NEW CSB ISSUE: SHOULD YOU BUY?

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  The new issue of Canada Savings Bonds is now on sale, and Ottawa has added a new wrinkle this year. It’s called the Canada Investment Bond (CIB) and if you look at it as simply a GIC issued by the federal government, you’ll be right on the mark.

The first CIB issue will be dated Nov. 1 and will be for a term of three years at an interest rate of 3%. That 3% rate may seem low but it is actually not bad. A three-year non-redeemable GIC issued by Royal Bank, for example, currently offers only 2.35%. However, you can do better at smaller financial institutions. ING Direct is paying 3.5% on a three-year GIC right now, and your money is covered by deposit insurance up to $60,000.

Like a GIC, a CIB cannot be redeemed prior to maturity, although it can be transferred, subject to certain conditions. CIBs do have one advantage, which is that you can invest as little as $100 (compound interest bonds), which puts them within range of just about everyone. Most financial institutions have a $1,000 minimum on GICs. The new bonds can only be purchased through investment dealers who are authorized CSB sales agents.

Should you buy? At this stage, I wouldn’t advise it. In fact, I don’t advise tying up your money for three years even at the higher rate offered by ING. If you want to invest in one of the new government products, this month’s Canada Premium Bond (CPB) looks more attractive because of the flexibility it provides.

CPBs can be cashed once a year, on the anniversary date and for 30 days thereafter. So if interest rates rise, you can bail out and reinvest your money elsewhere. The new issue (Series 34) has a term of five years, with a rate guarantee for each year. In year one, it is 2.45%. The rate increases to 2.8% in year two, 3% in year three, 3.5% in year four, and 5% in year five. The annual compound rate of return if held to maturity is 3.34%.

I think that giving up some yield in the first couple of years is a fair trade-off for the five-year guarantee and the liquidity offered by the CPBs. Here again, you only need $100 to invest.

As for the old, traditional Canada Savings Bonds (CSBs), the new series pays only 1.75% and there are no guarantees for future years. You can do better than that with a savings account at ING or President’s Choice Financial.

RRIFS AND MUTUAL FUNDS

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  If you’re an older investor, you may have a registered retirement income fund (RRIF) already or will open one soon. The big challenge with RRIFs these days is figuring out how to juggle the twin objections of income and safety. With interest rates so low, it’s tough, but there are some solutions. You can read about some mutual funds that I believe work well in RRIFs right now by going to http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=1628

WHAT TO DO WITH A SEVERANCE PACKAGE?

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  Anyone who has ever been laid off knows the problem: How do you shelter as much of that precious money as possible from the long hand of Canada Customs and Revenue? Read the advice we give to one person in that situation on our Q&A page at http://www.buildingwealth.ca/qa.cfm

Other topics covered this week include early retirement, cash gifts to young children, paying off debt, and contributing to RRSPs after retirement.

If you have a question of your own, there’s an e-mail link on the page that allows you to submit it directly.

DEFLATION STRATEGIES

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  It seems to be an unlikely scenario, but the big thinkers in the U.S. are not ruling out the possibility of a period of deflation which could potentially have a disastrous impact on the economy. The Federal Open Market Committee of the US Federal Reserve Board made an oblique reference to its concern in the June 25 statement that announced that the federal funds rate was being cut to 1 per cent. It reiterated its view on Aug. 12, saying:

“The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the foreseeable future.”

In appearances before Congress, Fed chairman Alan Greenspan has reiterated these worries.

Few of us have any memory of a deflationary environment. The last extended one in North America was during the Great Depression of the 1930s, although the U.S. Consumer Price Index did experience short-lived dips in 1949 and 1954. So it’s little wonder that we’ve received many inquiries from people who want to know which type of securities will do best and which would be most vulnerable in such conditions. Here are some broad guidelines.

Best performers:

Government bonds. Safety is the number one concern of investors in a deflation. Bonds issued by strong governments sit atop the safety pyramid. Also, since interest rates would fall to near zero in such a situation (as they did in Japan), government bonds offer capital gains potential. The longer the term to maturity, the better.

Cash. If prices are falling, cash increases in value because a dollar will buy more. Generally, it’s not a good idea to stuff wads of bills into your mattress, but deflationary times are an exception.

Gold and silver. In times of economic crisis, which a deflation would certainly be, precious metals tend to hold their value better than most other types of securities.

Worst performers:

Stocks. Most vulnerable would be smaller companies with limited financial resources. Many would be unable to stand up to the pricing pressures and the fall-off in revenue they would face. Energy companies and those in the consumer staples business (e.g. food) are considered to be the least vulnerable in a deflation.

Corporate bonds. You might expect all bonds to do well in a deflation, but corporates could be vulnerable, especially those issued by companies with less than pristine balance sheets. Defaults will rise and the enhanced risk will drive down bond prices.

Real estate. Normally, real estate prices rise when interest rates are low, as we’ve seen in recent years. But in a deflation, prices fall and real estate will be no exception.

I don’t believe deflation is likely to occur. However, it would be foolish to rule it our entirely and the Fed certainly isn’t doing so. If you’re concerned about it, you may wish to make some portfolio adjustments. Talk to your financial advisor.

FUND GAINS 12.6%! BUT BE CAREFUL!

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   Everyone is interested in investments that make big gains. Well, here’s one. It’s a mutual fund that jumped 126% in the year to Aug. 31. What’s the catch? Read all about it at http://www.buildingwealth.ca/News/Featuredetails.cfm?NewsletterID=1622

AN INCOME FUND THAT'S NUMBER ONE

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  The 2004 edition of Gordon Pape’s Buyer’s Guide to Mutual Funds will be published in November. To give you a sneak preview of what it contains, here’s our pick for Fund of the Year.

TD Monthly Income Fund. As increasingly desperate investors sought safe havens for their savings during the bear market, this fund emerged as a standout. While the average Canadian balanced fund was under water for the three years to Aug. 31, managers Doug Warwick and Greg Kocik were earning an average annual return of 12% for their investors, one of the best in the category. Latest one-year gain was 18.3%.

Not only was the return excellent, but the fund provides good cash flow as well, which is especially important to income-oriented investors. Monthly distributions are being paid at the rate of 4¢ a unit, and that amount has been consistent for some time. Of course, that is not guaranteed and can change at any time.

As for safety, which is high on everyone’s priority list these days, this fund ranks with the best. Its volatility rating is much better than average for the category, meaning that it is less prone to big up and down swings. The fund has never lost money over a calendar year since it was launched in mid-1998 and it has been a top-quartile performer since 2001.

The fund has a very low management expense ratio of 1.28% (average for the category is 2.44% according to The Globe and Mail). Best of all, it is accessible to everyone. You can buy units at any TD/Canada Trust branch for a minimum initial investment of just $500, and there are no sales commissions to pay.

If there is a dream fund for today’s investing environment, this is it.

SPECIAL: You can order an advance copy of the 2004 Mutual Funds Guide at 30% off the suggested retail price if you act before Oct. 31. For details, go to http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=421

Also available at 30% off: Gordon Pape’s 2004 Buyer’s Guide to RRSPs. To order: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=422

Combination Package: Both books at 35% off: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=423

GET CONTROL OF YOUR MONEY DUE OCT. 25

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  My latest book, Get Control of Your Money, is shipping to bookstores now. Publication date is Oct. 25. The book offers solutions to the basic, everyday financial problems that confront us all, including credit card debt, mortgages, budgeting, teaching kids about money, savings, retirement planning, taxes, insurance, and more.

This is your last chance to order a copy at our pre-publication special discount of 30%. Details at http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=410

With the holiday season approaching, this book would make a great gift!

TOP STOCKS PICKS WINNERS

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  Our budget-priced TOP STOCKS newsletter is on a roll. In recent weeks we have taken profits on several winning recommendations, including the following:

Northern Property REIT, +36% Ameron International, +24% Circuit City Stores, +20% Lone Star Steakhouse, +17%

Overall, gainers outnumber losers by better than two to one on our current Recommended List.

You can subscribe to this high-performance newsletter for less than $30. As a bonus, you’ll have access to a special Members Only section of our website where you can read all past issues and check out the status of every current recommendation.

For details: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=293

That’s it for this month. Happy Thanksgiving, and we’ll see you again in November.