Q&A: Low risk, high return

Zoomer | October 4th, 2011

Question: How can we get the best return with the most tax effective investment at a low (or no) risk, other than GICs or money market funds? – Michael V.

Gordon Pape answers: There is no such thing as a risk-free investment. The whole concept is based on the false premise that anything that preserves capital is riskless. It’s not. Inflation erodes the purchasing power of money over time so unless you earn a return that at least keeps pace with the cost of living, you’ll steadily lose ground. As of August, Canada’s annualized inflation rate was 3.1%.

There aren’t many low-risk investments available these days that come close to matching that. Some small financial institutions offer five-year GICs that yield 3.5%. That’s about as good as it gets on a risk/return basis.

For higher returns, you have to take on greater risk — there is no way around it. Some securities to consider that I would rate as low to medium risk include preferred shares, corporate bonds, and the mutual funds or ETFs that invest in them. For tax efficiency, the preferreds are the better bet because their distributions qualify for the dividend tax credit.

Do you have a money question you’d like to ask Gordon? Send it along and then check out our Q&A section regularly to see if it was chosen for a response. Sorry, we cannot send personal answers.