Expert: Paul Henneman - 9/16/2006

Question
Thanks again Paul,

I think I am getting a better idea now where to go... I am just 20 years old, and have like $1366 or so in a RSP (retirement one) thats not affected by taxes..and really don't want to put the rest towards that..

So I was looking at Cash term deposits which as u said is like CD in the US... https://www.tdcanadatrust.com/GICs/GICTable.jsp

According to their table, cash deposit is like 2.9% retun for 3 years..and with inflation/tax that wont be much after...

So my next choice was Government of Canada Money Market Strips  which seems like the one i can afford ($5 000 compared to $100 000 face value...isn't face value future? so I can invest less than that ..i'm kind of confused about that)   https://www.tdcanadatrust.com/invest/moneymkt/icrcipcm.jsp

OR I can look at Government of Canada Treasury Bills ("T-Bills")  https://www.tdcanadatrust.com/invest/moneymkt/icrcipct.jsp

Does any of the above sound better than the other? I'm just afraid to walk into the bank and ask for their advice..as I hear its misleading. I really appreciate your help.

Thanks!!


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Followup To

Question -
Wow, I really am happy at the level of service you are providing. I am currently with TD canada trust..and their CD seems to be below their GIC rates according ot this table ( http://www.tdcanadatrust.com/GICs/GICTable.jsp )

So would it be better if i go with a GIC? Again im worried about tax. Currently I have a GIA (guranteed investment account, its like a savings account where i get like close to $45 per month for $15000 or so of savings i have) thats like 3% i think...so will moving to these other option make  a big difference. I really appreciate your help!!!!!! You are my only source for thinking furthor about investing..and I am very thankful.
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Followup To

Question -
Thank you so much for the details. That was very helpful. I have already read the investing for canadians for dummies and now I wanted real help.. because I cna't decide..that book concetrated mostly on RRSP...

So far I havnet come across CD in canada...so i'm confused and interested in something like CD...do you know if CD exists in canada? Thanks for your help.


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Followup To

Question -
Hello Paul,

I want to find a good way to invest $25 000. I have looked into GICs (3 years) at ING Direct  that pay 4.3% but a friend told me there are alota tax reductions involved. Currently I am with TD Canada trust and don't know if Money market (Mutual fund or Canada treasurey T-Bills) is better...

I am looking at something with not too much risk...and 3-5 year term when'll I'll be needing the money. If I go with mutual fund aren't there other fees involved? I'm confused as to whether whats better and worse for my situation..Hope you can help and thanks alot!!

Answer -
Steve,
   Thank you for your question!
I would actually recommend either an index mutual fund, or CD's. I can't speak much regarding Canadian investments, as I don't have any experience in that regard. I imagine there is not much difference from the US counterparts, but that is just my impression, not based on fact.
CD's: A longer term CD of perhaps three years should give you somewhere between four and six percent return each year. This would be a very stable investment with virtually no risk. I would check with a major bank regarding the interest they offer, and any fees. You can compare with the rates through an organization like www.NetBank.com   NetBank is FDIC insured, and does offer good rates for CD's, with minimal fees. It is a good benchmark, and if you can't find anything locally that is comparable, you can use their service.
Mutual funds are a bit more risky, as they can drop in value as well as go up. Generally you can expect on average two to three times the return on a mutual fund over a CD, but some years are good and some bad. Your time frame of three to five years is relatively short. If you are willing to to take on some risk, your investment will likely earn substantially more in a mutual fund. But there is a risk it will not.
Choosing a mutual fund is another problem. The last time I checked, there were over 10,000! My suggestion would be to find an index fund. These are funds that simply copy a major index. So no research is needed, and the fees for index funds are lower. I know that this was one of your concerns. A good one is the Vanguard S&P500 index fund, the ticker is VFINX. You can purchase a mutual fund through any investment firm or online brokerage service. I like www.Scottrade.com as their fees are low.
As a final suggestion, I would pick up a copy of "Investing for Dummies". It goes into some more details on both CD's and mutual funds, as well as most other forms of investments just to be sure that you are not overlooking something that may be appealing to you. Additional sources are given should you wish to research any topic in more detail, but this single source should give you the basics on creating a financial plan for your $25,000.

I hope this helps! Please do not hesitate to follow up with me if I can be of any further service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc
www.ValuEngine.com


Answer -
Thank you for the follow up! I am certain that you can get CD's in Canada. I would suggest contacting any major bank and asking them about their "Certificates of Deposit". I did a google search for "Canadian Certificates of Deposit" and came up with several companies that offer this, such as:
http://www.hometrust.ca/investments/
http://www.cibc.com
http://www.tdcanadatrust.com/GICs/security.jsp

I am sure that there are others, most likely every mid to large Canadian bank or investment firm can offer them.
I hope this helps, please do not hesitate to follow up with me if I can be of any further service!

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com


Answer -
Thank you for the follow up question!
While I am not very familiar with GIC's, it does look pretty straightforward. I think this is fine, and you can consider it very much like a CD. So the main concern is two fold: first, is the interest they offer good when compared to other banks, and second, what are the fees and how do they compare.
In the US, you should usually take out about 2% annually for inflation. So this would cut your returns in half, and this makes even a half percent increase in returns very important. Most of the GIC's at TDCanadaTrust seem to be in the mid three percent range. This is ok, and if you feel most comfortable going with a bank that you already work with, go for it.
It is true that you will be taxed for these returns.
I am not sure how this works in Canada, but here in the US you can set up your investment through an IRA account. This is a retirement account where you do not pay yearly tax. This is only good if you are saving for retirement, as it is  difficult and the penalties are high if you withdraw before you are of retirement age. But, if that is what you want to do, the tax advantages are substantial. Again I do not know if this or something like it is available in Canada, I am sure that there must be some sort of retirement structure there. There is usually a limit regarding how much you can put into a tax free retirement account each year, for and IRA it is $4,000 per year for most people. You may want to consider starting something like this, and continuing to build on it each year. This could be done with just a small portion of your $25,000, and the remaining put into a GIC or CD.
When looking at those GIC's, compare them to the CD rates available on www.NetBank.com, over 5%. So the 1.5% difference in interest you would receive on these two types of accounts is substantial, approximately a 30% higher yield. I assume that you could set up an account at Netbank or similar institution fairly easily should you wish to go this route.
It all depends upon how important getting every bit of efficiency and available return is out of this investment. If the security of working with a bank that you are familiar with and have done other business with is important, by all means. Excluding fees and taxes, you could expect about $875 a year in interest earned from the GIC at your bank. A CD at 5% would yield about $1,250, again that is excluding fees and taxes. Typically the smaller banks offer the higher fees, so it is important that you find one that is fully insured, has been around for a while, and is highly rated.
I hope this helps! Please do not hesitate to follow up with me if I can be of any further service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc
www.ValuEngine.com


Answer
Thank you for the follow up!
   I think you are definitely on the right track on how you are looking at this. Unfortunately I am just not familiar with those types of investments that you mention are available at your Canadian bank. However, the main focus is just what you are thinking about, getting the returns high enough to offer some upside after inflation. Ideally you want to be at 4% or higher, so I would keep looking at these safe types of investments until you get there. If you are able to invest in US banks, check out wwww.NetBank.com, those CD rates are very good and offer an excellent solution for you, assuming there is no problem that you reside and Canada (I am not certain about that). Their customer service is good, a quick call could answer that question easily.

Sincerely,
Paul Henneman
President
ValuEngine, Inc
ValuEngine.com