Prime Minister Mark Carney has cautioned Canadians to brace for the fallout from the escalating trade war with the United States.
For retirement investors, that might mean running a few ‘what if’ scenarios through their portfolios.
Diversification remains key to spread risk and keep your nest egg growing but if some of the ‘what ifs’ are keeping you awake at night, a shift to cash might be in order.
Finding a comfort zone in cash is different for everyone. The cost of that safety is usually lower overall returns but there are ways to squeeze out extra yield.
Make sure your cash deposits are insured
First, it’s important to be sure your cash is invested through a member financial institution insured by the Canada Deposit Insurance Corporation. CDIC is a crown corporation supported by the Federal Government that covers deposits of up to $100,000. You can insure more by spreading your money across different categories or banks.
Most Canadian financial institutions pay premiums to be insured with CDIC and members are listed on the CDIC website for anyone to see. Members include banks, federally regulated credit unions, and trust companies. All the big Canadian banks are members along with non-financial businesses with finance arms.
If a CDIC member fails, eligible account holders will be contacted and the principal and interest will be reimbursed within days.
Savings and chequing accounts are covered along with guaranteed investment certificates (GICs), and other term deposits with original terms to maturity of five years or less.
Coverage applies whether the cash is in registered accounts such as a registered retirement savings plan (RRSP) or a tax free savings account (TFSA), or outside a registered account.
That doesn’t mean they are risk free in the real world. There is no guarantee inflation will not outpace your return. Canada’s headline inflation rate is currently 3 per cent.
Here are three safe havens that can pace your cash with inflation.
1. High-interest savings account
If you want to be ready to redeploy your cash in other asset classes quickly, it needs to be as liquid as possible. The best, and most common form of near-cash is a high-interest or high-yield savings account.
Most financial institutions offer them and it’s just a matter of transferring the cash within the portfolio when you need it.
According to RateHub, annualized yields for high-interest savings accounts currently range from 2 per cent to 2.8 per cent.
Yields tend to be highest for large amounts or short term promotions, so read the fine print.
Returns might seem paltry but they are higher than a regular savings account, which yields nothing.
2. Money market funds
On the downside, the rates offered on most high-yield savings accounts are variable and subject to change daily.
One way to automatically access the best short-term yields is through money market funds. They are a kind of mutual fund that invests in highly liquid, near-term instruments such as cash equivalent securities and short-term debt-based securities with high credit ratings.
In most cases, investments in money market funds can be liquidated within a day.
Returns on money market funds also fluctuate but are currently yielding between 1.5 per cent to 2.3 per cent annually.
The downside to money market funds are annual fees based on a percentage of the amount invested, which can top a full per cent. That fee, or management expense ratio (MER), is deducted from the yield but it could still top a high-interest savings account depending on how well it is managed.
3. Guaranteed investment certificates (GICs)
Higher yields require longer commitments. Another way to keep income flowing at a higher rate is through fixed-term guaranteed investment certificates (GICs).
According to RateHub, the best yields currently range from 3.7 per cent to 4.25 per cent for one to five year maturities.
One strategy to keep your income stream flowing, and keep your cash liquid, is to stagger maturities.
What is not insured under CIDC
CDIC insurance does not compensate losses from stocks, dividends, mutual funds, exchange traded funds (ETFs), real estate investment trusts (REITs), bonds and other fixed income with maturities over five years.
Foreign currencies such as U.S. dollar accounts and cryptocurrencies are also not covered.