What to do with cash?

RYAN   By Guest Blogger Ryan Lewenza

I’ve been writing research reports and blog posts for a long time now and sometimes I get my best ideas from the readers. Recently I had a good suggestion from a blog dog to cover the topic of what to do with cash given the very low interest rate environment. Unfortunately with yields so low there are few good options, but I’ll do my best to examine the landscape and the different options.

There has never been a better time to be borrowing gobs of money. With the Covid-19 outbreak and ensuing deep recession, central banks have slashed benchmark interest rates to rock bottom levels. Currently, the Bank of Canada (BoC) overnight rate sits at a previously unheard level of 0.25%. While millennials love these low rates, retirees, generally, loath these record low levels.

Why? Because they’ve worked hard to accumulate wealth and financial assets and now they are retired and need income from the portfolios to live off, so they are getting hosed by these low interest rates.

BoC has cut rates to rock-bottom lows of 0.25%

Source: Bloomberg, Turner Investments

Let’s first look at the safest investments you can own – Canadian government bonds. Below I plot the yields of different government bond maturities, also known as the yield curve. With our benchmark rate at 0.25% this has brought down yields across the entire curve. Currently 1-year T-bills are yielding a paltry 0.25%, with 2 and 5-year yields at 0.4% and 0.8%, respectively.

Even longer term maturities are yielding around just 1.5%. That’s not going to provide enough income to pay for a trip to Europe, much less a pitcher of beer!

Canadian Yield Curve

Source: Bloomberg, Turner Investments

Next up are GICs, a traditional safe haven for retirees. Below is a sample of current GIC rates from various financial institutions. Looking at the top-tier issuers like the banks, they’re paying roughly 0.4% for 1 year, 0.8% for 2-years and they finally get to 1% at a 3-year term. And you’re locked into these so you better not need the funds before the maturity date.

Current GIC Rates

Source: Turner Investments, Raymond James

Next up I reviewed some of the prominent money market funds and high interest savings accounts (HISAs). Currently they range from 0.7% to 1.35% and the benefit of these products is the ease to get in and out with little to no cost. We like to use these HISA ETFs and money market funds for this reason.

Now if roughly 1% yields does not pique your interest then you need to consider moving up on the risk curve by looking at short-term and corporate bond funds. Short-term bond ETFs are currently yielding around 2-2.5% while corporate bond ETFs are yielding around 3%. Not bad yields but these come with additional risk if interest rates rise or if we see a big risk-off event, which would cause credit spreads (yield differential between government and corporate bonds) to blow-out.

Lastly, investors could look at preferred shares, which pay higher yields and are dividends so they are more tax efficient. Many of the main preferred share ETFs are yielding around 4%. Now these are not GICs or government bond substitutes as they come with higher volatility. But, when adjusted for the different tax rates between dividends and interest income, at a roughly 6% interest-equivalent yield, they could be an option for those investors who can handle the additional volatility. Of course within a diversified and balance portfolio.

So looking at the different options, I believe the best options for investors looking to invest cash in a lower risk vehicle, are the high interest savings accounts and short-term bond ETFs. There you would be looking at yields of roughly 1-2%. While not great, and definitely losing purchasing power after adjusting for inflation, they are the best options (of a bad bunch) if looking for higher yields than your typical GICs.

And final point. All those adverts you see for 8% returns and no risk. Bupkis! There is a reason why they are paying you 8% and the banks are paying you 0.5%. Whether it’s income trusts, Yellow Pages, or asset-backed commercial paper, there is always more risk than investors anticipate and the ‘reach for yield’ often ends in tears. So know what you’re investing in!

Yields of various shorter-term investments

Source: Turner Investments, Company Websites
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.


The trap

Stanley thinks his nephew’s an idiot. “Actually,” he adds, “the guy and his wife are the classic couple you often describe in the blog.”

So this is a tale about pandemic real estate. A Covid classic. The virus changed the way many people think, as we all now realize. The bug locked down society, which led to WFH, crashing loan rates and urban flight. That begat aggressive nesting, a quest for personal space, then a real estate rush and escalating values amid buyer competition. After a while the health emergency was just wallpaper for a speculative frenzy as buyers panicked at the thought they’d be priced out forever. Then along came the Justin & Erin show to emphasize the “housing crisis” and assure everyone they’d never let real estate fail. Bingo.

Here’s Stan’s recounting of his relative’s experience…

“They’re in their thirties with two kinds, one two years old and the other one two months. They moved from Toronto to Mississauga in May because they wanted a bigger house and more property – and because of FOMO. The considered Oakville, but could not make a deal there, so ended up in Mississauga – paying $1.8 million. Big mortgage.

“Here’s the thing – they bought with no conditions. Of course. Like everyone. The house was renovated in 2015, not by the recent seller but the seller before him. The place was built in the early 1970s with a very compartmentalized layout, so the reno had opened up the entire main floor, giving an open concept kitchen.”

By the way, the realtor benchmark (Frankenumber) for Mississauga properties is now $1.11 million, which is up 20% year/year, and reflects the numbing impact of the pandemic. As anyone who lives in the western burbs knows, this is a car-centric place with dodgy public transit and the need to burn a litre of gas to get a litre of milk. But housing has been hot. The average detached home costs $1.365 million, compared with $1.674 in the city itself where services abound. Over the last year 416 real estate appreciated 11.2%. In Mississauga the gain was 25.6%.

The tale continues…

“For weeks now they have noticed many cracks in the ceilings. While my wife was visiting, my nephew’s wife showed her the damage. When she came home and told me, I immediately contacted n client of mine who is an architect. He visited the house and said there are issues with the renovations so, in turn, he brought in an engineer. That expert determined that the beams used when the bearing walls were removed are undersized. It’s important to note the renovations were completed without a permit. At this time the estimated cost to rectify the problem is approx. $40,000.

“This young couple purchased an expensive home, had to buy it without conditions for home inspections and are now having big repair bill. Why? Two reasons: the housing market, of course, and the absolute whore’s business that is residential real estate. Agents never want to take the time to do anything that could jeopardize a deal. Granted, my nephew agreed to table an unconditional offer and I am sure there are numerous situations of buyers ending up with unintended consequences of unconditional offers. But the 40k they will have to spend could have been used toward the kids’ RESP or their own TSFAs.”

A certain pathetic blog has moaned and vexed about the impact of the pathogen on housing for the last 18 months. And it just gets worse. Not only have buyers forgotten that pandemics always end, normalcy eventually returns and WFH will turn into a brutal commute for most, but FOMO made them do stupid things. Move to a higher-cost area, for example (suburbs suck money). Compete for real estate in a bidding war. Or spend $1.8 million with no safeguards and inadequate research.

There are rules to remember to help avoid this kind of heartbreak and financial setback (not to mention having to move out of your house while structural repairs are done).

First, don’t buy in a war. Chill. Conditions will change. Other properties will come to market.

Second, scout out listings that have languished on the market for a while. Maybe they have some hair on them. Perhaps they need renos. Maybe they were overpriced at first and have become stale. But don’t fall for the ‘hot new listing’ hype and the competition that ensues.

Bidding wars? Fuggeddaboutit. Walk away from properties where sellers and their agents are ‘holding offers’ until a certain hour on a certain day. Be especially wary when the listing price is less than area comparables since that suggests a blind auction is being engineered. Choose peace instead.

Never buy without some layer of protection. A home inspection is de rigueur for first-time buyers who have no experience with furnaces, electrical panels, basement moisture, drainage, asphalt roofs, insulation or sewer connections. If you are dumb enough to be in a multiple-offer situation, hire an inspector to visit before making your bid.

Get pre-approved for financing. Then be aware in a competitive market you risk paying more than the bank will finance if the sale price exceeds the appraised value. Then you know what a heart attack feels like.

Include the right to visit the property two or three times prior to closing. Use those sessions to ensure you made the right choice. There are always options for abrogating a deal (none of them cheap). Engage an experienced local realtor to help research homes and represent you when an offer’s made. Get sold comparisons plus the price history of the property. Look for red flags. Quick renos and flips. Buy title insurance when the deal closes. Hire a lawyer who specializes in real estate transactions, not an ambulance-chaser or the guy who did your mom’s will. And lock in the loan rate.

Or, eschew debt, save and invest your money. Be mobile, fluid and financially free. What a radical thought.

About the picture: “A am a regular reader of yours – thanks for sticking with it despite the commentary you must see,” writes Tom. “You’ve positively influenced many of our decisions over the years. This is Harvey, waiting for my daughter at the end of a school day.  He is a Labradoodle who loves long walks and lazing about.  Feel free to use.” (If you have a pooch to share, let me know – [email protected])