Slow is Smooth, Smooth is Fast.
The title of this piece is in reference to an old navy seals motto that was adopted by the game of golf, about keeping tempo steady in your golf swing. Every swing should look and feel the same. If you keep the proper tempo, you are more and more likely to hit better shots as you progress through a round on the course. In the case of the Navy Seals, it is about ensuring you do the job right by taking your time and not panicking when things get noisy.
Keep the right tempo, and as important, keep your eye on the ball (the goal) and you have a good chance of success.
In today’s investment universe, secured low interest-bearing securities are seen as both incredibly safe and effective investment tools by institutions, advisors, and investors alike. But what happens when security and changing tides collide? What happens when a vast divide between interest paid, and interest rates, is generated by forces that can’t be controlled by any one person, business, or government?
For all intents and purposes, a T Bill is simply a GIC offered by the government that you can buy and hold for the long term. These are built for long term investors so irrationally afraid of risk, that they will trust the government to generate returns for them over the long term. Institutions looking to park their money in a security that allows them to secure other assets and back stop them in the case of an emergency will also consider T-Bills.
With the recent collapse of several regional banks in the US, we can see that this is not always a good idea. Hyperopia, (farsightedness) in this instance, is the lack of any forethought to the near future. With the intense increase of inflation and an historic rise in interest rates, interest bearing securities of any kind have not been a solid investment. Let alone a haven for investors and institutions alike.
I will let you read about the issues some American banks on your own, suffice it to say, if it isn’t outright greed and hypocrisy putting your deposits at risk, its stupidity, usually all three.
Luckily for us Canadians, our banks are heavily regulated and tend to be extremely highly rated on a global scale when it comes to security and trustworthiness. In fact, I would go so far as to say that the banks of Canada, especially the big six, have some of the best investments you can buy.
Too bad they don’t bother telling you about them.
Instead, they machine-gun interest-bearing certificates (GIC’s) and High Interest Savings Accounts (HISA) into the crowd. They rarely miss and rarely, if ever, have Canadians every profited from them.
Industrial Alliance, where we do the vast majority of our investment and insurance business has excellent GIC rates, they market them more than any other kind of investment instrument, rarely marketing their industry leading stable of investment funds (Segregated Funds, Mutual Funds and Insurance Contracts) to the average investor.
Why don’t they market these to the average investor?
Because there are literally trillions of dollars sitting in these kinds of accounts at the banks and other institutions across the country.
Trillions.
$X,000
$X,000,000
$X,000,000,000
$X,000,000,000,000
Four comma’s, 12 zeroes, trillions. Who wouldn’t want a part of that action?
Over 50% of invest-able capital in Canada sits in these accounts. It shouldn’t come as a surprise to anyone that this is the case though, we should be inundated with safe and secure investments, shouldn’t we?
Let me know when that happens.
GIC’s and HISA’s are not safe, they are not secure, they are not useful to the investor in most cases.
Question: Why do we buy them?
Answer: Fear.
We are ignorant of the facts, and fear what we have been told to fear. We are taught to fear volatility, that volatility is the enemy we cannot defeat. That steady is safe, and safe is how we ought to invest at least a portion, our money. Slow and steady. Slow and steady. Repeat it again, “Slow and steady”. We are taught not to be greedy, to be patient, but when GIC rates shoot up, deposits multiply incredibly fast.
Ironic, that.
“Darris, I remember when I could go to the “Bank” and buy a GIC for 15%... BEAT THAT!”
– every investor alive in the late 70’s and early 80’s.
Well, inflation was running at a cool 18%, so you lost 3% of your buying power every year you held that GIC while the bank lent you back your capital to buy your first home, a vehicle, or a new acre of land for 20%+, while the stock markets in North America ran hot for years.
So, what did that accomplish? Not a whole lot. It just seemed like a great deal, so people jumped on it without much thought. People are greedy.
Slow and steady does indeed win the race, but that doesn’t mean we ought to sacrifice long term returns because we fear market volatility, right?
Between 1975 and 1985, if a person put $100 into a GIC, accounting for inflation, they’d have lost nearly 5% a year due to inflation. The same investment into The Dow, SP500 and or TSX you’d have more than tripled your money.
Slow and steady, isn’t a lesson in safety, it is a parable in not being distracted by shiny things. Keeping your eye on the goal, focusing on the goal, never wavering is the way to ensure you maximize your potential. When the bank waves, currently 5%, at you; you must not falter. The 5% will lose you X% per year over five years at worst, and at best it will break even. (X = GIC rate - Inflation)
Banks on the other hand, will continue paying a stable dividend to shareholders, which can then be reinvested into more bank stocks, that will pay more dividends, and so on. The bank stock will grow, and the dividend will be paid. While the GIC sits there, while the HISA sits there, being lent back to you at a higher rate, which then in turn generates the dividend the stockholder is being paid.
Your GIC creates the profit the shareholder is paid from.
The banks have abused the individual with a shiny trinket, while their shareholders get rich from the revenue your deposit creates for the bank.
Never forget that.
Be a shareholder.
The GIC isn’t “safe”. The savings account isn’t “safe”. They’re simply not visibly volatile and they take no thought. Set it and forget it…
The markets are safe but take time and attention to be successful as an investment tool. It can be difficult for most people to find the time and the attention span to keep an eye on things and concern themselves with their money.
This is why advisors exist. We take that time on your behalf and pay attention to the minutia and the goings on; download that to us, let us carry that weight.
Invest your money in the global stock markets, prudently and actively, with assistance, and watch it grow over time.
Or park your money in an interest-bearing account, and watch it collect dust. Slowly disappearing before your eyes.
Please click the image above for a larger higher resolution copy.
Above, I have attached and Andex chart here for you to see what it looks like to invest over long periods of time. If you don’t know what an Andex chart is, or think it looks scary or overwhelming, it really isn’t and it is just a collection of data that shows what an investment in various types of instruments would look like, from the aforementioned T-Bill to Stocks and bonds all over North America.
If you look at times of high inflation over the last 90 or so years, you will find that interest bearing investments do not hold up well, but markets do. You will also notice that the more aggressive you are, the more money you are likely to make.
Being aggressive simply means you are taking different risks than being conservative, or “safe”. It doesn’t mean you are acting in a risky manner, or being “unsafe”.
When times get tough, or scary, institutions and advisors will offer all kinds of shiny baubles for you to look at. With the help of an advisor or advisors, like us, who will work to educate you and ensure your attention stays where it ought to, we can secure a safe and growing portfolio. An investment portfolio ought to be viewed as a growing concern, one that outpaces inflation and interest rates over the long term; interest bearing certificates and savings accounts cannot do this.
We can’t protect your money if your buying power is being eaten away by forces out of your control. GIC’s, T-Bills, Government Bonds, HISA’s take that power away from you, both short and long term.
A case can be made for short-term interest-bearing investments, when a large purchase is planned to be made, or if cash is a short-term necessity, but in our opinion, there is no long-term case for these types of instruments. They are cash, cash is meant to be spent or invested. In the case where you are going to spend the cash, or perhaps believe you will require it in the short term, HISA’s are a great little tool. Your money is liquid and ready to rock when you need or want it.
“Darris, we are thinking of buying a house in the next six months, how should we invest?”
“Don, we think we may need some cash in the short term, perhaps in the next two years, to sustain our business, what would you advise?”
In these cases, we would have great HISA rates, competitive with any bank in the country to use. But we would also advise, that at the end of these time periods, we review the “what and why’s” of the scenario. Often, it is time to invest that capital or to go spend it.
Sitting around waiting for inflation to eat our money isn’t going to work.
The reality is most of the investment industry relies on these tools to help you “save” money. But saving money isn’t the objective. Making money is.
GIC’s and similar tools don’t help us protect your money, they help institutions lever back to, and profit from you. We believe and believe you ought to consider this when looking to invest. Profit with the bank.
The best way to protect the $1 you give us, is for us to hand you back $2 in the future.
Better yet, make it $3, just to be safe.
Thank you for reading. Please comment below. Do you agree, disagree, or just want to talk? Let us know, we would appreciate respectful conversation.
Darris Cameron,
CEO,
Financial Value Inc.