$450K to invest for six months -- what would you do?

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fireseeker
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$450K to invest for six months -- what would you do?

Post by fireseeker »

We are midway in the process of selling one house and buying another. In the meantime we are renting.
Today we put $450,000 in one of our BMOIL accounts. Now, we have to figure out what to do with it before plunking it on the new house.
The prudent thing, of course, is an HISA. But I keep feeling like this is a wasted opportunity -- BMO will pay 0.95%, which, after tax, means roughly a $1,000 gain for six months. That doesn't move the needle.
We could try to scoop some dividends around ex-dates, even though I blv the evidence is in the long run that doesn't work.
We could carefully target some blue chips in an uptrend for a short hold. Maybe prefs, which are definitely in an uptrend.
We could put most in the HISA and fool around with, say, a leveraged ETF for a small portion.
We are in a very financially sound position (we own another property free and clear and have significant financial assets) so we can assume more than zero risk.
But what risk makes sense?
All input gratefully received.
Thanks --fireseeker
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Re: $450K to invest for six months -- what would you do?

Post by SQRT »

How critical is it that you get all the money back? This will determine what you can do with it. If you absolutely must have all of it for the new house. then HISA. If you could afford to lose say 10% then you have more options. You could, in that case, buy 3-4 blue chip div payers. Banks, telco’s. utilities,
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Re: $450K to invest for six months -- what would you do?

Post by gobsmack »

I would consider CDZ for something like this. The MER is high but you would not be holding it for long. Very safe div yield and low price volatility.
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Re: $450K to invest for six months -- what would you do?

Post by kcowan »

I would consider buying Commercial Paper:
An alternative for high value, short term investing
It gets you out of the GIC/HISA realm for large short term holdings. We bought some during a hold period for ex-MILs inheritance. It worked as expected. We bought Scotia.
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Re: $450K to invest for six months -- what would you do?

Post by Peculiar_Investor »

Given the short term nature I wouldn't take any additional risk. I'd just hold my nose and accept the essentially risk-free return of a HISA or equivalent such as commercial paper.

No-one has an accurate crystal ball but it is worth considering that the current bull market is very long in the tooth. If/when it corrects is anyone's guess, but I wouldn't want to expose funds that are required in six months to anything but something that guaranteed return of capital versus taking on risk with the goal of return on capital. In the short run, any return on capital is essentially a bonus.

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” -- Ben Graham.
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Re: $450K to invest for six months -- what would you do?

Post by ockham »

SQRT wrote: 11 Jan 2018 04:28 How critical is it that you get all the money back?
Surely the key question. The OP says that $1K on the upside "doesn't move the needle." OK. So far, so good. But it's the downside that matters here. How many $K on the downside does it take to move the OP's needle??

"Money necessary to meet short term liabilities should never be put in the equity market" is a fundamental truth. The OP should not mess with it.
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Re: $450K to invest for six months -- what would you do?

Post by Koogie »

I would just game the CDIC coverage on a HISA and get somewhere like 2.30% and be happy with it.
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Re: $450K to invest for six months -- what would you do?

Post by fireseeker »

ockham wrote: 11 Jan 2018 09:23 How many $K on the downside does it take to move the OP's needle??
To give a quick, clear answer: Suffering a $50K loss would not wreck us.
I'd really rather not blow $50K -- but I suppose if the potential reward were compelling enough we would consider it.
The key, I think, is finding a decent risk-adjusted return. Taking zero risk means a $1K return. BMO's money market offerings are little better.
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Re: $450K to invest for six months -- what would you do?

Post by Ken »

Koogie wrote: 11 Jan 2018 10:01I would just game the CDIC coverage on a HISA and get somewhere like 2.30% and be happy with it.
Agreed. I was reading this thread and wondering when someone would suggest just putting it into EQ Bank or the like.
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Re: $450K to invest for six months -- what would you do?

Post by AltaRed »

Per P_I, 6 months is not a long time to take much capital risk. What is the difference between 1% and 5% return in 6 months if you could have an equity market correction of 10% or greater in that period of time, or if there are a number of interest rate increases and pref/bond prices take a nosedive as a result? What is your risk/reward?

Why be focused on putting all that cash in BMO IL? There are plenty of HISA offerings out there from bonafide online banks where you can put $400k spread around with 2-3 institutions. Examples from https://www.highinterestsavings.ca/chart/ include Alterna Bank 1.95%, EQ bank 2.3%, etc. without leaving CDIC insured institutions. I wouldn't spread it around too much, but a few of these online banks have steady rates.

Even using BMO's Savings Builder account might be a good bet. As long as you increase your balance by at least $200 every month, you get 1.3% interest. I use it as my cash vehicle matched with my BMO IL brokerage account rather than using AAT770. I also have an HISA with Zag bank 1.65% to hold my cash allocation.

P.S. When I left Canada in 2003 to work as an ex-pat, I put all my house money from the house sale into ING Savings at the time (the one and only high interest savings vehicle at the time) and let it slowly grow until coming back to Canada in 2006. While I didn't grow the money in great leaps and bounds, it was a 'set and forget', don't worry solution.
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Re: $450K to invest for six months -- what would you do?

Post by SQRT »

fireseeker wrote: 11 Jan 2018 10:10
ockham wrote: 11 Jan 2018 09:23 How many $K on the downside does it take to move the OP's needle??
To give a quick, clear answer: Suffering a $50K loss would not wreck us.
I'd really rather not blow $50K -- but I suppose if the potential reward were compelling enough we would consider it.
The key, I think, is finding a decent risk-adjusted return. Taking zero risk means a $1K return. BMO's money market offerings are little better.
You sound pretty ambivalent to a 10% loss. If that is really true, weigh whether a 4% div yield is worth the risk? Up to you. Most people would play it safe though.
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Re: $450K to invest for six months -- what would you do?

Post by ig17 »

You can roll out your own market-linked GIC. Put $445K in a few HISA-s. Use the remainder $5K to buy a call option that can pay 10x.

Heads: you win.
Tails: you don't lose much, if anything.
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Re: $450K to invest for six months -- what would you do?

Post by THEMAINEVENT »

2.5% with Tangerine. Sleep well at night.
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Re: $450K to invest for six months -- what would you do?

Post by adrian2 »

SQRT wrote: 11 Jan 2018 10:39 You sound pretty ambivalent to a 10% loss. If that is really true, weigh whether a 4% div yield is worth the risk? Up to you. Most people would play it safe though.
4% dividend yield for 6 months is 2%.
2.5% HISA gets you 1.25%.

Hmmm: 2% with a variability of +/- 30% or more, vs. 1.25% guaranteed.
I know which one I would pick...
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Re: $450K to invest for six months -- what would you do?

Post by SQRT »

adrian2 wrote: 11 Jan 2018 17:54
SQRT wrote: 11 Jan 2018 10:39 You sound pretty ambivalent to a 10% loss. If that is really true, weigh whether a 4% div yield is worth the risk? Up to you. Most people would play it safe though.
4% dividend yield for 6 months is 2%.
2.5% HISA gets you 1.25%.

Hmmm: 2% with a variability of +/- 30% or more, vs. 1.25% guaranteed.
I know which one I would pick...
I don’t disagree but the OP seemed fairly eager to earn more. Could get a few more percent in cap appreciation and the tax rate woul$ be lower.
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Re: $450K to invest for six months -- what would you do?

Post by AltaRed »

Or perhaps a 10% correction in capital. Makes trying to juice income by a tiny bit a high risk play. No one knows what the equity market will do in the next 6 months. I don't understand what is hard to understand about that.
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Re: $450K to invest for six months -- what would you do?

Post by beachcomber »

I had a similar situation several years ago. Searched around for the best interest rates. I think ING was the best at that time. Took that rate to my bank and 2 credit unions and asked them to meet or beat it. They all did - but one of the credit unions won out. I like a good night's sleep.

Here on the wet coast the provincial government provides unlimited deposit insurance to our credit unions. Even on foreign currency accounts.
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Re: $450K to invest for six months -- what would you do?

Post by adrian2 »

AltaRed wrote: 11 Jan 2018 19:16 Or perhaps a 10% correction in capital. Makes trying to juice income by a tiny bit a high risk play. No one knows what the equity market will do in the next 6 months. I don't understand what is hard to understand about that.
My point is that the downside can be (far) greater than 10%.
10% was an example, not a hard coded downside limit.
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Re: $450K to invest for six months -- what would you do?

Post by AltaRed »

adrian2 wrote: 11 Jan 2018 19:40
AltaRed wrote: 11 Jan 2018 19:16 Or perhaps a 10% correction in capital. Makes trying to juice income by a tiny bit a high risk play. No one knows what the equity market will do in the next 6 months. I don't understand what is hard to understand about that.
My point is that the downside can be (far) greater than 10%.
10% was an example, not a hard coded downside limit.
Indeed. Could be 30% albeit not likely in a 6 month time frame. The point really is... Why risk mere uplift of perhaps $2-5k in BT income uplift if one is lucky versus the risk of a $50-100k or more capital loss? The downside risk is a heck of a lot more than potential upside.
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Re: $450K to invest for six months -- what would you do?

Post by LAJ »

I'd use Hubert Financial 1 year term. It has an escalating rate every quarter and is redeemable. Collect the first two quarters and redeem as necessary.
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Re: $450K to invest for six months -- what would you do?

Post by DanH »

fireseeker wrote: 11 Jan 2018 10:10
ockham wrote: 11 Jan 2018 09:23 How many $K on the downside does it take to move the OP's needle??
To give a quick, clear answer: Suffering a $50K loss would not wreck us.
I'd really rather not blow $50K -- but I suppose if the potential reward were compelling enough we would consider it.
The key, I think, is finding a decent risk-adjusted return. Taking zero risk means a $1K return. BMO's money market offerings are little better.
If this was my money, I would likely stick with cash or money market instruments - something with almost no risk and very little yield. But if you are intent on taking some risk and you're considering equities; I have two other suggestions that lie somewhere in between (albeit still quite a bit lower risk than equities).

First Asset Enhanced Short Duration Bond ETF (FSB). Effectively your big risk exposure is to credit risk and credit spreads (i.e. the excess yield of corporate bonds over government bonds). FSB's fact sheet will give a better idea of exposures and yields.

Another idea is iShares Short Duration High Income ETF (CAD-Hedged) - CSD. This is a pure high yield bond fund focused on shorter maturities on average.

If choosing between the two I prefer FSB as CSD is relatively more volatile (but less so than broader groups of HY bonds and much less than stocks). But again, if this was me, I'd stick to cash and take my risk in the longer term portion of my portfolio.
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Re: $450K to invest for six months -- what would you do?

Post by DanH »

Koogie wrote: 11 Jan 2018 10:01 I would just game the CDIC coverage on a HISA and get somewhere like 2.30% and be happy with it.
The only problem with this is one of timing/liquidity. While CDIC coverage effectively covers the credit risk of going with a smaller bank with more aggressive pricing (i.e. higher interest rates); think about what happens if such a bank defaults. The OP needs the money in six months. If something happened within that six months and CDIC kicks in; it's unlikely the speed of making the OP whole will be in time for when the cash is needed.

So for this time frame, the credit risk protection of CDIC is somewhat less valuable. My suggestions don't have CDIC or similar coverage, but the spreading of credit risk effectively reduces the worst case scenario considerably without the same liquidity risk in a worse case scenario.
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Post by Irwin »

Thanks Dan H. for the CSD suggestion

Aside from the relatively low daily volume, I like the looks of this a lot.

Correlation to the stock market is positive, but with the 5% distribution, I'm guessing that a 30% drop in SPX would see CSD fall about half that much.
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Re: $450K to invest for six months -- what would you do?

Post by fireseeker »

Dan -- thanks for the interesting tips.
Morningstar says CSD's distributions are treated as Canadian dividends, not bond income. Is that your understanding?
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Re: $450K to invest for six months -- what would you do?

Post by Irwin »

fireseeker wrote: 16 Jan 2018 21:44 Morningstar says CSD's distributions are treated as Canadian dividends, not bond income.
Info for 2017 likely isn't out yet, but here is the 2016 Distribution Characteristics for iShares CDN Funds
(see page 10 for CSD).
https://www.blackrock.com/ca/individual ... -en-ca.pdf

Code: Select all

Total Distribution Per Unit 0.89999
EligibleDividends ......... 0.00000
Non EligibleDividends ..... 0.00000
Other Income .............. 0.02025
Capital Gains ............. 0.00000
Return of Capital ......... 0.20966
ForeignIncome ............. 0.67347
Foreign Tax Paid ......... -0.00339
Distributions for 2015 were 95% Return of Capital.
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