This week’s monumental rebound for stocks is a reminder of the downside of bailing on volatile markets.
Stocks can fall in a hurry, but they can make up a lot of ground just as quickly. If you sell plunging stocks to avoid worse losses, you might miss a sudden recovery. Prefer to skip all that drama? Let’s look at what’s available in the world of investments that offer a low risk of losing money compared to stocks and even bonds:
- High interest savings account exchange-traded funds: They hold assets in bank savings accounts and yield around 2.5 per cent right now.
- Investment savings accounts: Returns of 2.25 per cent to 2.5 per cent from these products, which are bought and sold like mutual funds and typically benefit from deposit insurance.
- Money market funds: Yields around 3 per cent to 3.5 per cent; these funds invest in government treasury bills and short-term corporate borrowings.
- Federal government T-bills: Yields of as much as 1.6 per cent for terms of up to one year.
- Guaranteed investment certificates: Returns up to about 3.5 per cent are available for terms of one through five years from issuers who are part of Canada Deposit Insurance Corp. or provincial credit union deposit insurance plans.
Expect something like 6 per cent to 7 per cent on an average annual basis from stocks over the long term on an after-fee basis. Even with declines like we’ve seen for stock markets in early April, it’s reasonable to expect returns like these over 10 years or more.
Low-risk investments pay much less, but offer a very low probability of losing money. One way to assess the adequacy of low-risk returns is to look at the real rate of return, which means after inflation.
After an uptick in February, the year-over-year inflation sits at 2.6 per cent. As of mid-April, only money market funds and GICs offered any sort of real return. Money market fund yields can be expected to edge lower if the Bank of Canada cuts rates, while GIC rates are locked in. The downside to GICs is that they can’t be redeemed unless you go with a lower-yielding cashable version.
One more thought on low-risk investments is that they are more suited for preserving capital as opposed to growing it. A diversified portfolio of stocks and bonds is the preferred way to build wealth.