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You think you know what you are doing. You think you have a plan then you go to 2 of your favourite financial blogs on an icy Monday morning to get some information before work and they both have the same advice. They both say that maybe I don’t know what I am doing buying individual stocks and too many people lose money on stocks and maybe I should stick to GICs (guaranteed investment certificate similar to the American CD).
The blogs I read this morning were Boomer and Echo’s Can You Succeed With An All GIC Portfolio? and Financial Samurai’s Recommended Net Worth Allocation By Age And Work Experience.
Echo says that a person can have a safe long term investment strategy holding only GICs with the added benefit of completely avoiding the fees incurred with mutual funds, ETFs (exchange traded funds) and the buying and selling of individual stocks. The argument against this investment method is the lower rates of return on GICs are often beaten by the potential rate of return when investing other ways. You can earn more with other investments but there is no guarantee that your investments won’t dip wildly in value just when you need them the most.
The GIC article at Boomer and Echo is an examination of the ideas of Canadian chartered accountant and personal finance writer David Trahair.
In Canada GICs from banks and credit unions are guaranteed by the CDIC (Canadian Deposit Insurance Corporation). As long as you don’t keep too much money in 1 financial institution the government will insure the deposit against bank failure. I don’t think I will ever have enough to hit the deposit insurance ceiling.
GICs can be protected from the tax man by sheltering them in RRSPs (registered retirement savings plan) or a TFSA (tax free savings account). Safe, secure and avoiding tax are 3 very big pluses for this GIC only plan.
Financial Samurai provides a lot of information in to where your money should be at different ages. High risk is for the young. I am in my late 40s and the Samurai thinks I am too old for the risks associated with dealing in individual stocks and I need to be more conservative. I read it twice. The Samurai says “stocks should be a minority portion of your net worth by the time you are middle age”. There is low risk, careful or you might break a hip, safe and sound investing for people of a certain age. Individual stocks are not in the safe category. GICs are. I think that seeing my age in the older part of the charts was the only bad part of this blog post.
Financial Samurai says “You are not smarter than the (stock) market” and I wonder if I should believe him.
Could these 2 blog posts be a game changer for my strategy of buying individual stocks? Am I too old to take chances with my money?
The flip side of this playing it safe argument is my hard truth. I am in my late 40s, I don’t make a lot of money and I don’t have much saved for retirement or much time to save. I need to maximize my investment returns or I will retire poor or I won’t be able to retire at all. I need each dollar invested to make the most money possible to help me retire. GICs and other safe investment will guarantee a return without risking the principle but it won’t make me wealthy at this late stage in the game.
Take a chance with stocks and potentially enjoy a big reward or play it safe with GICs and keep every penny that I work so hard to earn.
Take a chance and risk losing it all or play it safe and enjoy a very late, very modest retirement.
2 posts that made me think about my approach to investing. 2 posts that I thought about all day at work. 2 posts that may be game changers for my investment strategy.
I am not an expert in investing, and have only recently started to plan what I’m going to do after my debt is paid off and I can start accumulating wealth. My plan is to have most of my money in fairly safe investments, with a bit in high risk stuff, just to keep it interesting.
Never gamble more than you can afford to lose.
I am concentrating on debt but the stocks are fun. I don’t gamble at the nearby casino but I do experience a bit of a rush buying stocks. I need to work on less emotions and more fact when I am chosing investments.
My entire investment portfolio isn’t enough to give me 1 good year of retirement yet. It is a big hill to climb.
Even I only have a small percentage of my net worth (about 5%) in stocks. I put everything into index funds.
GICs are not worth it. I’d rather take the risk with index funds, even until I’m 50.
I only have 14 months to go until I turn 50 so that it weighing on my decision.
If you want to get even deeper with how you should be handling your finances check out a blog like Mr.MoneyMustache! He’ll open your eyes up to a world of saving 40% of your take home pay
I am a big fan of MMM and I would not like him to know that I still have cable.
I never miss his posts but my bad assity level is no where near his.
Wes Gray and Tobias Carlisle just came out with a book on investing that is exceptional – the title is Quantitative Value. Another good one is Active Value Investing.
One thing you have to ask yourself is if we are in a sideways market or not, and I believe that we are. There’s nothing in the economy (especially the US economy) that leads me to think that there’s reasons for GDP and corporate earnings to go up as they have in past bull markets. If that’s the case then the S&P will be about the same level in 10 years as it is today. As it was 10 years ago. So you may have to ask yourself if that’s a risk you want to take.
GIC’s and T-bills are for people who have enough of a stash – or a pension – or old age security – that they can assume little to no risk and even have inflation eat away at their number. I’m not in that place myself and don’t think you are either.
The world of investing can be very confusing when you start. I would stay away from most general PF blogs when looking for what to do and go straight to quality books like those I mentioned. .
I am lucky that my library will borrow books from other libraries in the province so I can request these without spending any money. A penny saved is a penny earned is an important part of my financial strategy.
You don’t think you can ever hit the deposit insurance ceiling? Not if you continue to have that kind of attitude (>_< ) 40's is the new 30's these days. You gotta have a positive attitude
You need to believe you can reach financial freedom if you put enough effort into it. People can only succeed if they believe they can, and I believe you can retire with at least a million dollar net worth, if not more! I don't have the best advice for investments but my personal approach is a well diversified portfolio includes stocks, farmland, and fixed income. GICs were a great option back in the 1990s when interest rates were higher, but a bond index fund would be better bang for the buck today. Of course there's also real estate. I don't know anyone who has invested in housing over any 10 year period in Canada or the US and have lost money doing it. You still have lots of time so a little risk is okay 
As for stocks, buying index funds is the best way to go for most people. Happy deciding 
“I don’t know anyone who has invested in housing over any 10 year period in Canada or the US and have lost money doing it.” OMG! Please read this wiki…
http://en.wikipedia.org/wiki/United_States_housing_bubble
I can retire well with a lot less than 1 million but you are right I need to have more faith and work harder. I need to just keep listening to new ideas.
How would I invest in farmland? Is it some kind of REIT?
Just an editorial nit pick — I doubt we should attribute the “GIC-only” strategy opinion to Robb; he was presenting the arguments of David Trahir. Nevertheless, excellent juxtaposition of the two posts.
Sorry. I was hopeful that everyone would read the blog. Robb explains David Trahir’s ideas much better than I could but you are very correct. If people are going to start reading these posts then I better start paying more attention to what I write.
I have added an extra sentence to my post and given credit where credit was due.
I put everything into index like mochimac. I am not smarter than the market and for gambling, I chose tangible assets. I have a coconut farm, some cattle heads… at least if the prices tank I can eat meat and coconuts for the rest of my life.
Coconut oil is the new hot product thanks to doctors on television saying it can cure just about everything and coconut water is very popular right now. Have you noticed a recent increase in the prices you can charge per coconut or per pound or per bushel?
I have to agree with both bloggers, especially Financial Samurai. A rather unfortunate situation you are in at this moment in regards to income and savings, but at least you are more aware and should be able to take steps/actions to improve your future.
I am still recovering from the being in the bottom half of the age categories. I still feel 23. Not first thing in the morning but once I get moving…
Treat your investments like a gamble and follow the mantra gamble what you can afford to lose and don’t expect to hit big right away!
I have so little that I really can’t afford to lose anything but I can’t afford to let what little I have stagnate in a pool of low interest rates.
Howdy Jane,
Good to hear you’ve been ruminating about this topic. When I write “Stocks,” I mean equities in general e.g. stocks, ETFs, index funds, mutual funds, equity derivatives etc. I didn’t mean the literally just stocks. A couple others on FS commented similarly on thinking just stocks, so I’ve added Equities in the column and a bullet in the assumptions.
Good feedback! Please feel free to provide more if you have any. The one difference I see between Canada and the US is that it seems like the Canadian gov’t will take care of its people and has no massive social security hole. As a result, perhaps it’s easier for you folks to be more aggressive w/ risk.
Sam
Canada does have a good social safety net but the baby boomers are getting ready to collect pensions and as they age they are stressing out the health care system.
I am struggling with the thought of being aggresive versus taking the safe path. The government does ensure that Canadians are fed, sheltered and have health care but it is a low income life.
When I was writing stocks I was referring to the individual shares that I purchase. I am beginning to think that mutual funds are only good investments for the people selling them.
After food, clothing, shelter, and health care, I say anything more is just gravy!
I wonder if there will be a big migration up to Canada for US retirees and whether y’all will let us?
I believe we are considering a fence along the 49th parallel similiar to the one you are putting up at your Mexican border. Our fence will be much shorter because we are only keeping out seniors and a lot of them are afraid to climb in case they fall and break a hip.
Hi this is Jeams from CDIC.
Great blog. Thank you for including CDIC in this entry. I thought I might take a moment to confirm that GICs with an original term to maturity of 5 years or less are insured by CDIC if held at one of our member institutions. At the moment, credit unions are not covered by CDIC. However, as of December 2012, credit unions and caisses populaires may incorporate federally – but so far, none have done so.
It is important to keep in mind that not all investments are insured by CDIC even if you have not reached the insurance limit of $100K. Check out the link What’s Covered, What’s Not? for more information.
I hope this information is helpful.
Thanks,
Jeams
Official correct information. I had no idea that credit unions were not insured with the Canadian Deposit Insurance Corporation. I do not use a credit union but they are very popular in my city.
Thank you for adding to the post.
Wow – I look at it in a completely different manner. I’m almost 45, so I figure I could very easily be around for another 45 years, maybe more. Looking at historical records, the stock market has outperformed fixed income over long periods of time. Will the future be the same as the past – nobody knows….but if I buy a good diversified mix of stocks, and they all lose over a 40 yr period, then the economy as a whole is in very bad shape, and I think we have other things to worry about. In the meantime, I look for strong companies, preferably that pay me some dividends in case the market really does stay put – at least I get paid to wait. If things get better as I assume, and the companies grow, then so do the payouts. Just FYI, I have no fixed income, but I do keep a considerable amount of cash, which can be used to invest if an opportunity presents, or used for emergencies etc should something come up and I actually need to tap into it. I probably hold 30 different companies, 25 of which are reasonably large dividend players in a variety of sectors, and a few small players that I think have a good chance to grow quickly. I also have a home with not a lot of mortgage left. Be patient, but think long term and don’t worry about what happens over the next few months or years. Most of my best buys were done in early 2009 when the market had tanked – I only wish now I had been braver and doubled my positions in everything I bought. Next time.. Take care. Chris
Chris, you sound like you got an early start on investing and know what you are doing. I think that things just go up and down and if you have time, the way you do, you can jump in and out of certain investments at the right times.
I am in my late 40s and I am very impatient because I know I am running out of time and because I waited so long to start.
Don’t make the mistake of following advice on the internet. And don’t make the mistake of following the advice of a financial advisor.
If you want to have a long term investment strategy that provides solid returns and lowers risk, then you need to do your research and look for ways that have been PROVEN to do exactly that. As soon as you hear something that sounds like it makes perfect sense, but doesn’t have proof or research behind it, then you’re gambling.
The way forward will not ever be picking individual stocks. That’s akin to gambling, with odds of losing being 97%. Seriously – they’ve shown repeatedly that people who pick stocks can’t outperform the index, 97% of the time. Same goes with fund managers. Every single thing that I’ve seen that’s actually been analyzed has been shown, 97% of the time, to provide lower returns than if you simply parked in an index fund and never loooked at it for 20-30 years.
Let me give you an example of where common sense fails. Everyone ‘knows’ that when you retire you should be more conservative in your investments. Yet someone age 65 who’s life expectancy is age 85, has a 50% chance of living 20+ years. Isn’t 20+ years a long term investment horizon? If so, why are you being conservative in your investments when everyone ‘knows’ that long term, you should be more aggressive? Which is it?
The short answer is that you should be primarily in equities using index funds or variants, with some other asset classes (that are either inversely correlated or uncorrelated) to lower volatility. Figure out what all that terminology means and you’ll be well on your way IMO to building a solid retirement. Picking individual stocks is going to make you broke someday.
I am considering a Vanguard fund when I get my next little pot of money together. I will leave the stocks I have alone but my future money needs to go to indexed funds.