One of the keys to building wealth is understanding the relationship between risk and reward. Canadians are always on the lookout for low-risk investments, but you must understand that the idea of a free lunch does not exist. A risk-free investment (like a GIC) has a lower expected return than a high-risk investment (like an individual stock). As an investor, your goal should be to balance the trade-off between risk and reward and find investments to suit your tolerance for risk. Here are four low-risk investment options to consider, plus one really terrible low-risk option and one option that was so bad it’s no longer available.
High-Interest Savings Account
We should all keep some cash savings on hand in case of emergencies. The standard rule for emergency funds is to have 3 to 6 months of expenses in cash. Still, no one wants their cash sitting idly by earning nothing.
That’s where a high-interest savings account comes into play. The best high-interest savings accounts in Canada offer inflation-beating rates (above 2%), and you’ll likely need to stray from the big banks to find them. Plus, it’s a safe bet to park your money in a “HISA”: savings deposits at most banks and credit unions are insured by Canada Deposit Insurance Corporation (CDIC) for up to $100,000 in case of bank failure. Investments don’t get much more low risk than that.
A top high-interest savings account is the new Wealthsimple Cash – a hybrid account for saving and spending that offers a 0.90% interest rate. There are no fees, and you’ll get the benefits of a chequing and savings account rolled into one.
Guaranteed Investment Certificates (GICs)
One step above a savings account, a GIC is another low-risk investment option that can pay slightly higher interest depending on the length of your term. Most GICs come in terms of 1 to 5 years – the longer the term, the higher the interest rate.
Know that with a GIC you’re locking in your money for the length of the term. A steep penalty may apply if you withdraw your funds before the term expires. That’s why GICs make the most sense when you have a specific goal you’re saving for – such as a new car or a down payment on a house in three years.
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.
Money Market Funds
Money market funds were once the go-to place for investors to park cash on the sidelines. A money market fund is a mutual fund that invests only in cash or cash-like instruments to provide investors with a safe and liquid place to hold onto their money.
Today, most money market funds fail to keep up with inflation so investors looking for a low-risk investment option for their cash are better off in a high-interest savings account or GIC.
To make matters worse, money market mutual funds come with a management expense ratio (MER) that further eats into the already low rate of return. For instance, CIBC’s Money Market Fund has a distribution yield of 1.32% but also has a MER of 0.71%. That means investors earn a paltry 0.61% after the bank takes its fee.
Low Volatility Fund
The goal of many investors is to maximize return and minimize risk. But how can you achieve this dichotomy when your funds are invested in the stock market? Answer: A low volatility fund.
BMO’s low volatility ETF – ZLB – is an enticing option as a low-risk/high-return investment. Low volatility is a proven strategy that shows lower-risk stocks tend to outperform across a longer time period.
ZLB is a 5-star Morningstar-rated fund, has the best risk-adjusted return in the Canadian Equity category, and is the top-performing Canadian Equity Fund over 5 years.
Investors looking to add market exposure through a low volatility ETF like ZLB can do so by opening a discount brokerage account at Questrade and purchasing the ETF through their self-directed platform. Even better, if you sign up for Questrade, you’ll get $50 in free trades as a welcome bonus.
Alternatively, Wealthsimple Trade is Canada’s first and only zero-commission trading platform and investors who are comfortable with a mobile-only platform can open an account there. You’ll be able to trade stocks and ETFs for free. Here’s an excellent reason to sign-up: those who open a Wealthsimple Trade account will get a $10 cash bonus + $0 commission trades. All you have to do is deposit $100 and buy $100 worth of stock within the first 45 days.
An annuity is a contract designed to provide you with a guaranteed income stream. Typically used during retirement, annuities are sold by an annuity provider, such as a life insurance company.
You purchase an annuity with a lump sum and then receive payments for a fixed period, or for the remainder of your life. The payments are a mix of interest income and return of capital (i.e. paying back some of your own money).
The amount of money you receive depends on your gender, age, health, the amount of money you invest, and the type of annuity you purchase. Other variables include: whether you want payments to continue to your beneficiary after you die, the length of time you want to receive payments, and the rate of interest at the time you buy your annuity.
Buying an annuity late in retirement can be a great way to protect yourself from longevity risk (the risk that you outlive your money) by transferring risk from your personal savings to the insurance company.
Canada Savings Bonds (no longer available)
Once a staple of low-risk investments for Canadian families, the Canadian federal government decided to stop issuing Canada Savings Bonds as of November 1, 2017. Still, existing Canada Savings Bonds and Canada Premium Bonds will continue to earn interest until maturity or redemption. Once a certified CSB or CPB matures, it no longer earns interest and should be redeemed by presenting the certificate at any financial institution in Canada. These savings bonds paid out a solid 4.75% as recently as 2000, but the interest rate fell to a pitiful 0.5% in their final years of issuance.
When To Buy Low-Risk Investments
Some investors are naturally risk-averse and cannot stand the idea of losing money. For these people, it’s great to know there are so many low-risk investment options available. But risk avoiders should understand there are no safe investments with high returns. The best risk-free investments will simply tread water with inflation (currently hovering around 2%).
Low-risk investments are also ideal for short-term savers. The fact is, if you need to access your money for a major purchase in five years or less, then you shouldn’t invest that money in the market. It’s perfectly reasonable to stash your cash in a high-interest savings account or GIC and earn a healthy 2%+ on your cash.
Long-term risk-averse investors also need to understand that they can’t rely on a high rate of return to build their retirement nest egg. Since these investors will never earn more than 2-3% on their savings, they’ll need to have a much higher savings rate than someone who invests regularly in the stock market and can earn a 6-8% return on their money. That’s how to get a high return on investments.
When To Take Additional Risk
If you don’t need to access your money within five years, you should consider some exposure to the stock market. The key is to add bonds to the mix. There’s a reason why bonds exist – to smooth out the volatility of stock returns.
A risk-averse investor could also look to a reputable robo-advisor like Wealthsimple to construct a conservative portfolio that can give their savings a chance at higher returns. Wealthsimple’s conservative portfolio is made up of 35% equities and 65% fixed income (bonds). It uses ETFs with low-volatility characteristics to get exposure to international and emerging markets, plus a small mix of core Canadian and U.S. equity ETFs to round out the portfolio.
This conservative portfolio would have declined only 10% during the horrendous financial crisis of 2008. Other stocks saw declines of up to 60% that year.
Read our in-depth Wealthsimple review, or take a look at our comparison of the top robo advisors in Canada to see how they stack up. If you don’t have time to shop around, Wealthsimple is a great option because of its competitive fees, easy-to-use platform, and unique perks. Here’s another excellent reason to sign-up: new customers who open and fund a Wealthsimple account with $1,000 will get a $75 cash bonus.
Are There Safe Investments with High Returns?
Ultimately, there are no low-risk high return investments. But there are a number of places for risk-averse investors to park their savings and still keep up with, or beat, inflation.
That means looking beyond the big banks for better rates on high-interest savings accounts and GICs. It means avoiding costly money market funds. It means considering low-volatility funds, either purchased on your own through a self-directed investing platform or as part of a portfolio constructed for you by a robo-advisor, like Wealthsimple. It also means considering annuities in your retirement to protect your nest egg from longevity risk. All are solid options for you to build wealth and to meet your financial goals.
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