Holding cash will cause a drag on your returns most years. Nevertheless, some cash and near-cash should be included in most portfolios for several reasons.
* Cash provides stability. Cash and cash-equivalents are guaranteed to hold their value in nominal dollar terms during any market correction, crash or outright panic.
* Cash provides the “dry powder” to take advantage of bargains that arise in individual stocks or the overall market. It’s difficult to take advantage of bargains without cash on hand.
* In some cases, cash is also needed for monthly withdrawals.
It’s an unfortunate reality that cash and near-cash often pay little or no interest. Investors often avoid holding cash in favor of investments with higher returns. But it can be a mistake to completely avoid holding cash. There are no substitutes that have the same stability and liquidity qualities.
Here are some recommendations on where to “park” cash.
Cash within an investment account. Cash in an investment account is of course immediately available for withdrawal or to reinvest. But with most brokers it earns little or no interest.
Savings accounts within investment accounts. The discount brokers of each of Canada’s “Big 5” banks as well as many smaller brokerages offer daily interest deposit accounts. The current interest rate is about 1.8% and tends to move in lockstep with changes in the Bank of Canada’s policy interest rate.
My understanding is that these are bank account products and therefore are covered by Canadian Deposit Insurance Corp. (CDIC) for the first $100,000. Confirm this with your broker if this is a concern for you.
An advantage of this product is that it is a bank account that can be accessed within a brokerage account system, including within registered accounts. There are many higher interest savings accounts available, but they cannot be directly accessed from within a self-directed bank brokerage account.
Another big advantage of these accounts is that the discount brokers (in my experience) allow you to use the funds instantly to purchase other investments. You simply need to enter an order to sell enough of the fund to cover your purchase. These funds therefore become ready cash in your portfolio. You do have to wait a full business day if you are withdrawing the cash.
Oddly enough, these accounts can be found under the mutual fund category. The fund symbols are: TD: TDB8150; CIBC: ATL5000; RBC: RBF2010; BNS: DYN6000; BMO: BMT104; Laurentian Bank: BTB100; National Bank: NBC100; Manulife Bank: MIP510; ICICI Bank: IBN100; and Dundee Bank: DYN500.
For US funds, TD offers TDB8152, currently yielding a reasonably attractive 3.15% per year. For the other banks, check with your broker for the symbol for US dollars.
Savings accounts with smaller lenders. Various online lenders, including EQ Bank, Tangerine Bank, and Simplii Financial, offer high-interest savings accounts. And they often have short-term special deals at attractive interest rates. Even RBC currently has a “teaser” short-term offer of 4.6% for three months for those opening new online high-interest savings accounts.
Money in taxable investment accounts can be moved to these accounts, but the downside is having to move money around frequently, thereby generating more tax slips to deal with. Unfortunately, these non-registered savings accounts can’t be used for money within a registered account at a different institution.
Bank interest exchange traded funds. A product that has been around for only a few years is ETFs that apparently lend the funds to banks but provide higher interest than bank accounts. They are not covered by CDIC (while bank accounts are covered up to $100,000).
The rates on all of these will tend to move down or up as the Bank of Canada’s interest rate changes. Over time, the interest rates will likely be very similar. Each of the three following ETFs trades at an essentially constant $50 per unit and pays interest monthly. The cash in these accounts is available with a delay of usually just one business day: CI High Interest Savings ETF (TSX: CSAV), with a 2% forward yield; Purpose High Interest Savings Fund ETF (TSX: PSA), also with a 2% yield; and Global X High Interest Savings ETF (TSX: CASH), with a yield of 2.3%.
Short-term GICs. The shortest-term GICs (terms from 30 days up to one year) are often considered to be cash-equivalents. They offer the same stability as cash but are not immediately available if actual cash is needed. Current interest rates range from about 1.8% for 30 days to 1.9% for a term just under one year. GICs are covered by CDIC up to the $100,000 maximum per investment account.
Longer-term GICs offer the same stability as cash but due to the money being locked up are not considered to be cash-equivalent investments.
Government of Canada Treasury Bills. Investors with larger cash amounts could consider investing in T-Bills. These are available through your broker. Current interest rates range from about 1.8% for 30 days to 1.9% for a term just under one year. These are considered to be the safest possible investments.
Remember,interest income is fully taxable. Those with both registered and non-registered accounts may wish to use their registered accounts for their allocation to cash to avoid or defer income tax.
Contributing editor Shawn Allen provides a paid stock picks service as well as a free newsletter at www.investorsfriend.com. He is based in Edmonton.