Don Cromar, CIM, FCSI

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The Cost of Cash

In terms of investment risk, cash is the safest asset class for preserving capital.  But, when you consider inflation and the cost of living, is cash really safe, or is it costing you.  Historically, stocks and bonds have outperformed cash which has produced a long term negative return after taxes and inflation.

The cost of cash is that it loses its purchasing power over the course of a 20 year retirement.  With interest rates at near record lows and the volatility in the equity markets keeping many investors on the sidelines – hoarding cash is not uncommon.  Just don’t fall into the trap of holding too much cash – for too long.

Using income-oriented exchange traded funds (ETFs), investors can take advantage of the benefits of diversification, low management fees, and favourably taxed income.  The old adage, “Get paid while you wait,” is very prevalent today with mutual fund companies and investment providers touting conservative income products.  The ETF providers have been fast to the market with income products to satisfy investor appetite for yield.

Owning a basket of real estate investment trusts; high-yielding corporate bonds; high dividend common stocks; and short term bonds can provide a yield of approximately 4.5% in a low to medium risk portfolio.  In a declining stock market, income-oriented investments tend to outperform the broader market.  In an uncertain environment for economic growth and equity returns, it’s important to place priority on the cash yield from investments.  This is commonly referred to as total return investing.

If you are like most investors, you might be asking, I’m earning next to nothing on cash and GICs.  What should I do with my fixed-income portfolio?

The broader question is really, what should I do with my money?

In the very short term, cash might be king, however, over time, it is a loser.  Diversify your portfolio, consider ETFs as a way to diversify and generate income from your investments.  The ETF Solution works, whether it’s for income, balanced income with growth, or a pure ETF growth model.

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