Should I Invest in a Bond or a GIC?

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Re: Should I Invest in a Bond or a GIC?

Postby AltaRed » 11 Jan 2012 00:22

Justise wrote:Low interest rates are additionally hidden taxation. With over 3% inflation, the returns after tax is definitely negative.

The OP, Otto, already has a range of other investments in other asset classes. Holding bonds and/or GICs in the FI component of one's asset allocation might be the perfect thing. As an example, it is, to a significant extent, for my 93 yr old mother.
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Re: Should I Invest in a Bond or a GIC?

Postby Justise » 11 Jan 2012 16:59

AltaRed wrote:
Justise wrote:Low interest rates are additionally hidden taxation. With over 3% inflation, the returns after tax is definitely negative.

The OP, Otto, already has a range of other investments in other asset classes. Holding bonds and/or GICs in the FI component of one's asset allocation might be the perfect thing. As an example, it is, to a significant extent, for my 93 yr old mother.



In my opinion, in investing, we have to do some critical thinking. First, we have to see what causes the present debacles.That is to say where market forces came from and where market forces are going. Where do we start?

1. I will start with "irrational exuberance". Those new-kids-on-the-blocks were buying pricey RE with their new found wealth from the tech irrational exuberance. That is to say part of the money went to RE. When the tech sector crashed, many are poorer except perhaps the new-kid-on-the-blocks. The catch word is RE.

2. Greenspan created the 2nd wave of "irrational exuberance" when he lowered the interest rates to historical low and maintained it there for a long period of time. It was this factor that drove the WHOLE-WORLD's RE prices to crazy levels including those of US, UK, Spain, Australia, Canada, Ireland, Asia excluding Japan. This is misallocation of capital. So the bubble burst in 2008. The Jimmy-come-lately got burnt and so are those using the house as the ATM. This is the result of easy-money-has-consequences. The unintended consequences are the consumers and mortgagees in trouble, meaning the economy is in trouble from the false boom sucking money to the non-investment sector i.e. housing. The repercussion effect is that the banks are in trouble make worse by the economies in trouble.

3. So helicopter Ben got no choice but to keep the rates lower still, meaning robbing Peter to help Paul (Paul includes the biggest debtors in absolute terms - the government debts). Peter, the saver, got screwed.

4. Where are we going from here? Low interest rates are here to stay both from the US and EU debts and economic growth points of view. The result is the rich gets richer, the saver gets screwed.

5. With the baby boomers retiring, with the low interest rate environments, the rush is to dividend paying stocks. With low interest rates, the corporations refinanced debts at much lower rates and therefore helped in the bottom lines for years. Therefore, the perfect place to be is in dividend paying stocks which is also tax efficient.
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Re: Should I Invest in a Bond or a GIC?

Postby Pickles » 11 Jan 2012 18:49

Whoa, Justise. The topic of this thread is "Bond or GIC?" I suggest you delete your last post here (having copied it to your clipboard first) then repost it in a more suitable thread.
Last edited by Pickles on 12 Jan 2012 00:36, edited 1 time in total.
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Re: Should I Invest in a Bond or a GIC?

Postby AltaRed » 12 Jan 2012 00:34

Agree the point of this thread (per Subject) is a discussion of bonds vs GICs. Nothing else should derail that discussion.

I think there is a place for both bonds and GICs in the FI component of one's asset allocation. Gov't bonds are not worth much so I look to a selection of corporate bonds + GICs for my own account. It depends on when you might need to tap into the money, the amount of juice you want to try to get for taking more risk (e.g. junk, corporates), and the sources for these. I cannot imagine anyone being without a major discount broker to manage this efficiently (versus chasing rates with multiple companies).

I mentioned my elderly mother's account above simply because the actuaries suggest she currently has a 50% chance of living 2 more years, which will soon decrease to 50% chances of living one more year. She is mostly in a GIC ladder which protects capital for her 'sleep at night' factor and eliminates capital risk from a beneficiaries' perspective, etc.
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Re: Should I Invest in a Bond or a GIC?

Postby Otto » 13 Jan 2012 12:00

I chose a 5 year non-redeemable GIC at RBC Direct Investing paying interest twice a year. I always take 5 year GIC's rather than laddered GIC's. You cannot make up the loss of low rates if you invest in short term GIC's. Sure, what ever one does, due to inflation and taxes the result is negative income, about 2.5%. That is better than the risk of loosing 10-15% in equities. I do have equities but I keep them low. My objective is preservation of capital.

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Re: Should I Invest in a Bond or a GIC?

Postby AltaRed » 13 Jan 2012 12:45

Otto wrote:I chose a 5 year non-redeemable GIC at RBC Direct Investing paying interest twice a year. I always take 5 year GIC's rather than laddered GIC's. You cannot make up the loss of low rates if you invest in short term GIC's.

That is fine because you are investing in only one GIC. But if you bought another 5 yr GIC in 2013 with new money, another 5 yr GIC in 2014 with new money, another 5 yr GIC in 2015, and another 5 yr GIC in 2016, you would now have a 5 year ladder built up with 5 yr GIC rates. That is the essence of a 5 yr ladder. That is what I do in my RRSP (using a mix of GICs and Corp bonds).
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Re: Should I Invest in a Bond or a GIC?

Postby Justise » 13 Jan 2012 16:02

Otto wrote:I chose a 5 year non-redeemable GIC at RBC Direct Investing paying interest twice a year. I always take 5 year GIC's rather than laddered GIC's. You cannot make up the loss of low rates if you invest in short term GIC's. Sure, what ever one does, due to inflation and taxes the result is negative income, about 2.5%. That is better than the risk of loosing 10-15% in equities. I do have equities but I keep them low. My objective is preservation of capital.

Otto



In my opinion, you have chosen the lesser of the 2 evils. I think for the biggest cohort of the investing population, the baby boomers, the negative return is about 3% per year after factoring in taxation & inflation.

If the current trend continues which has a higher probability, for 10 years, the baby boomer investors will likely loose 30%. Still think return of capital is safe? That is why my simple answer is NEITHER.

Another factor regarding inflation is that the published figure is sort of average. For the baby boomers, their concerned consumed items will definitely be higher, and energy is having a bigger foot print.
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Re: Should I Invest in a Bond or a GIC?

Postby ThomTheAnalyst » 05 Feb 2012 11:35

Otto wrote:The investment is in a non-registered account. I already have accounts at 3 banks and two discount brockers, so I do not want to start with another financial instition. I like to deal with a bank that has a branch as a building preferably in my neighbourhood..

To scomac: I will consider the Claymore S&P TSX preferred Share ETF. I already own Claymore S&P TSX CND Dividend ETF and I am very happy with it (It contains no banks, so it is performing well).


You are considering a preferred share ETF but don't want to buy GICs from a CDIC insured, OSFI regulated trust company/bank? There are good GIC rates out there if you're willing to shop around (I know, someone else already stated this but it's important). And if you are comfortable investing in Provincial bonds then you should be comfortable with GICs from small credit unions (not CDIC insured, but provincially insured) as well.

I get your points about not wanting to setup lots of accounts and having a physical presence, but then maybe just setup one more relationship with someone like PC Financial. They won't always have the best rates but it's usually middle-of-the-pack to OK rates, they have "pavillions" staffed by people, and it's backed by CIBC.


Rate sheets:
http://www.globeinvestor.com/servlet/Page/document/v5/data/rates?pageType=gic_long&tax_indicator=R
http://www.cannex.com/canada/english/term/term02.html
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Re: Should I Invest in a Bond or a GIC?

Postby Bylo Selhi » 05 Feb 2012 13:50

ThomTheAnalyst wrote:GICs from small credit unions (not CDIC insured, but provincially insured) as well.

Maybe. Maybe not. Maybe not so much...
DICO wrote:DICO maintains a deposit insurance reserve fund to cover potential claims. A review of this fund is undertaken annually by DICO’s board of directors to ensure that it remains within an appropriate range. In addition to this fund, DICO has access to a line of credit backed by the Government of Ontario.
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Re: Should I Invest in a Bond or a GIC?

Postby Insomniac » 07 Feb 2012 00:20

Bylo Selhi wrote:
ThomTheAnalyst wrote:GICs from small credit unions (not CDIC insured, but provincially insured) as well.

Maybe. Maybe not. Maybe not so much...
DICO wrote:DICO maintains a deposit insurance reserve fund to cover potential claims. A review of this fund is undertaken annually by DICO’s board of directors to ensure that it remains within an appropriate range. In addition to this fund, DICO has access to a line of credit backed by the Government of Ontario.


DICO doesn't sound all that great. Only $100,000? Maybe you should put your money in a BC based credit union: http://www.cudicbc.ca/
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Re: Should I Invest in a Bond or a GIC?

Postby Shakespeare » 07 Feb 2012 00:21

Only $100,000
Personally I think any guarantee should be at the 95% level, not 100%, to avoid moral hazard.
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Re: Should I Invest in a Bond or a GIC?

Postby Justise » 15 Feb 2012 17:00

Pickles wrote:Whoa, Justise. The topic of this thread is "Bond or GIC?" I suggest you delete your last post here (having copied it to your clipboard first) then repost it in a more suitable thread.



Pickles, I am giving one answer to that question i.e. neither. My view on bonds is well supported by the very recent headline news - Bonds among most dangerous assets: Warren Buffett.
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Re: Should I Invest in a Bond or a GIC?

Postby schmuck » 16 Feb 2012 20:14

Justise wrote:Bonds among most dangerous assets: Warren Buffett.


He said the same thing a year and a half ago, and you know what?
You readddy for this?
Believe it or not, HE IS NOT ALWAYS RIGHT.

I love WB, but man, do we have to mimic everything he mumbles as he walks on water.
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Re: Should I Invest in a Bond or a GIC?

Postby Justise » 18 Feb 2012 04:26

schmuck wrote:
Justise wrote:Bonds among most dangerous assets: Warren Buffett.


He said the same thing a year and a half ago, and you know what?
You readddy for this?
Believe it or not, HE IS NOT ALWAYS RIGHT.

I love WB, but man, do we have to mimic everything he mumbles as he walks on water.




Are you sure you know what you are talking about? WB is not only right. He is more than right. Where have you been in the last year and half? Just came back from Mars?

I am sure you heard of Greece Gov bonds of huge magnitude sure to default, or hair cuts of anywhere from 50% to 85%. And the big EU banks particularly those from France and Germany are mostly holders of those bonds. Other peripheral countries including Spain, Ireland, Portugal, Italy similarly have very high debt problems and big budget deficit issues are 'adding insult to injuries' so to speak and their bonds will probably need hair cuts of not-insignificant magnitudes. So those bonds on aggregate not only literally rattles the whole EU's survival, but is having contagion third party risk knock-on effect directly or indirectly across the pond to the US major big banks. And our RBC is also affected to certain degree. Because of what Japan saw of what happens to Greece, the Japanese government is similarly worried of their own highest debt to GDB in the whole world and still climbing. Greece is giving a wait-up call to many countries. Government deficits mean debts and debts means mostly bonds.

WB is merely stating the obvious. If interest rates were to rise to the mean, bonds again and reits are next on the significant loosing ends. Then WB will be right again !!
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Re: Should I Invest in a Bond or a GIC?

Postby newguy » 18 Feb 2012 10:08

Justise wrote:Because of what Japan saw of what happens to Greece, the Japanese government is similarly worried of their own highest debt to GDB in the whole world and still climbing.


:lol: I'd hate to see what they'd do if they weren't worried.

TOKYO, Feb 14 (Reuters) - The Bank of Japan boosted
its asset buying programme by $130 billion on Tuesday and in the
face of political pressure set an inflation goal of 1 percent,
signalling a more aggressive monetary policy to pull an ailing
economy out of deflation.


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Re: Should I Invest in a Bond or a GIC?

Postby CathyF » 18 Feb 2012 15:15

I used to have a lot of respect for Warren Buffet, but it seems the past couple of years he's really going downhill. I don't know if he's just getting dumber from old-age, or if he's just sucking up to Obama. But some of his statements and purchases seem to be more about politics than they are about sound investing. The way that Berkshire has lagged the S&P500 since the credit crisis seems to back my feelings.

I think Buffet is more concerned about his legacy and image, and not too concerned about making any more money. At his age, I don't blame him, but I am also very wary of his advice. I put as much faith in what he says as I do a politician.
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Re: Should I Invest in a Bond or a GIC?

Postby CROCKD » 18 Feb 2012 15:34

in my opinion certain posts in this thread should be moved to the board

Financial News, Policy and Economics

Recommended reading, economic debates, predictions and opinions
" A verbal contract isn't worth the paper it is written on " Samuel Goldwyn
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Re: Should I Invest in a Bond or a GIC?

Postby schmuck » 18 Feb 2012 16:38

Justise wrote:Are you sure you know what you are talking about? WB is not only right. He is more than right. Where have you been in the last year and half? Just came back from Mars?


Woah there Justibaby!
The only thing I'm sure about is that WB said bonds were the worst investment a year and a half ago, and HE WAS WRONG! In fact, I think he said that more than a year and a half ago, in which case he would be even more wrong.

Here are some examples of US bond ETFs:
ishares Lehman Aggregate Bond ETF (AGG) +5%
ishares Lehman Government Bond ETF (GBF) +6.2%
Total Bond Market ETF (BND) +5%

Most Canadian bond ETFs were up aroud 10% during that time, but I don't thing he was referring to Candian bonds, or European bonds that you are rambling on and on about, and probably not even bonds from Mars.

WB may very well be stating the obvious for the long run. The only problem is that Bernanke keeps on kicking the can farther and farther down the road. In the meantime, I'm quite happy to stick with my corporate bonds and REITs.

Like I said, I love the guy, but gimme a break already.
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Re: Should I Invest in a Bond or a GIC?

Postby Insomniac » 18 Feb 2012 20:23

I agree with Mr. Buffet, and he will be proven right. Just tell me when I need to sell my bond ETFs. Thank you.
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Re: Should I Invest in a Bond or a GIC?

Postby CathyF » 20 Feb 2012 09:53

Insomniac wrote:I agree with Mr. Buffet, and he will be proven right.


If you wait long enough, everyone will eventually be proven right, even the drunk on the street corner shouting the world is going to end. The problem is, I don't have forever to wait, because I'm going to die before that time is up.

It's not hard making predictions. It's hard putting a timetable to it. Clearly, Buffet has not been timing the market well the past couple of years. Saying, "Bonds are going to go down in value when interest rates go up", is not exactly brilliant advice. Telling me exactly when that is going to happen is much better advice. I have not seen Buffet get that right, lately. IMO, he's gotten too old, and too politically involved.
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Re: Should I Invest in a Bond or a GIC?

Postby schmuck » 20 Feb 2012 14:25

CathyF wrote:I have not seen Buffet get that right, lately. IMO, he's gotten too old,


And his sidekick, Charlie Munger is six years older.
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Re: Should I Invest in a Bond or a GIC?

Postby randomwalker » 20 Feb 2012 22:06

CathyF wrote:
Insomniac wrote:I agree with Mr. Buffet, and he will be proven right.


If you wait long enough, everyone will eventually be proven right, even the drunk on the street corner shouting the world is going to end. The problem is, I don't have forever to wait, because I'm going to die before that time is up.

It's not hard making predictions. It's hard putting a timetable to it. Clearly, Buffet has not been timing the market well the past couple of years. Saying, "Bonds are going to go down in value when interest rates go up", is not exactly brilliant advice. Telling me exactly when that is going to happen is much better advice. I have not seen Buffet get that right, lately. IMO, he's gotten too old, and too politically involved.


I've never seen anyone compare Warren Buffett to a "drunk on the street corner shouting the world is going to end." before but I guess if a man live long enough... As for Mr Buffett having "gotten too old" I would suggest that is nothing more than ageism on your part and no different from racism or sexism and therefore offensive to many on this board I'm sure. Further, to say Mr Buffett "has not been timing the market well the past couple of years." is to not understand his methodologies, some research may be in order. Perhaps you could call us when you too make one of the Forbes lists.

With respect to Mr Buffett's actual call on bonds being over valued, when you know your right about a call in the long run it doesn't matter if your wrong in the short run. As is often said when one is involved in capital markets "it's better to be early than late.

As for those who are long bonds,

"Countries, governments don't pay off debt, they inflate it away over time."
Sir John Templeton
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Re: Should I Invest in a Bond or a GIC?

Postby CathyF » 21 Feb 2012 09:51

randomwalker wrote:I've never seen anyone compare Warren Buffett to a "drunk on the street corner shouting the world is going to end." before but I guess if a man live long enough... As for Mr Buffett having "gotten too old" I would suggest that is nothing more than ageism on your part and no different from racism or sexism and therefore offensive to many on this board I'm sure. Further, to say Mr Buffett "has not been timing the market well the past couple of years." is to not understand his methodologies, some research may be in order. Perhaps you could call us when you too make one of the Forbes lists.


What a nasty response! Nasty person, or did you just wake up on the wrong side of the bed, or did I accuse your idol of being human? Considering I never said or meant anything you accuse me of, you really need to rethink your response.
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Re: Should I Invest in a Bond or a GIC?

Postby ModeratorW » 21 Feb 2012 10:54

Time to cool it folks. Stick to debating the issues and avoid personal attacks per Terms of Service.
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Re: Should I Invest in a Bond or a GIC?

Postby randomwalker » 21 Feb 2012 12:55

CathyF wrote:
randomwalker wrote:I've never seen anyone compare Warren Buffett to a "drunk on the street corner shouting the world is going to end." before but I guess if a man live long enough... As for Mr Buffett having "gotten too old" I would suggest that is nothing more than ageism on your part and no different from racism or sexism and therefore offensive to many on this board I'm sure. Further, to say Mr Buffett "has not been timing the market well the past couple of years." is to not understand his methodologies, some research may be in order. Perhaps you could call us when you too make one of the Forbes lists.



CathyF wrote,

"... Considering I never said or meant anything you accuse me of, you really need to rethink your response."[/quote]


"If you wait long enough, everyone will eventually be proven right, even the drunk on the street corner shouting the world is going to end...I have not seen Buffet get that right, lately. IMO, he's gotten too old..."

nasty
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