Play The Markets

Smart money strategies: Gordon Pape helps shape your investment strategy for the year ahead.

Don’t tie up money in long-term GICs. As I write, the major banks are offering around two per cent on five-year non-redeemable GICs. Do not tie up money for such a long period at those low rates. Interest rates will begin to rise long before your GIC matures in 2018, but you won’t be able to take advantage of them.

Do consider dividend-paying stocks. Many investors are still traumatized from the crash of 2008-09. But safety comes at a price these days in the form of low returns. Most big bank stocks offer dividends in excess of four per cent while telecoms (e.g., BCE, Telus) are usually in the four per cent to five per cent range. Plus the dividends are eligible for a tax credit if the shares are in a non-registered account. Real estate investment trusts (REITs) are also worth considering.

Don’t use money market funds. These used to be the safe haven for investors seeking to park cash. But the prolonged low interest rate environment has knocked back the returns to almost nothing. The average Canadian money market fund generated only 0.39 per cent in the year to Dec. 31 and was showing a three-year average annual compound rate of return of 0.31 per cent at that point. After inflation is taken into account, you’re actually losing money.

Don’t buy oil stocks, unless … with a few exceptions, oil stocks are likely to stagnate until the delivery issues are resolved. However, if the Iran situation flares up, world oil prices will move sharply higher, and Canadian oil stocks will ride the coattails. If that happens, get in, take profits and exit.

Do look south. The U.S. stock market outperformed the TSX in 2012 and is likely to do so again in 2013. It offers much more diversity than our domestic market, which is heavily concentrated in resources and financials, and valuations look reasonable.

Don’t  invest in “risk-free” notes. Bay Street has issued billions of dollars worth of guaranteed securities in recent years. These enable you to play the stock market or a basket of commodities while promising to return your principal at maturity. Often, that’s all you’ll get – your own money back with zero return after three or five years. The only ones who make money are the issuers and the dealers.

Do buy short-term bonds. Stocks are likely to outperform bonds this year, but you need fixed-income securities in your portfolio for safety and balance. Short-term bonds (maturities under five years) carry the least risk if interest rates rise. A low-cost short-term bond fund or ETF is the easiest way to do this. You won’t get rich, but the returns will be better than from money market funds and, since you can sell at any time, you’ll be able to take advantage of any rise in interest rates.