Alison's Money Rule

Stock Market Bear Protection

Posted November 28, 2011
Originally Published October 11, 2011

In times of turmoil a guaranteed return is something to love.

With the Canadian market officially in bear territory last week, down 20 per cent for the year, and global markets not far behind many investment statements are looking pretty ugly.

Where on earth can we find a safe haven to ride this one out? I have one. Cash.

Having a portion of your portfolio in cash investments, like GICs, offers a guaranteed return that helps keep your portfolio afloat. Inside a TFSA or RRSP you won’t pay tax on the income.

Because rates are so miserably low it pays to comparison-shop. For example, at my bank brokerage the best rate for a 1-year GIC issued by the bank was 0.9 percent last Friday. But there’s a little known alternative called third-party GICs. They are issued by other financial institutions such as credit unions and also available through your brokerage. The top 1-year rate I found was 1.75 percent for an AGF Trust GIC. There is less difference for longer maturities like three and five years.

Treat GICs as a fixed term investment and plan to hold them until they mature, otherwise you will loose some or all of your interest. There are cashable GICs but they offer lower interest rates.

Another option I really like is the only Canadian money market exchange traded fund (ETF.) ETFs are investment products – not mutual funds – that simply track an index. They are cheap and transparent.

The Claymore Premium Money ETF is listed on the Toronto Stock Exchange, ticker symbol CRM, and has a management fee of just 0.25 percent. You can set up an automatic purchase plan with Claymore to avoid paying a trading commission with each purchase. Go to www.claymoreinvestments.ca and click on PACC (pre-authorized cash contribution.)

The current yield on CRM is about 1.1 percent. Not as good as you’d get from a locked in GIC but you can make small purchases monthly and the yield will rise in lock step with rates. If you need more information call Claymore, 866-417-4640.

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