Issues

Interest rates continue to rise in Canada, finally offering a break for savers.
GIC rates of nearly 5% can now be found at smaller trust companies, for 5-year terms,
and fully guaranteed up to $100,000.

When I bought Canadian MoneySaver magazine back in 2011, I really never thought I
would ever talk about GICs. After all, I love stocks, and they provide solid long-term returns,
if you can handle volatility.

But as investors get older (like me!) GICs paying 5% start to look more attractive compared
with a near-20% loss on stocks this year (referencing the S&P 500, as I can only buy US stocks because of my role at Canadian-research firm 5i Research).

GICs are taxed at the highest rate, will never provide ‘more’ interest than stated, and are still below today’s inflation rate. In real dollar terms, even at 5% you are still losing money. They clearly
are not perfect. But then again, neither are stocks. Sometimes, after a tough year, investors just might want to sleep, and not have to worry about part of their investment portfolios.

GICs can offer you more sleep and can help stabilize an overall portfolio. For some investors,
it is probably time to start looking at them again.

Peter Hodson, CFA
Editor

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Long-term MoneySavers will know that we never think it is wise to try to time the
market. The market dances to its own beat, and is the collective bet from billions
of investors. No one has shown consistency in predicting the market for more
than a quarter or two.

That being said, we are pretty sure we reached ‘maximum pessimism’ in the market in late June. After a horrible start to the year, investors were simply fed up. They hated everything: Stocks were down, bonds were down, cryptocurrencies were down, utilities were down, real estate was declining, small caps were destroyed, the Canadian dollar was down, and even gold--the asset that is supposed to offer ‘insurance’ in such times--was struggling.

When everyone is negative, by default the market has priced in the worst.Theoretically, at least, the market should go up when ‘all the selling is done’. We will see. Certainly July showed some positive market signs, but one or two months does not make a trend. Talk to us in December.

But, based on our experience, the worst is likely over, or close to it. Inflation will likely peak
this year. Interest rates have risen sharply, but the bond market is already predicting lower rates next year. Corporate earnings, so far, have not been as bad as feared.

It is probably safe to go back in the water. But maybe make sure there is a lifeguard in sight,
just to be sure.

We hope you had a happy and safe Summer.

Peter Hodson, CFA

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Well, GIC investors are finally getting what they wished for: interest rates
are rising and GIC (Guaranteed Investment Certificates) rates are finally
bumping up.

With market uncertainty, the GUARANTEED part of a GIC is what investors want. There
is no guarantee in the stock market, of course, and a 3.5% yield is starting to look good to some investors, after a 15% stock market decline this year (S&P 500 Index).
But if buying GICs, keep in mind that CDIC insurance only covers $100,000, per account.
Also, GIC interest is taxed as income: there is no dividend tax credit or capital gains tax break.

When talking to equity investors, GICs often get no respect. Most stock investors would
rather ‘take a chance’ on stocks than receive a ‘paltry’ 3.5% (and last year it was barely 2%).
Of course, sometimes the stock market goes up 3.5% IN A SINGLE DAY. That will never
happen with a GIC.

But, MoneySavers, don’t let others dictate what you should do. If you sleep better at night
with a guaranteed investment, who are others to tell you that’s wrong?

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Peter Hodson,
CFA

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This year is beginning to look like GroundHog Day. Every week, there is something to worry about, and it is often the same worry as the prior week, only in a new cover.

April was the worst month for stocks in many years. Bonds, supposed to be a safe harbour in rough markets, have done nothing but lose money for a while now. Even inflation-linked bond ETFs are down this year, even though inflation is one of the main worries for investors.

The only people happy are savers. GIC rates are moving up, but their rates are still not one might call at a ‘livable’ rate.

What to do? Well, we would just hang in there. All these troubles will pass, one day. At some point, this section of your MoneySaver will be filled with comments about how well investors are doing. Trust us. We can’t tell you when, but we promise the market mood is going to improve, and the first part of 2022 will be one of those times when investors look back and say, ‘I wish I had invested back in the Spring of ‘22.

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Peter Hodson, CFA

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Well, between Covid outbreaks and new variants, higher interest rates, higher inflation and other issues, 2022 did not start out well. Now, to make things worse, we have a horrible war to deal with. Our thoughts go out to all thoseimpacted by this completely unnecessary aggression. But we will have to leave the political debate to others; we have to focus on the impacts to North America.

First, inflation may rise much more than expected. Russian supplies of just about everything have been curtailed. Ukraine supplies are also of course impacted. The best approach is to assume everything is about to rise in price, except perhaps your stocks for a while. We would encourage investors to have some materials and energy exposure and gold in your portfolios. Amounts need to be personal, but some ‘insurance’ against inflation is likely a good thing right now.

Two, interest rates are going higher. This should cool the housing market a bit, and finally give ‘savers’ a break from 0.75% GIC rates. We don’t know how high rates will go, and the magnitude of any change will largely depend on inflation rates. Right now, governments are worried, and rates could also go higher than expected.

The fall out of all this? Well, we are going to see a lot of ‘recession’ talk. When rates rise and costs go up, demand falters. An economic contraction could be relatively quick, as well, as uncertainty is the only certainty these days.

But don’t panic. There have been 48 recessions in the last 100 years. They are part of the cycle. They are of course not good for workers who could be laid off, or over-leveraged real estate investors. But, for diversified investors, they are not so bad. Recessions get a lot of press, but if you own quality companies and have a diversified portfolio, you’ll survive.

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Peter Hodson, CFA

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A little known fact in the investment world (and perhaps deliberately hidden by thevery much male-dominated industry) is that women are better investors than men.

This is not an opinion; it is a fact. Dozens of academic studies have proven this. For example Fidelity late last year indicated that its accounts owned by women outperformed the
men by 0.4 percentage points. That may not sound like a whole lot, but over time, and with compounding, it can mean the difference between a retirement spent traveling the world or
on the beach, or one at home watching Netlfix.

Some reasons: Women don’t have the need to ‘prove’ something, so can admit their mistakes more easily. Other reasons: women trade less, and don’t suffer from the overconfidence that
dooms so many men investors. In my years as a portfolio manager I am seen overconfident male managers insist that ‘they are right, and the market is wrong’. This kind of thinking can
wreck returns, and I have seen it ruin a career or two, as well.

So, for the men out there, maybe let your wife be more involved with your investments. For couples, this is always a good idea anyway, so each knows what is going on and there are
no surprises.

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Peter Hodson, CFA

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With more depressing Covid news, travel suspended, winter hitting us hard, and the stock market (especially my beloved small caps) gyrating wildly, it is much easier to be depressed these days. Generally, I am a very optimistic person. But I now have four kids whose education has been interrupted for years. I am seeing businesses fold and workers and investors abandon hope of any return to ‘normalcy’. I am seeing vaxxers fight with their former friends, the anti-vaxxers. I want to just curl up and watch Netflix all winter.

But, of course, that’s the wrong thing to do. In life, and in investing, we have to look ahead. Covid—though it seems so now—will not be with us forever, at least not in its current state.
Small caps look horrible, but that means opportunity. Consumers WANT to spend money, and this will help the economy whenever it fully opens up in Canada. Kids are adaptable, and
will find a way to get through this mess.

When things are bad, of course they look bad. But don’t let ‘appearances’ dictate your future. The future may or may not be great, but it is going to be different, regardless. Look
for opportunities in life and in markets, rather than looking at ‘today’s’ problems.

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Peter Hodson

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The investment industry is just....so strange.

But first, Happy New Year!

As the New Year turned over, the investment dealers in Canada and advisors have to dealwith a new regulatory requirement, known as the “Know-Your-Product” rule.

Seriously, we can’t make this up. Only now do advisors need to understand their products.

In 2022, for the first time ever, advisors are now ‘required’ to perform due diligence on the products they sell, and to ensure those products are appropriate for you, the investor.
Investment Dealers need to perform due diligence on products, and if a security has complex or unique features making it difficult to fully understand, the Dealer may conclude that the
security should not be made available to a certain class or subset of retail clients.

Examples of difficult securities could be: leveraged and inverse ETFs, principal protected notes, asset backed securities, and derivative instruments.

Yep, you are reading that right. Only now, in 2022, do investment advisors actually need to know what it is they are selling.

Now, we could fill this page with comments about the bureaucracy and red-tape that is involved in the investment world, but that would just be boring.

Rather, we will again remind Money Savers, make sure YOU fully understand what you are buying. Review what it is you now own, because your advisor, until now, wasn’t even required to understand what they were pitching to you. In other words, this same statement applies, even with this regulatory change: NO ONE CARES ABOUT YOUR MONEY MORE THAN YOU, and at the end of the day make sure YOU are the one that knows what you are doing.

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Peter Hodson, CFA, Editor

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If there is one thing I have learned in my career it is to keep emotions out of investing.

Emotions will wreak havoc with your investment success.

Sure, you’ve heard this before, but it is so hard to do.
You read the news; you watch the market. When things are bad they sure do look bad. When sellers are panicking and you are losing thousands by the day (or hour, or second) it is certainly easy to get nervous and start selling, too.

Some tips to combat this: One, think like a mutual fund manager. Funds are priced daily, so assume you just bought all your stocks at today’s prices. Are you comfortable at
that price? Remember, a stock doesn’t know or care what you paid for it. Don’t ‘anchor’ a stock with a price from before that means nothing now.

Two, remember that you own part of a company when you own a stock. The most important thing is how that company performs. You have not bought China economic policies, a US budget, or anything else that investors like to fret about. You have bought a company. Many companies can do well in all types of market and economic scenarios.

Three, remember that volatility transfers wealth from short-term investors to long-term investors: the greatest stocks of the past 20 years have all experienced stomach-turning drops,
at times. But here they are, still making money for investors who stuck it out.

It has been a most unusual year, again. All of us at MoneySaver wish you a joyous and prosperous Holiday Season.

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Peter Hodson, CFA

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