Q&A: Subprime meltdown – what to do?

Question: With the current financial climate, slowing U.S.
economy, and subprime meltdown, what’s an investor to do? My husband and are
in our mid-50s and don’t want to risk our investments so we are sticking with
boring GICs (found rates in the 4.6% range) for 1-2 years. What are your thoughts
on the state of the economy and should we as investors stay on the sidelines
and wait for the subprime mess to clean itself out? Also, how safe are our Canadian
banks from this subprime mess? Do you see any of them going under? – W
and J

Gordon Pape answers: To answer your last question first, it
is unlikely in the extreme that any major Canadian bank would go under. All
are very well capitalized and if any one of them were faced with that kind of
situation, the Government of Canada would move quickly to allow it to be taken
over by one of the other major players in the industry. You may recall that’s
what happened when Royal Trust ran into trouble several years ago and was eventually
bought out by Royal Bank.

However, that doesn’t mean the share prices of the banks aren’t
vulnerable and in fact CIBC, which is the one most exposed to tainted subprime
paper, is down 38% from its 2007 high.

What to do in these circumstances? Well, there is nothing wrong with your boring
GICs. Better boring than losing, I always say. If you want to aim for better
returns, buy some bonds or bond funds, especially those that focus on government
issues. Bonds have done very well in the past few months and should continue
to outperform stocks if, as expected, interest rates continue to drop in the
first half of 2008.

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