should be mostly in dividends and capital gains, which are taxed at a far lower rate than interest. And it’s not weird to expect a gain north of 6% – while maintaining total liquidity.
So, choices. No risk, no return. Managed risk, good return.
Or, you can buy a condo next to the CN Tower. And pray.