Should you just avoid GICs for five years now? Plus, the best balanced ETFs and the latest bets against TSX stocks

Safety Island at Investing is a lot more luxurious these days.

Interest rates on secured investment certificates increased this spring on an almost daily basis for periods ranging from one to five years, as well as for shorter periods. For the first time in a long time, rates from 3.8 to 4.1 percent are plentiful from alternative banks. The big banks, unusually, are not too far from interest rates.

The surprise here is that you don’t have to be locked up for five years to get the 4 percent rate or close to it. The strangeness of the current price environment means that the rates for three, four and five years are largely identical.

The obvious strategy in this case is the three-year ladder. Equal amounts are invested from one to three years, rather than the usual five-year approach. When there is no bonus in the form of a premium, why lock your money in the bank for five long years?

Here’s why: you think rates are currently peaking and will stabilize and then reverse when inflation subsides in the face of the Bank of Canada’s increased interest rate attack. If inflation fades to more normal levels, 4 percent would be enough to give you a decent real rate of return.

Regardless of whether you use the three- or five-year ladder, you’ll have plenty of opportunities to take advantage of higher rates in 12 and 24 months. With grading, you take the proceeds of the mature GIC and invest it in a new three- or five-year degree—whichever you use as the maximum for a term on your ladder.

If the rates are higher in a year, you will win by using the gradient strategy. If the prices are lower, you can still win because only a limited amount of your money is due. The rest remains invested at higher rates.

Predicting where rates are headed is the next level of difficulty at the moment due to complex factors in economic forecasts such as rampant inflation, high oil prices and the pandemic. The yield on Canadian five-year government bonds, by bond market standards, has risen this year. But it seemed to hit a wall this week, perhaps because weak stock markets had reminded investors that high-quality bonds always pay their interest on time and are redeemed at maturity at face value.

GICs are a reasonable alternative to investment-grade government and corporate bonds – better yields, similar security, but worse liquidity in that they cannot easily be sold before maturity without a heavy penalty.

If your hunger for security exceeds your need for growth, be sure to get some much-improved GIC returns today. A guaranteed return of 4 per cent would be a good thing if lowering inflation leads to an economic slowdown or recession.

– Rob Carrick, Personal Finance Columnist

This is the Globe Investor newsletter, published three times each week. If someone forwards this email newsletter to you or you are reading it on the web, you can sign up for our newsletter and others on our website Newsletter subscription page.

rundown

Shorting in TSX: What Bears Investors Are Betting on

Short sellers are making big bets on energy, financials and crypto ETFs in Canada. Larry MacDonald reviews what stocks are most targeted.

Rob Carrick’s 2022 ETF Buyer’s Guide: The Best Asset Allocation Funds

A fundamental rule of thumb for investing in 2022 has flipped: Portfolios suffer because bonds are doing as bad or worse than stocks. You’ll find many examples of this investment anomaly in the sixth and final installment of the 2022 Globe and Mail ETF Buyer’s Guide, which covers asset allocation ETFs. In an unusual development this year, ETFs allocating assets to the most cautious investors slipped back in the first quarter of 2022 more than the more aggressive ones.

The oil correction is witnessing a noticeable return among investors amid rising profits, and a renewed focus on energy security

Investors’ attitudes toward the oil patch are changing practically by the day – a product of the sector’s increasing profitability, combined with renewed urgency around global energy security as a component of investing in the environment, society and governance. Tim Scheufelt reports.

What you need to know before withdrawing the bonds in your portfolio

In case you missed it, we’re in a bond bear market. A sudden, frustrating, and confusing bear market that most investors have never experienced before. Investors may be tempted to dump their bonds and not look back. With high inflation and high interest rates on the horizon, it is believed that it will only get worse. Can. But panic-selling bonds are just as short-sighted as bailing out stocks after a crash. For investors who want to keep a balanced portfolio, Dan Bortolotti has some thoughts to consider before pulling out a bond.

Amid rising interest rates, cash-strapped companies can turn to Warren Buffett

As tech giants such as Meta Platforms Inc. and Netflix Inc. , the more regular business of Berkshire Hathaway Inc. (BRK-BN) It’s getting more and more attractive, from insurance to rail. Meanwhile, higher interest rates mean cash-strapped companies could knock on Warren Buffett’s door again. Ian McGugan looks at the outlook for Berkshire shares and what could emerge from this weekend’s shareholder meeting.

See also: Warren Buffett’s ‘Woodstock for the Capitalists’, a smaller issue after the pandemic

Forest companies are set to report huge profits. Will their stock prices go up?

The forestry sector has been volatile for most of the past six months as the stock market weighs high commodity prices and a crowded housing market against rising interest rates and fears of a recession. David Berman looks at what might happen next.

Other (for subscribers)

Stocks with the highest returns in TSX, plus risk data

Number of attempts: Six sub-shares paid dividends with the possibility of acquisition

Analysts promotions and downgrades on Friday

Friday Insider Report: CEO Invests Over $376,000 In This Stock With Expected Return Over 80%

Analysts promotions and downgrades on Thursday

The Tilladock Escape rocks Cathy Wood’s ship

globe advisor

Why is now the time to take advantage of fixed rate loans to split income

Are you a financial advisor? Register with Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, coverage and in-depth industry analysis and access to ProStation – a powerful tool to help you manage your clients’ portfolios.

Ask Globe Investor

A questionAre Canadian bank profits safe in the future? We could be heading into a recession at some point in the near future, and bank loan losses always seem to rise and their stocks take a hit in such an environment.

Answer: I agree that we are heading into a recession at some point. But no one knows if it will be next year, three years from now or later. While it’s wise to be aware of the risks when investing, focusing too much on what might go wrong can be a recipe for paralysis.

Instead of worrying about a possible recession “in the near future,” I suggest you focus on the long term. Ask yourself where the bank stock prices will be, not next month or next year, but five years from now. I would bet they would be much higher than they are today. It might be worth looking at a long-term chart of a stock like Royal Bank (RY) or Toronto-Dominion Bank (TD). You will notice a lot of peaks and valleys, but the general trend is up. Well done.

What’s more, the fact that interest rates are going up is actually a good thing for the banks. Higher interest rates increase banks’ “net interest margins” – the difference between what banks earn on loans and what they pay to depositors and other lenders.

In terms of dividends, Canadian banks are very well capitalized, and continue to make billions of dollars in profits every quarter. Analysts expect banks to continue increasing their payments after announcing significant dividend increases in late 2021.

Also keep in mind that even in tough times, dividend cuts are extremely rare among large Canadian banks. With the exception of the National Bank – which cut its payments in 1992 – the big banks have paid steady or increasing profits for more than a century. Typically, during a severe economic downturn, banks will keep their profits flat for a year or two — as they were mandated to do during the pandemic — rather than cut them.

If you are planning to invest in Canadian bank stocks, just remember to have them as part of a well-diversified portfolio to help control risk.

– John Heinzel

What’s new in the coming days

This year’s stock market volatility comes with a lesson: stock valuations still matter. David Berman will explain why this lesson is the single biggest reason to watch Tesla from the sidelines — even if you think Elon Musk is a genius.

Central bank boom and other global market topics for next week

Click here to view the Globe Investor earnings report and economic news.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter Tweet embed

You may also be interested in our Marketplace update or Carrick on Money newsletters. Explore them on our website Newsletter subscription page.

Compiled by staff at The Globe Investor

Leave a Comment