As ever when the economy struggles, interest rates are being held at low levels that encourage borrowing and instill a feeling of futility in savers.
Bank of Canada governor Tiff Macklem said last week that rates will stay low until the economy recovers from the damage caused in the pandemic. “If you’ve got a mortgage, or if you’re considering to make a major purchase, or you’re a business and you’re considering making an investment, you can be confident that interest rates will be low for a long time,” he said.
Savers, you’re roadkill on this long stretch of highway leading to a stronger economy. Rates on savings accounts and guaranteed investment certificates held up reasonably well in the early months of the pandemic, at least among alternative banks and credit unions. But in recent weeks, we’ve seen a depressing pullback. Just three online banks now offer savings account rates of 2 per cent or more, and five-year GIC rates come at 2.3 per cent and lower. Much lower at the big banks.
There’s nothing exceptional about what’s happening here in Canada with rates. As noted by money manager and blogger Ben Carlson, close to 90 per cent of countries have government bond yields of 1 per cent or less, and 40 per cent of this group of countries has negative yields.
If you’re wondering how stocks can keep soaring while the economy struggles, look to those low yields on bonds and savings. People are willing to accept the greater risk of stocks to get far higher yields from dividend-paying common and preferred shares.
Those who have the time to wait 10 years or more for their stocks to recover from any corrections or crashes ahead should be fine subbing dividend stocks for bonds. If you might need your money sooner, or if you simply don’t want your money exposed to a big stock market decline at any time, then you’ll have to live with low rates. There just isn’t any way to get a better return with no risk.
As the pandemic shut down the economy in March, financial success was measured by how much money you had saved and available for emergencies. No one disparaged saving because the returns were modest. Having the money available was everything.
Remember that when looking at the pitiful rates on savings accounts and GICs. Safety has value in this year of overriding uncertainty.
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Rob’s personal finance reading list…
Keep the faith in dividend stocks
“Don’t let one bad bear market for dividends have you throwing in the towel on the strategy,” a new report says. Good reasons here for staying on track with well-chosen dividend stocks.
Working at home: Get me out of here
I have highlighted the financial advantages of working at home a lot in recent months – you could save a lot by not commuting to work and maybe going down to one vehicle from two at your household. Mark Goodfield of The Blunt Bean Counter blog says he cannot wait to go back to the office.
A look at racism in the wealth management business
Black people in the investment industry talk about the racism they’ve encountered.
Eight worthwhile expenses for your backyard
Ways to spruce up a backyard on a cost-effective basis, including quality outdoor furniture and a pro grilling setup.
Ask Rob
Q: I was very fortunate to have come into some money recently from an inheritance ($150,000). Having never invested in the stock market and being very leery of the current markets, what is my best course of action? I am within five years until retirement, have no debt other than my mortgage.
A: I totally get you in being leery of the stock market right now. So how about putting your inheritance to work gradually, maybe with monthly contributions of $12,500 over the next 12 months? Doing so will give you a plan to follow for getting into the market gradually and keep you from investing a bundle just ahead of a stock market plunge. Put the money into a diversified mix of stocks and bonds – a balanced exchange-traded fund is worth a thought.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
Tips on preparing a will during the pandemic from FP Canada, which oversees the Certified Financial Planner (CFP) designation.
Video of the week
How to have difficult conversations about retirement, estate planning and more from Dr. Amy D’Aprix, a life transitions expert.
ICYMI
Three Globe and Mail personal finance-related stories
- Less than 1 per cent of Canadians choose to delay CPP. Here’s why the rest are missing out
- Couple want to cover lifestyle spending and set aside enough for eventual long-term care
- Insurers offer out-of-country medical coverage amid COVID-19 pandemic (for Globe Unlimited subscribers)
More Carrick and money coverage:
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Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: How to survive the gig economy • How to get out of debt • Is now the right time to buy a house? • Crisis-proof your finances • Can you afford to live downtown? • The cost of kids
- ✔️ A 10-point pandemic personal finance checklist: Create a “wartime” family budget; stop worrying about bank deposits; clean out your big-bank savings account; get relief on car payments; get preapproved for a mortgage; WFH? Save $1,000 a month; save, save, save; build resilience by not anxiety-buying; consider the cost of mortgage deferrals; get ready for the second wave of financial distress.
- 📈 Investing: The case for a tight portfolio of big blue chips dividend stocks; robo-advisers beat human advisors (and they’re thriving), why online banks that are better than the branch; is it time to invest your 2020 TFSA; don’t get your mortgage at a bank; why it’s so hard to invest in preferred shares; stock up on stocks to retire early; and are you following the 10-year rule with your investments?
- 💰 Saving: Food waste is wasted money; why you might regret that SUV and find out if CAA is worth it; juice your PC Optimum points; how an ex-Bay Street lawyer got out of debt; blindly easy tweak to your retirement investments to survive economic downturn; should you buy that latte?
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Rob Carrick