How to invest $10000 windfall | General financial discussion | Discussion forum

John (I'm guessing that is your name),
If you don't need the money for something like education which pays off over time then perhaps open a TFSA - tax free savings account or start/top up your RRSP account. Besides GICs as an investment product I can't give you financial advice.

Jon, it sounds to me like you have already made your assessments of the markets and that you don't want to get into them right now. Fair enough.

So, the next question, from my point of view, is what do you envision as the ultimate use of this money? If you don't think you'll need it within the next 1 to 5 years, then I think laddering GICs may be your best and safest bet for now.

I would suggest a ladder of GICs through Peoples, Hubert (credit union in MB) and Accelerate (another CU in MB).
If you think you might need some or all of it within the next year, I would go with the 1-yr special at Hubert, which allows for withdrawals and offers excellent rates in the current environment.
If you think you can hold on a bit longer, than there is the 1yr GIC at Peoples at 2.4
For 2-yr, Peoples at 2.45
For 3yr, Accelerate at 2.5
For 4 yr, Accelerate at 2.75
For 5yr, Hubert at 2.95.
I would also open ordinary savings accounts at all of the above, to make it easier to move your money around.

HOWEVER, and this is a big however, if you think you might not need the money for a long time, then you might consider a ladder of government bonds. I know you said you were afraid of bonds declining in value, but if you hold them to their maturity date you will get exactly what you expected to get. The fluctuation in price is then at the buying end, i.e. in what it costs you to buy them. You might consider a ladder up to 10 years (but not using every year, maybe just every other year, so that you have 5 of them). This will likely bring you better returns than simple GICs. They can be sold on the market at any time, although there is the risk of a temporary decline in value if interest rates have risen in the meanwhile. Nonetheless, you will always get back the face value when the term is up, and that will almost certainly be more than the GIC would bring you, at least in the longer terms. Too bad SD2013 is no longer with us (a former member) as he was a big fan of these bonds and would have been very glad to give you lots of details on how to take advantage of these. To buy these, you would need to set up some kind of account, probably with a discount brokerage, so you would have to see if the costs involved are worth it to you. And I would strongly suggest you get some advice from your dad or someone who has some experience with this. Someone on this forum may be able to help. I am not the right person for that. I am not sure if there are minimum purchases for these things, so that could potentially be a consideration. If there are not, you might want to just put a portion of your money into a 10yr bond and put the rest in the GICs.

You could also consider some Real Return Bonds, to balance off your concerns about bonds devaluing etc., but I am not an expert on this. I am only trying to point you to things you might investigate.

I believe that at age 18 you can start contributing to an RRSP, although it depends on how much money you have earned. It may be that you have to wait til next year. Check your income tax statement for 2013 if you had one, and see if it says you have any contribution room. If not, then you might have it by next year.

Presumably you will want to max out your TFSA again next January, as it's the best longterm place to put your money. I don't know how much you are earning, but it might not be enough to allow a contribution to TFSA. In that case, you will want to keep some of your 10,000 liquid in order to be able to contribute it to TFSA in January. For that I suggest the Hubert 1yr cashable GIC, which you should cash out in 3months (at 2.2% per annum) and then deposit in a savings account with Hubert until 2015, at which point you move it to the TFSA.

I hope I didn't just make it more confusing!

If you don't have next years contribution to your TFSA covered, I would put 5500 in a Peoples Trust High Interest savings account. 1.8% is not too bad these days. Set up a transfer for Jan 1 ( it's less than 5 months away!!!) directly into your TFSA and let it sit until something better comes along in the way of interest rates. Right now nothing comes close to their 3% and it's liquid if you need it for emergencies. The rate has been steady for a while now, but there are no guarantees. Take the other 4500 and put it in the 1 year GIC for 2016's TFSA contribution. If the maximum contribution stays the same, you'll be shy of 2016's maximum by about 800.00. Good luck and congratulations on your financial foresight. I wish I was smart enough to start saving when I was 18.

I like Rick's point about keeping money available for further TFSA contributions in next couple of years.
You can carve out a few more dollars for yourself using Hubert judiciously in the interim, but not a lot of difference.

Agreed, rates are not likely to go up much in foreseeable future, if at all. Therefore, might as well go long and use strips if no contradicting factors, I suppose, although my sense is that Jon wants to keep his finger on the button in case the markets go down.

Much depends on what he sees as his future over the next few years. For all I know, he's a dot come wiz kid who may have a lot of money in a couple of years! However, if that seems unlikely, there is not much to choose from.

Some would advocate a good Balanced Mutual Fund, but there is much to consider with that sort of decision.

Jack, my concern is that I am not sure that rates have bottomed. There is another 3% to lose! (Remember Japan.)

In spite of everything, I have not yet read any credible "expert" who disagrees with laddering in principal, simply because we can never really know where rates are going. For someone with more money, more diversification might be in order, but not for Jon, from what he has said.

I assume that you must be concerned that a strip bond at 3.75 or so might not look like a good investment 6 or 10 years from now. Jon doesn't have any GICs at all yet, so any that he may buy now will be in the 2.9 to 3.0 range for 5 years, at best (less for shorter duration). So why wouldn't he be better off putting some of his money in a strip that pays more and has a few years' longer maturity?

I remember quite some years back now when interest rates were about 11-12%, and people thought they were low because they had previously been even higher. At the time, it was hard to interest a broker in selling you bonds of any sort. We bought provincial bonds, the best rate at the time, and they turned out to be our best investment at that time. I wish I'd followed my instincts when the broker responded by telling us that one of his clients had just cashed in ALL her stocks and bought long bonds. It sounded like she had quite a bit of money and that the broker was disappointed but also that he could see the merit in the idea. My instinct was that she was right. It would have been the right decision for us, especially given what he sold us instead.

Ah, yes, I hear what you are saying, Jack.
I guess the issue for Jon, since he doesn't have any older strips to fall back on, is whether he can get any better rate at all from strips, after commissions or whatever. I don't know the answer to that.

I agree that "actively managed" mutual funds don't always work out to one's advantage. A good balanced fund can do better than GICs or other shortterm investments, and is less likely to tank than a more specialized fund, but it is a longer-term strategy, and I am not particularly recommending it. A little research will tell you if there are any fund managers who might do better than the ETFs, but it also depends on what is the mandate of the fund.

You obviously can get some good help from your dad because he has seen the markets ebb and flow, and has learned from his successes and his mistakes.

I only mentioned RRSPs in case you had earned income and were eligible. You should only ever do it when your tax return says you can.

Hubert sounds good for you. Please remember that it's a credit union, not a bank, therefore is not insured by CDIC. But it is insured by Deposit Guarantee Corporation of Manitoba. Some people feel that their insurance might not be as good, but I don't have any problem with it, and I think that most people on this forum do not have a problem with it. I haven't noticed anyone say that they would not invest with them for this reason.

Good luck!