Sep 16, 2022
Hiding out from market volatility in 'near cash' can be rewarding
By Dale Jackson
Look for opportunity in GICs as interest rates continue to rise: Lyle Stein
Personal Finance Columnist, Payback Time
You can’t blame any investor for re-evaluating their tolerance for risk after Tuesday’s gut-wrenching stock market selloff, when the S&P 500 and tech-heavy Nasdaq sank the most since June 2020.
As central banks aggressively tighten monetary policy to tame inflation (possibly at the risk of a recession), these are uncertain times for those who count on the markets to grow their retirement savings.
But the biggest difference between the early stages of the pandemic and now is the availability of options for investors cashing out and heading to the sidelines.
Citadel Asset Management Director and Senior Wealth Consultant Karl Berger told BNN Bloomberg this week it might be best to wait out the central banks’ rate-hike missions in cash-like instruments as yields rise with interest rates.
“It’s not a market where there’s an obvious trade or there’s an obvious thing to do and sometimes that just happens, and it’s best to sit on the sidelines,” he said.
WHAT IS NEAR CASH?
There are several terms for cash-like instruments; near money, quasi-money, cash equivalents, arm’s length cash, or near cash.
The one thing they have in common is safety and yield. You won’t get rich on near cash, but you won’t lose it either.
To put it in perspective; near cash is one of the best-performing asset classes so far this year if you compare the two or three per cent returns to the S&P 500’s loss of about 19 per cent.
Near cash, along with other fixed-income investments, has an amazing way of stemming equity losses and preserving the worth of a broader portfolio.
The difference between near cash and any other fixed income is its high liquidity. It can be converted to cash quickly when other investment opportunities arise.
WHAT ARE THE YIELDS ON NEAR CASH?
How “near” the cash is depends on the length of its term to maturity.
The nearest cash is money in your pocket — it’s ready to go, but it pays a yield of zero. It’s the same as a standard cash account, which yields near zero.
The next nearest cash is probably a high-interest savings account. You’ll need to shop around but some financial institutions are posting three per cent annually — assuming certain conditions, such as minimum deposit amounts, are met.
High-interest savings accounts are like any other savings accounts without the bells and whistles, and can be transferred immediately.
Money market funds are popular with many investors waiting to pounce on the next opportunity. They are a kind of mutual fund that invests in highly liquid, near-term instruments such as cash equivalent securities and short-term debt-based securities with high credit ratings.
Past returns for money market funds have been dismal, but can be expected to rise with interest rates.
In most cases, investments in money market funds can be liquidated within a day or two.
Generally, yields gets higher as the term to maturity lengthens. If you have more time to spare, some one-year guaranteed investment certificates (GICs) have reached 4.5 per cent.
Yields on longer term GICs are slightly higher, but run the risk of being dwarfed as broader interest rates continue to climb at an unprecedented pace. For that reason, many investment advisors recommend laddering maturities over time to take advantage of higher rates as often as possible.
NEAR CASH: RISK AND REWARD
Assuming you are in cash to avoid risk, it’s important to be sure your near-cash instrument is invested with a financial institution insured by the Canada Deposit Insurance Corporation. CDIC is a Crown corporation supported by the federal government that covers deposits of up to $100,000 in each account.
Most Canadian financial institutions pay premiums to be insured with CDIC, and members are listed on the CDIC website for anyone to see. Members include banks, federally-regulated credit unions, and trust companies. All the big Canadian banks are members along with non-financial businesses with finance arms like Canadian Tire Corp.
If a CDIC member fails, eligible account holders will be contacted and the principal and interest will be reimbursed within days. The last CDIC member failure was Security Home Mortgage Corp. in 1996.
Savings and chequing accounts are covered along with GICs, and other term deposits with original terms to maturity of five years or less.
That doesn’t mean they are risk-free. With the cost of living currently topping seven per cent, there’s no protection against inflation.