# Safe Investments



## Mortgage u/w (Feb 6, 2014)

A GIC will preserve capital but not necessarily keep up with inflation. So....

If you had to choose 1 investment which its sole purpose was to preserve capital and keep up with inflation, what would it be and why?


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## Ostracized (Feb 7, 2014)

A real return bond literally keeps up with inflation and is pretty safe.


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## gibor365 (Apr 1, 2011)

Ostracized said:


> A real return bond literally keeps up with inflation and is pretty safe.


not sure about "keeps up with inflation " , but it's not save for sure, in 2013 XRB dropped 15% in just couple of months.... if you are talking about bonds that short term like CBO or VSC are much safer


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## OnlyMyOpinion (Sep 1, 2013)

Investment grade corp strip bond - bought today at 4.1% for 8yr.


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## andrewf (Mar 1, 2010)

Real return bonds are quite volatile, at least the Canadian Federal government issues. They are all pretty high duration and are very senstive to interest rates.


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## Rusty O'Toole (Feb 1, 2012)

Over what time period? If we are talking long periods like a lifetime or more, gold silver or good farm land. I know one successful investor who loans her money out in first mortgages at 8% to 10%. She wouldn't touch a stock or a bond.


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## Taraz (Nov 24, 2013)

Here's one: 

Loan money to condo associations. It's hard for them to find lenders for small amounts (under 100,000k). You can charge 10% interest, and probably get away with a fee to cover lawyer costs as well. It's safer than making mortgage loans, because the condo association gets paid before the mortgage holder does (here in Alberta, at least), and the association is unlikely to declare bankruptcy in most cases. I'd probably stick to older complexes, though, since a major structural problem in a new condo complex could bankrupt the whole thing.


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## GoldStone (Mar 6, 2011)

Mortgage u/w said:


> If you had to choose 1 investment which its sole purpose was to preserve capital and keep up with inflation, what would it be and why?


Individual RRBs or TIPS held until maturity.

Two key points:
1. You have to buy individual bonds. Do not buy RRB funds such as XRB.
2. You have to hold the bonds until they mature. Make sure you don't need the money before the maturity date.

Note that RRBs/TIPS are poor investments if deflation occurs. Have you thought about deflation?

General comment:

Investing is the eternal struggle between multiple risks. Risk of losing capital. Risk of inflation. Risk of deflation. And so on so forth. Your desire to find one magic investment that protects you against all risks is misguided. The solution is to own a diversified portfolio of different asset classes. Equities, GICs, RRBs, real estate, etc.


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## Sherlock (Apr 18, 2010)

Preferred shares eg XPF.to


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## GoldStone (Mar 6, 2011)

Sherlock said:


> Preferred shares eg XPF.to


CPD dropped 35% in 2007/2008.


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## Just a Guy (Mar 27, 2012)

Depending on the purchase price, I'd say rental real estate. If you can get a place cheap enough to cash flow in a bad economy, the rents can be inflation adjusted, and the property's value should also keep up with inflation. If the real estate market collapses, and people lose their homes, there is more demand on the rental market.

Of course, in this market it's not easy to buy, it's not a liquid asset (but you can access the equity by refinancing), so it's nowhere near a perfect investment...


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## james4beach (Nov 15, 2012)

Mortgage u/w said:


> If you had to choose 1 investment which its sole purpose was to preserve capital and keep up with inflation, what would it be and why?


First I hope you realize that no investment guarantees that...

If you have stocks in mind, they will only do as you say on time frames 30 years and longer. Anything shorter than that, and it's a total gamble...

So if your time frame is >= 30 years, then I say a stock index.


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## james4beach (Nov 15, 2012)

GoldStone said:


> CPD dropped 35% in 2007/2008.


That's not starting from the high point of preferred shares.

Look at PFF for a better indicator. Preferred shares dropped more like 60%

If you want short or medium term capital preservation, the best investment are GICs in my opinion. Laddered 5 year GICs. Currently they yield around 2.6% and that's pretty reasonable considering inflation is around 2%


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## OnlyMyOpinion (Sep 1, 2013)

+^
As OP said: "which its sole purpose was to preserve capital and keep up with inflation"


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## doctrine (Sep 30, 2011)

A 5 year laddered GIC plan will keep up with inflation in a registered account. In an unregistered account, they will struggle to keep up with inflation after taxes depending on your employment income.


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## Squash500 (May 16, 2009)

doctrine said:


> A 5 year laddered GIC plan will keep up with inflation in a registered account. In an unregistered account, they will struggle to keep up with inflation after taxes depending on your employment income.


 Exactly. IMHO laddered GICS are a totally awful investment in a non-registered account.


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## Squash500 (May 16, 2009)

OnlyMyOpinion said:


> Investment grade corp strip bond - bought today at 4.1% for 8yr.


 Again only in an RRSP. Strip bonds are terrible investments for non-registered accounts.


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## Sherlock (Apr 18, 2010)

2008 was a once in a lifetime event. And preferred shares recovered much faster than common stock did.

If you want a return that beats inflation (so GICs or a HISA are out) then what option is safer than a preferred shares ETF?


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## OnlyMyOpinion (Sep 1, 2013)

+^ Good points. If your'e going to have interest income, keep it in your TFSA, RRSP or RESP.


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## cainvest (May 1, 2013)

Just curious ... what was the average inflation rate for the last 5, 10 and 20 years?


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## OnlyMyOpinion (Sep 1, 2013)

BOC calculator says 1.75% (5yrs), 1.83% (10yrs), 1.89% (20yrs) based on monthly CPI basket:
http://www.bankofcanada.ca/rates/related/inflation-calculator
We're currently assuming 2% future inflation. So, 4.1% strip bond example will make 2.1% real return in a sheltered account and ~1.5% real (after her tax) in an unsheltered account.


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## cainvest (May 1, 2013)

OnlyMyOpinion said:


> BOC caculator says 1.75% (5yrs), 1.83% (10yrs), 1.89% (20yrs) based on monthly CPI basket:


Ok, so let's say anything returning > 2.0% fits the OP's original statement of "preserve capital and keep up with inflation". 
I believe a fair number of 3-5 years GICs will do that, assuming no taxes.


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## james4beach (Nov 15, 2012)

I wouldn't consider an 8 year corporate strip bond to be a particularly safe investment (in a portfolio of bonds yes, but not an individual bond).

I'm confused about the 4.1% yield you mentioned on an investment grade strip --

XCB holds investment grade corps, with more than 8 year average term, and that only has 2.8% ytm. What bond was this exactly that had 4.1% yield? That's 130 basis points more than the other stuff in XCB for seemingly the same term and credit quality?


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## OnlyMyOpinion (Sep 1, 2013)

cainvest - maybe its the "safe investment" that's causing the difference in responses. If most of us think of an investment as something that will provide some real return and not just keep up with inflation, then I suppose we are offering up our ideas for a safe, but real return/inflation-beating investment. 

james4beach - our example was Loblaws, INT-LOBL-33 8.75% 23May22, rated BBBm. We spent $35,182.51 on Friday for $48,600 at maturity, the reported AY was 4.068%. We agree with you, a corp strip it is not 100% risk-free and not even CDIC-insured, and a porfolio is needed to reduce exposure to any single issue. However we consider them acceptably 'safe' for our fixed income/capital preservation allocation. We hold 74 various strips across our accounts that get reinvested as they mature. Over the years to date (knock on wood) we've never had an issue default.


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## cainvest (May 1, 2013)

OnlyMyOpinion said:


> cainvest - maybe its the "safe investment" that's causing the difference in responses. If most of us think of an investment as something that will provide some real return and not just keep up with inflation, then I suppose we are offering up our ideas for a safe, but real return/inflation-beating investment.


Well the OP wanted to "preserve capital and keep up with inflation" so a 3-5 year GIC fits the bill nicely, even exceeds it. Anything higher (with a few exceptions like certain TFSA HISAs) and I believe your capital will not be safe but be at risk. Last I checked (months ago) a 5 year GIC was returning 2.7% so the question as always, is it worth a little risk to squeak out a potential small gain over that? Maybe it is?


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## Moneytoo (Mar 26, 2014)

Was hoping to find the answer in this tedious article: http://www.hussmanfunds.com/rsi/policyportfolio.htm

but alas:

"As Peter Bernstein suggested, a more flexible and opportunistic investment strategy is going to be demanded until bond and stock valuations once again become attractive."


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## james4beach (Nov 15, 2012)

OnlyMyOpinion said:


> our example was Loblaws, INT-LOBL-33 8.75% 23May22, rated BBBm. We spent $35,182.51 on Friday for $48,600 at maturity, the reported AY was 4.068%. We agree with you, a corp strip it is not 100% risk-free and not even CDIC-insured, and a porfolio is needed to reduce exposure to any single issue . . . We hold 74 various strips across our accounts


Thanks for details on that, interesting. That's great actually if you have 74 different strips and if you're managing your risks (single issuer exposure, sectors, credit grade, etc) nothing wrong with that. Only brief comment is this Loblaws bond is the lowest of 'investment grade' range and bordering junk.


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## My Own Advisor (Sep 24, 2012)

A dividend paying stock like JNJ or PG.


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## humble_pie (Jun 7, 2009)

OnlyMyOpinion said:


> +^ Good points. If your'e going to have interest income, keep it in your TFSA, RRSP or RESP.


really, OMO? you own 74 strips worth roughly $35,000 apiece & scattered across your TFSA, your RRSP & your RESP?

that's a pretty large amount of registered savings. Something like $2,500,000 in registered accounts alone. Plus the RESP is saying you have young or at the most college-age children. Wondering how you managed to corral so many $$ into limited registered accounts at such a young age?


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## OnlyMyOpinion (Sep 1, 2013)

humble_pie - Should have said, _as much as possible_ keep it in your TSFA, RRSP or RESP, or _use them first and be aware of the cost of having interest income outside of..._ The comment was meant to be general, since the RESP we held for our 2 has been fully used now. 

In addition we do carry strips in our non-registered acc - where we agree, they are very inefficient. They and our dividends are intended to provide retirement income from age 60-71, then our RRSP's>RRIF's will become our source of income. We've looked at other scenarios but this is what works in our case.


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## HaroldCrump (Jun 10, 2009)

OnlyMyOpinion said:


> They and our dividends are intended to provide retirement income from age 60-71, then our RRSP's>RRIF's will become our source of income. We've looked at other scenarios but this is what works in our case.


Do not forget to take into account delaying OAS/CPP until 70 either.
Delaying OAS and CPP is also an "investment" that provides a real, measurable RoR.
If you believe your non registered investments can carry your desired lifestyle for 11 years, there is a good chance that delaying your OAS/CPP is a good option for you.
You can probably convert RRSP > RRIF earlier than 71 and start drawing income from that and not claim OAS/CPP.
The drawdown in your RRIF prior to 71 will be offset by the boost to OAS + CPP at 70.


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## humble_pie (Jun 7, 2009)

OnlyMyOpinion said:


> Should have said, _as much as possible_ keep it in your TSFA, RRSP or RESP, or _use them first and be aware of the cost of having interest income outside of..._
> 
> In addition we do carry strips in our non-registered acc - where we agree, they are very inefficient



the idea of holding $2.5M across registered & non-registered appears to make sense ... but is there not a severe tax consequence in non-registered account?

is investor holding strips in a non-registered account not required to report notional interest from strips as taxable interest at least every 3 years? even though he has not received one red cent as real income?

holding something like $1M in strips in non-registered & having to pay tax on imputed or notional interest every 3 years while waiting with zero real strip income - waiting decades in some cases - for the darn things to mature, would surely kill most investors' appetites ...

one would think ...


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## gibor365 (Apr 1, 2011)

cainvest said:


> Ok, so let's say anything returning > 2.0% fits the OP's original statement of "preserve capital and keep up with inflation".
> I believe a fair number of 3-5 years GICs will do that, assuming no taxes.


In this case Peoples Trust TFSA HISA 3% and 1 year GIC 2.2% will beat inflation


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## gibor365 (Apr 1, 2011)

HaroldCrump said:


> You can probably convert RRSP > RRIF earlier than 71 and start drawing income from that and not claim OAS/CPP.
> The drawdown in your RRIF prior to 71 will be offset by the boost to OAS + CPP at 70.


You can have more than one RRSP and can convert RRSP to RRIF at any age, RRIF minimum payment you can get only from dividends, and if you have too much income you can reinvest in in another RRSP, TFSA or Spousal RRSP


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## HaroldCrump (Jun 10, 2009)

gibor said:


> You can have more than one RRSP and can convert RRSP to RRIF at any age, RRIF minimum payment you can get only from dividends, and if you have too much income you can reinvest in in another RRSP, TFSA or Spousal RRSP


For someone in such a situation, OAS is probably not a factor (most of it will get clawed back).
But if such individual is eligible for CPP, the problem of "too large RRSP" can be partially addressed by aggressively un-registering securities from the RRIF between 60 - 71, and deferring CPP until 71.
Starting from 65, the RRIF income will become split-able.
At 70, he/she would start the delayed CPP, thereby replacing non pensioned, non indexed RRIF income with a higher indexed pension from CPP.

All I am saying is that delaying OAS and CPP is a valid "investment" strategy.


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## gibor365 (Apr 1, 2011)

HaroldCrump said:


> All I am saying is that delaying OAS and CPP is a valid "investment" strategy.


I agree with you. My point is that you can break up you RRSP and convert part of it in RRIF and get sufficient for life income


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## Squash500 (May 16, 2009)

humble_pie said:


> the idea of holding $2.5M across registered & non-registered appears to make sense ... but is there not a severe tax consequence in non-registered account?
> 
> is investor holding strips in a non-registered account not required to report notional interest from strips as taxable interest at least every 3 years? even though he has not received one red cent as real income?
> 
> ...


 There is a severe tax consequence in holdings strips in a non-registered account. However IMHO if your net worth is over $2 million then I guess it doesn't make that much difference at the end of the day--LOL.


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## OnlyMyOpinion (Sep 1, 2013)

humble_pie - now see an earlier assumption you made which is erroneous - we do not "own 74 strips worth roughly $35,000 apiece". They were bought at amounts above and below that amount, and while substantial, they do not yet total $2.5MM.
We pay tax annually on the deemed interest even though as you note, there is no actual 'income' until maturity. But there's not much choice, if you've tax-optimized across your accounts and still need to hold some fixed income unsheltered. You just try to get the best rate you can, within your defintion of a "safe investment".


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## Squash500 (May 16, 2009)

OnlyMyOpinion said:


> humble_pie - now see an earlier assumption you made which is erroneous - we do not "own 74 strips worth roughly $35,000 apiece". They were bought at amounts above and below that amount, and while substantial, they do not yet total $2.5MM.
> We pay tax annually on the deemed interest even though as you note, there is no actual 'income' until maturity. But there's not much choice, if you've tax-optimized across your accounts and still need to hold some fixed income unsheltered. You just try to get the best rate you can, within your defintion of a "safe investment".


 Well instead of holding so many strip bonds in your non-registered account, you could substitute some of those strips for individual preferred shares in your non-registered account. Preferred's are very efficient tax-wise in a non-registered account.


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## HaroldCrump (Jun 10, 2009)

Yabut, preferred shares aint bonds.
Bonds are higher on the capital structure, and interest payment is mandatory unlike prefs.
Also, prefs. have features, terms, and conditions that are often very different than bonds.

If you want bonds, get bonds.
Don't let a tax implication change your asset allocation.


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## Squash500 (May 16, 2009)

HaroldCrump said:


> Yabut, preferred shares aint bonds.
> Bonds are higher on the capital structure, and interest payment is mandatory unlike prefs.
> Also, prefs. have features, terms, and conditions that are often very different than bonds.
> 
> ...


 Fair enough Harold. However aren't strip bonds the worst investment vehicle (tax-wise) that you could possibly buy for a non-registered account? Wouldn't any other type of bonds be more efficient (again tax-wise) in a non-registered account?

With strips, as HP already correctly said, you're paying tax each year on income that you won't receive for many years down the road?


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## HaroldCrump (Jun 10, 2009)

Squash500 said:


> Fair enough Harold. However aren't strip bonds the worst investment vehicle (tax-wise) that you could possibly buy for a non-registered account? Wouldn't any other type of bonds be more efficient (again tax-wise) in a non-registered account?


The notional interest already has the PV built into it.
Yes, you are paying for income that you haven't received yet, but it has indeed accrued to you.

It is sort of a reverse RRSP, where you get the tax deduction now, and pay the tax later - this is the opposite.

Also, with bond yields at historic lows these days, the absolute tax due on notional interest may be lower than the absolute tax due on a high yield dividend stock or pref. share.
You could have a strip bond with an effective yield of say 2% - 3%, vs. a high yield dividend stock paying 5% - 6%.

Dividend taxes can be quite punitive at higher income levels, esp. in *Taxtario*.


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## Squash500 (May 16, 2009)

HaroldCrump said:


> The notional interest already has the PV built into it.
> Yes, you are paying for income that you haven't received yet, but it has indeed accrued to you.
> 
> It is sort of a reverse RRSP, where you get the tax deduction now, and pay the tax later - this is the opposite.
> ...


Thanks for the excellent response Harold. Much appreciated.


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