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Email this9:00 pm
April 6, 2013
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Loonie said
...
Cunningham recommends supplementing and extending the ladder beyond 5 yr GICs with gov't and corporate bonds to 10 years, but I have not read most of his book yet. Do these pay out annually, then? I'm not very familiar with bonds yet.
The terms of gov't and corporate bonds can vary. Semi-annual (twice a year) is the most common interest payment frequency for non-stripped government and corporate bonds.
Strip bonds are bonds stripped of all their interest payments. There's only one payment, at maturity, of their face value.
9:08 pm
October 27, 2013
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Norman1 said
Strip bonds are bonds stripped of all their interest payments. There's only one payment, at maturity, of their face value.
Strip bonds are not recommended in taxable accounts because accrued interest must be declared on one's tax return each year...while there is no payment until maturity.
Another wrinkle for those not familiar with nominal bonds in taxable accounts. When one purchases a certain amount, e.g. $20k, of a bond, the purchaser also must pony up for the accrued interest (for the 1-182 days interest has been accruing before the semi-annual payment). That means the purchase price could be $20K+ $x accrued interest. The accrued interest portion is treated as an 'interest/investment charge', i.e. deduction on one's tax return.
9:24 pm
October 21, 2013
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Thanks, guys. I sure hope Greg is aware of all this, if this is his strategy.
11:29 am
November 4, 2014
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AltaRed, yes we know about this and all the longer term bonds if we were to buy them are $100 to $101 at the most. Some are even $98 to $99+ so that is not a problem. Our adviser also showed that any accrued interest paid to buy theses bonds, it will simply an interest expense on line 221, T-General.
The fact about zero coupon bonds, residuals, strip bonds is true and there is a video about how to claim this on one's personal income tax return each year and at maturity too, http://www.investingforme.com.
You have to remember that compound interest GIC's work in a similar fashion, meaning you must add income accrued each year until, 2-7 years of a maturity of the compound interest GIC's. The difference is it is a simpler process than compound interest bonds known as zeros, strips, residuals.
Our adviser also gave us instructions and a good tax accountant if we need help as well.
12:29 pm
November 4, 2014
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Loonie, there are at least 50 different scenarios outlined in a multiple page report. It has graphs, charts, calculations, scenario comparison and analysis of different interest rates.
The simplest scenario is if the present a 5 year GIC ladder got a 2.37% average rate every 5 year period over the next 31.5 years. This 2.37% could be from shorter term GIC's as well.
It does not necessarily have to be a 1-5 year GIC ladder. We did this with multiple financial institutions as we can't put all our money in Oaken Financial which would have a 2.65% average rate.
This is compared to 3.00% 5 year GIC's being invested every 5 years. All the GIC rates may go up and down or stay the same but GIC rates average out with these 2.37% versus 3.00% rates.
Remember, if they are lower in 5 years and then again 5 years and again 5 years, the lost interest will be more. Japan's low interest rates are a perfect example of what nobody would ever predicted 25 years ago.
Japan's interest rates today are the following by year, 1yr. 0.012%, 3yr. 0.045%, 5yr. 0.13%, 7yr. 0.227%, 9yr. 0.39%, 10yr. 0.465%, 15yr. 0.811%, 20yr. 1.232%, 30yr. 1.505%, 40yr. 1.703%.
Now I am not forecasting these ridiculously pitiful rates but even small decreases of 10 basis points, for example, 2.37% down to 2.27%, 2.27% down to 2.17%, 2.17% down to 2.07% etc. every 5 years is possible. It could also be and up and down scenario as well. nobody really knows but this is scary stuff when you have to get income in retirement.
You can see this at http://www.investing.com/rates.....ment-bonds.
Simply compound 2.37% over 31.5 years and compound 3.0% over 31.5 years and the difference is $327,773 or $327,773/31.5 years=$10,405.49/52 weeks per year=$200.10 per week in lost interest.
This is based on total $735,000 of investments. I forgot to mention that my wife's father passed away 2 weeks ago and are in the process of transferring 6 different GIC's and Ontario savings bonds worth about $149,700 after all taxes, fees are paid. This money was illustrated and included in the extensive report our adviser prepared.
3:20 pm
November 4, 2014
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Gicjunkie, thanks for that information about the 3.10% 5 year GIC and that it is an Ontario credit union, DICO insured but the same problem remains that DICO does have 100%, unlimited deposit insurance for registered accounts only RRSP's, TFSA's in our case that is of interest to us but we are still not willing and comfortable with putting substantially more than $100,000 in each financial institution.
We want to spread our savings deposits, GIC's, RRSP's, TFSA's, investments etc. in many financial institutions. It is probably not necessary but it is just a comfort factor and being able to sleep at night.
We will look in using this GIC broker or deposit broker to see how it works. We never used one before. It does look like they need large tens of thousands of dollar deposits to get their top GIC rates.
Thanks again for the information Gicjunkie.
9:16 am
November 7, 2014
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Hi Greg,
You're welcome. Some companies that offer good rate specials want larger investments, which works for some, but not for all.
Also, you should get on the GIC Wealth email list for rate updates.
Regards.
8:17 pm
October 21, 2013
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I think you didn't really read my proposal very carefully, Greg.
If you used the ladder I proposed, the average would be 2.72%, not 2.37%. In fact, it would be higher because you would be overweighted in 5 yr term, plus, as the years pass, the lower rates would drop off and be replaced with 5 yr rates which, while unknowable, are generally higher than shorter terms. This calculation is simply from averaging out the rates for the 5 years. It does not and cannot include speculation about what rates might be when these GICs mature, or 20 or 30 years down the road. Nobody can reliably predict what rates will be in the future.
My opinion is that you probably have too much information but not a very good plan, and thus are making decisions more out of panic and fear than out of reason. You said you made some bad decisions in the past, and I think you are doing the same thing again in a different way, in both cases trying to pick the perfect term.
However, having most of your investments all come due at about the same time in 5 years creates interest rate risk. The best protection against this risk is to have some come due every year. I think you would have a hard time finding a reliable advisor who disagreed with this.
Only today, Jon came up with a 3.3% rate for a 5yr TFSA at a CDIC bank I had never heard of. Over 5 years, for 2 people, that's almost $1000 more than 3.0%.
Rates are always in flux. If they are up a year from now (as they keep telling us they will be, but we certainly can't count on that), then you will be saying you made a bad decision this year by putting everything into 5 years. If they are same or lower in a year, you will be pleased that you did the right thing, but you will have to wait 5 years and then every subsequent 5 years, hoping that rates will still be as good or better at that specific time, in order for your plan to work out.
In effect, you have decided to guess what the rates will be in the future. I don't know of any responsible financial planner or "expert" who believes this is possible to do with any accuracy, and I don't know any who would advise it.
I don't expect you to agree with or like what I have said, and don't expect you to change course. But perhaps someone else will benefit from reading this thread.
I hope it turns out lucky for you. For myself, I will stick with minimizing interest rate risk.
8:41 pm
August 9, 2014
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Loonie, you don't need to be so hostile. I just think Greg need to explain his idea better and share some of his data and their methodology with us.
1:00 am
October 21, 2013
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Jon said
Loonie, you don't need to be so hostile. I just think Greg need to explain his idea better and share some of his data and their methodology with us.
Jon, I don't consider my remarks hostile, but they are honest.
I have asked Greg several times for clarity on his plan and a specific response to my suggestions, since he said he did want suggestions.
It's OK to have different opinions.
It's also OK to tell people when you see red flags and think they may be headed for trouble, which happens regularly on this forum. I felt an obligation to be more pointed in my last post because of the risk inherent in Greg's approach.
I spent some time trying to write my last post in an objective but honest way.
In retrospect, I should have probably not have commented on this thread at all. Initially it seemed like an interesting challenge.
2:36 pm
October 27, 2013
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Nor do I. It is hard to fathom what Greg is trying to do/explain but I don't follow his 5 year GIC thing either. A true 5 year GIC ladder in operation today has a weighted average interest rate at about 2.7-3%, not 2.37% as Greg suggests. It has 5 year GICs maturing every year as a minimum, and perhaps every 3-6 months with 'many' GICs. A 5 yr GIC ladder does not speculate on interest rates. It simply renews at the prevailing rate when the GICs mature. Imagine all the folks sitting on 1.2-1.9% HISA money the past 5 years waiting for interest rates to increase.
Example: As of today, a minimum 5 yr GIC ladder would consist of: 1) a 5 yr GIC bought 5 years ago, but maturing this year (at whatever the 5 year interest rate was 5 years ago), 2) a 5 yr GIC bought 4 years ago with a year left on it (at whatever the 5 yr interest rate was 4 yrs ago), 3) a 5 yr GIC bought 3 years ago with 2 yrs left on it (at the rate 3 yrs ago), 4) a 5 yr GIC bought 2 yrs ago, and 5) a 5 yr GIC bought a year ago. This 5 yr GIC ladder would have a weighted average interest rate about 2.7-3% or so (depending where bought).
This weighted average will change from year to year depending on the direction of 5 yr GIC interest rates. Net-net, it is probably still drifting downward a bit as the older (higher rate) GICs mature and can only be replaced with a 5 yr GIC at today's rates. The trend will start to tick up again in a year or so as 5 yr GIC interest rates increase.
My personal 5 yr GIC ladder currently consists of GICs (all bought as 5 yr GICs) with interest rates ranging from 2.5-3.5%... the highest one maturing in 2015 and the lowest one maturing in 2019. I did not calculate current weighted average but it must be circa 2.9-3.0%.
3:42 pm
November 4, 2014
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Jon, he is trying to explain his point of view but really I have no idea who Loonie or anyone else is on this forum.
We are just having a casual discussion. Regarding GIC laddering, GIC staggering or whatever so called short term method he wants to use rolling over 20% or more of GIC's annually is a big costly lost of interest from the last decade and even as far back as in the 1990's where rates where 9% to 10% or more.
Nobody knows where interest rates are going. The problem is income protection in a falling interest rate world that is no going to end anytime soon. My adviser is responsible because when rates were 5%, 6% just 10 to 12 years ago, he told us to lock in but we listened to those that said going short term 1 to 5 years in GIC's is a better strategy.
It was the biggest mistake we made and we are all still paying for it. Loonie, if you think that what I posted is a challenge, wait until interest income and C.P.P, OAS and all income does not keep up with rising water, electricity, gas, heat, insurance, food, property taxes, property assessments, medical, income taxes, H.S.T or G.S.T, other taxes etc.
By the way, if you compare your GIC ladder of 2.72% to 3.79% on longer term bond rates, it is $404 a week in lost interest. Loonie, try to keep an open mind and don't believe everything you read in books etc.
Our strategy is very simple, we want to maximize our income and protect it for decades and I wish we listened to our adviser even 6 to 7 years ago, 5%+ long term bonds.
No gic ladder can do that now. Good luck to you and thanks for the discussion.
4:36 pm
October 21, 2013
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Greg Franklin said
"Nobody knows where interest rates are going. The problem is income protection in a falling interest rate world that is no going to end anytime soon.
Therein lies the crux of the problem.
Greg says 2 things here:
1. Nobody knows where interest rates are going. (true)
2. Interest rates are falling and are going to continue to fall for the foreseeable future, if not longer. (this contradicts #1).
He also advises that "if you compare your GIC ladder of 2.72% to 3.79% on longer term bond rates, it is $404 a week in lost interest. Loonie, try to keep an open mind and don't believe everything you read in books etc."
I never said he should restrict himself to a 5 yr GIC ladder. By all means, expand it with bonds of longer duration. His question was about GICs only in the first place, and he has never said he plans to buy longer bonds, so it is a red herring. Personally, I consider longer bonds but I would not go beyond 10 yrs because too many things can happen in between, such as rising interest rates, and I am too old to want to have to wait it out, but that is a personal decision based on my circumstances.
I read a lot of books, which hold a variety of opinions. There are many questions on which I have not yet made up my mind. The greater danger, in my view, is in making assumptions which are not verifiable about the direction and speed of interest rate movement, or any market movement for that matter.
Every person working in the investment world knows the mantra, "past performance is not a guarantee of future success" - or, I would add, "of future failure". It goes both ways, and it applies equally to interest rates. The same goes for bad decisions of investors. We have all probably made decisions we later regretted. The trick is to not make the same mistake again. By assuming that what went on in the past is going to happen in the future, we set ourselves up.
4:46 pm
November 4, 2014
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Loonie, short term to intermediate investing in bonds and GIC's and their ladders in the last 5, 10, 15, 20 years worked out to be less interest income or compound interest for investors so that did not only not work, it was a big loss over many years.
Lost interest is what I am talking about. By the way, this goes for dividend investors too as they have fallen by alot too from 9%+ in the 1990's to 3% to 4% today.
Why would governments, corporations and other borrowers want to give us more interest on our hard, earned money. They are successfully keeping them down and will continue to be successful.
Time will tell but the benefit for governments, corporations and borrowers to keep rates low to lower for years and maybe a decade to come is in their best interest.
Good discussion, Loonie.
5:04 pm
November 4, 2014
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Loonie, there is a German bank that is starting to charge interest, negative interest rates, to clients with their savings deposits of $500,000 and more. They first take an inch, and then a foot and then a mile.
Also, look at countries like Canada, developed countries that are today, November-12-2014, charging interest, negative interest rates, on their bonds, Belgium, 1 year -0.018%, Denmark, 3 year -0.018%, Finland, 2 year -0.010%, France, 1 year -0.001%, Germany 3 year -0.025%, Netherlands 6 month -0.063%, Sweden 2 year -0.017%, Switzerland 4 year -0.042%.
Even those that are not charging negative interest rates on their bonds, like Japan, Hong Kong, Taiwan, U.K., Spain, Italy, Singapore, Norway, Ireland are 0.03% to 1.40% for 1 month to 3 or 4 year bond rates.
They are put in a low interest, depleting their principal or capital corner that you better hope we don't get into here in Canada, U.S. etc., Loonie.
This seems to be a global trend and look what is happening, Loonie.Good discussion.
6:06 pm
November 4, 2014
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Just to clarify for everyone including Loonie, I mentioned that we are considering putting some money 3.70%+ longer term bonds, post 31 at 2:16 P.M. on November-7-2014.
Also, in my post at 10:03 a.m. November-7-2014, I did mention my adviser did show us longer term provincial bonds paying semi-annually. I did mention many times in my posts that longer term provincial 3.70%+ and zero coupon longer term bonds was a possible consideration for us.
This is part of the 50 different scenarios of interest rate comparison and analysis used by my adviser and not just 5 year GIC's.
Good discussion, Loonie.
6:25 pm
October 21, 2013
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The last 2 posts don't really advance the discussion. The point is not what other countries are doing or where we THINK interest rates are going in the future. The point is that none of us know the future. A defensive strategy such as laddering takes our ignorance seriously. It is the things we don't anticipate which mess up our projections - think tech bust, 2008, Great Depression, etc.
If you are trying to always hit the peak in interest rates, always get the best possible return over time, dream on. It would only be a matter of luck if you succeeded, and the odds are against you. It's the same as expecting to always buy at the lowest price and sell at the highest price in the stock market, which could only ever be a matter of luck.
If you'd bought long bonds 15 or 20 years ago, you would have won the interest rate lottery. You didn't, and now you regret it. But, at that time, you were just as sure that rates would stay the same or go up as you are now that they are going to stay the same or go down. You were wrong, as it turns out. But you might have been right. But now you are making the same kind of judgement, just in a different direction. The point is, we don't know, and we can't know. Laddering is a disciplined approach that is humble in the face of such uncertainty and recognizes that we will not always hit peak rates but mitigates against lowest ones.
By the way, I had some of those long bonds, so I am very much aware of the situation in the past. The broker didn't want to sell them to us. They were 20 or 25 year provincial strips. He wouldn't make much money on them and he didn't think rates would go down. At the time, the common wisdom was that rates were too low. We held them to maturity. We don't use that broker any more.
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