Index-linked GICs (Guaranteed Investment Certificates) provide the buyer with a return that is “linked” to the direction of the stock market in a given period. A quick look at the rules on these deals may give you the impression that the investor can profit substantially with little risk. However, the link depends on a formula or set of rules that is buried in the fine print.
These investments are marketed as offering all of the advantages of stock-market investing with none of the risk. But banks and insurance companies aren’t in the business of giving customers something for nothing. The capital gain that holders get depends on an ingenious formula which is cleverly designed to sound generous while minimizing the potential payout.
Index-linked GICs fail to offer the big tax advantages of stock investing
Another drawback is that returns on index-linked GICs are taxed as interest. That’s because you’re not actually investing in the stock indexes themselves; you’re just getting paid interest based on the change in the indexes. That’s a drawback because interest is the highest taxed of all investment returns.
Usually, stock-market investing produces capital gains and dividend income, both of which are taxed at a much lower rate than interest. (Of course, if you hold the GICs in an RRSP, all income is tax deferred.)
These GICs do protect your principal. But few investors if any make a good return on index-linked GICs. Most make less (at times substantially less) in index-linked GICs than they would have made in old-fashioned GICs.
If safety is your primary concern, you’d be better off with “plain vanilla” stocks and bonds. If you already own index-linked GICs, our advice is to cash them in at the earliest opportunity. If you don’t own them, we recommend that you stay out.
No matter what kind of stocks you invest in, you should take care to spread your money out across the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.
By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.
You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.
Our three-part Successful Investor strategy:
Invest mainly in well-established companies
Spread your money out across most if not all of the five main economic sectors (Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.)
Downplay or avoid stocks in the broker/media limelight.
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books.
By Cameron Webster, CFA Institutional Portfolio Manager, Mawer Investment Management Ltd.
Special to the Financial Independence Hub
At Mawer, we spend a great deal of time asking and answering the question: So What? A company’s share price is down 6% … so what? A central bank moved interest rates up … so what?” Google re-named itself Alphabet … so what?”
It is not always an easy question to answer and often leads us to ask even more questions in an effort to develop key investment insights.
“So what?” is one of the questions that can lead us to investment action (or inaction) in our process of building well-diversified, resilient portfolios. In an effort to pass on our “so what” learnings, I interviewed our Chief Investment Officer, Jim Hall, with specific questions pertaining to his views on risks in the current environment.
Cameron Webster: Jim, Mawer conducts a quarterly risk review, rating macro risks on both probability of occurrence and degree of severity. I see a few with 9/10 on probability but lower severity and a few with the opposite profile, high severity, lower probability. Help us understand the way Mawer is viewing some of the broader risks at the top of the list right now.
Jim Hall: It is not enough to just look at the rankings. We need to ask ourselves is it something we need to do something about? Is this something upon which we need to act? Is it a biggie? Is it important? That’s the value in evaluating these risks on both probability of occurrence and severity of consequence.
Our mortgage is up for renewal later this year. That’s a shame because I’m enjoying the ultra-low 1.90 per cent interest rate on our five-year variable mortgage (prime minus 0.80 pe rcent). It’s a near certainty that I’ll have to renew at a higher rate this summer.
My bank is offering five-year variable rates at prime minus 0.10 per cent, which means a mortgage rate of 2.60 per cent. That’s not much of a discount off of the five-year fixed rate they’re advertising, which comes in at 2.94 per cent.
Five years ago, when the deeply discounted variable rate was 1.50 per cent lower than the five-year fixed, it was a no-brainer to go variable. Now it’s not so cut-and-dried.
What is clear is that we’re living in the golden age of low mortgage rates. Remember three years ago when BMO introduced its controversial 2.99 per cent ‘no frills’ mortgage?
Now it’s rare to see mortgage rates ABOVE 3 per cent – and most come with all the bells and whistles; from 120-day rate holds and pre-approval, to double-up monthly payments and lump sum payment privileges.
Are you a retailer who uses eBay as a virtual storefront to move a lot of products? Or, are you merely an occasional seller? Or, do you use Kijiji and Craiglist to empty out your basement, storage locker or Aunt Mildred’s apartment after she moved to a nursing home? Perhaps you rent out your house, apartment or cottage using FlipKey and Airbnb?
Do you do graphic design using sites like Fiverr? Or, do you have a website or a YouTube channel that makes you tens of thousands of dollars in advertising revenue? Do you drive for Uber?
Making money on the internet is easier than ever. And there are millions of sellers. CRA knows this. So, starting with returns filed in 2014 for individuals and 2015 for corporations, Canadians have to report internet sites used by them for income earned from the Internet. This will allow the tax man to check the information that the taxpayer reports with websites advertising products and services and to audit internet vendors who do not report their web based revenues. Continue Reading…
Sensible Investing TV has posted part 8 of its How to Win the Loser’s Game series of videos, which you can view by clicking here.
Does it make sense for the average investor to invest in an active fund? The active investor who does invest in an active fund has to expect to lose relative to a passive strategy.
If an active investor chooses to overweight some stock then at least one other active investor has to underweight that stock. One might win by overweighting; but if he wins, he loses by underweighting. So it’s a zero sum game before we start thinking about costs.
What we see over and over again is that active trading costs money and active managers charge a lot for their services. One of them might have been brilliant but to the extent that one of them is brilliant, another person must have been whatever the opposite of brilliant is here … Minus brilliant.