Where Should I Put My Money

mirrenOctober 10, 2005

I just sold a propety and now have $38,000. I plan to spend about $10,000 paying off credit cards and then I will have $28,000 left. I am thinking about buying some certificates at the bank and making a little interest with it. Also I have $7500 invested with someone in mutual funds. This account has been moved around to several people, not by me but by the company. Now I have a new guy advising me. Frankly I dont like him. I just dont know what to do with the money. I am 60, am retired, receive a pension and also Canada Pension and I work on a part time basis. I dont understand much about investing but I am confused as to why I would keep tying up my money when I would like to spend some of it now. I hope Joyfulguy is reading this and can help me out.

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You would be best served by finding an independent financial advisor (that is, one who does not profit by selling you anything but financial advice); our advice may be helpful, but there is much more that anyone would need to know to give you the best guidance.

If you meet your living expenses with your pensions, then you have more flexibility with what you do with the $28,000.

Bank CDs make some sense if you know you won't have to cash them in early and forfeit interest. You might consider CDs of different lengths so you are not totally exposed to fluctuating interest rates.

I live in the U.S., so I don't know if the Canadian Treasury offers anything like U.S. Savings Bonds or Treasury bonds. Those (their Canadian equivalents, actually) might be good choices -- conservative yet capable of earning more interest than a bank savings account.

Finally, you could consider a money-market account through your mutual-fund company. Money markets are geared more toward liquidity than maximum interest, but they're pretty safe and you can then transfer money from those funds to others whenever you (or your financial advisor) think it's wise to do so.

And, though you didn't ask, I will suggest that you contact your mutual-fund company and ask for a different advisor. The relationship between you, as a customer, and a financial advisor must be based on trust. If you don't like the guy, that trust isn't there. If they're unwilling to accommodate you, find another mutual-fund company. There are several of them out there and having $35,000 to put into a fund may not put you on their VIP list but you still should rate some attention.

    Bookmark   October 12, 2005 at 10:11AM
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With regard to your current situation, does your advisor work for a company that offers only a limited variety oif investment vehicles, or can s/he offer a wide variety of types of investments?

When I went to the downtown (London ON) branch of TD Can Trust a couple of weeks ago to attend a seminar on investments, I asked at the information desk where the seminar was to be, to be told that it was just over in the corner of the main office, where people were visiting the tellers and there was a shelf in the corner holding a monitor and a semicircle of folding chairs set up.

I leaned a bit toward the lady and asking rather conspiratorially, "Do you know what's a better use for your money than putting it in the bank?"

When she asked what, I said, "Buying bank shares!".

Both of the women within earshot laughed heartily, aloud, and said, "That's for sure!".

You can buy Canada Savings Bonds, that, after a few months, can be cashed at any time - producing a rather low interest rate, usually.

I don't know what income tax situation you're in, but there are three major ways to pay top rate of tax - employment income, or the subsequent pension, or earning interest.

I don't like earning interest, largely for that reason.

Have you considered who gets hurt by inflation?

The bank doesn't - they bring in a dollar and lend out about 8 on the strength of that dollar.

Suppose, liking their guarantee that they'd repay every dollar that you loaned them, plus rent on the money (interest), you loaned them $10,000. on a 5 year guaranteed certificate, fifteen years ago and had renewed it twice, since.

There's another guarantee that they never mention - apart from the rent on the money (interest), they won't pay any more dollars than they borrowed, either.

Fifteen years ago, your $10,000. would have bought a fairly decent car. Not now. Cars and almost everything else have increased in price.

There are two rats that eat your cheese - Canada Revenue Agency wants to talk to you annually about every dollar of current income (though they tax some kinds of income at lower rates than others). In most cases - they want part of that income.

The other rat? Inflation.

If the asset that you have in exchange for the dollars that you parted with a while ago can't grow, you must move part of your current income, roughly the rate of inflation, from the "current earning" category into the "asset" category, in order to keep your purchasing power intact. Otherwise, though the number of dollars in your asset stays stable, each dollar won't buy as much as earlier.

At current interest rates, by the time you deduct your tax amount owing and the rate of inflation - there's very little remaining as current after-tax income, after allowing also for the erosion of inflation.

On the other had - if I borrow that $10,000. from the bank, which I'll only do to purchase an asset, not to subsidize current living expenses, after I've paid their required rent on the money (interest) on an interest-only current payment, I owe them, after whatever number of years - the same $10,000. that I borrowed.

If I was half-way shrewd, and bought an asset that increased in value by enough to pay the ongoing interest plus $12,000., I had at least the opportunity of gaining from inflation.

We can talk more later, as this is long already and I need to meet my son, 15 km. away, mainly through city traffic, in about 6 min.

Good wishes as you plan what to do with your money.

I'll send a private email later.

ole joyful

    Bookmark   October 12, 2005 at 1:58PM
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Hi again mirren,

You say that you have some mutual funds now.

Perhaps they are equity funds, i.e. the managers own mainly stocks.

You say that one at least of the funds that you own has been shifted around - more than once.

That could mean that the fund company that manages your fund(s). was bought out by another company and they merged that fund which you owned with one of theirs. However, it often means that the manager hasn't achieved too spectacular a rate of growth in that fund, so they merge it with another.

Have you been satisfied with the growth rate of your fund, apart from the planner that you deal with?

Only a few of the hundreds of mutual funds have managed to out-perform the market as a whole over a number of years.

As the market has grown over long periods at about 6 - 8% or so, that means that many of them have done less well.

When you figure that, if you own equity (i.e. owning largely shares of corporations) funds, the annual rate that the managers charge is about a third that much (not coming out of the stated rate of growth), that seems like a rather hefty fee to pay.

Some years ago I knew a local man who managed people's money, who asked them to pay him 10% of the annual rate of growth of their money. When I asked what happened when there was a loss year, he said that thus far he'd been able to bill every client, every year.

It seems to me that would be rather a good way to fly - I thought of giving him $10,000. to see how it would go, then offering a similar deal to some of my clients!

If the income you expect is more or less a one-time situation, such as a bequest from someone's estate, I like to suggest to people that they regard it as in the nature of a capital increase, invest the money and either use the money that it provides, or possibly leave the ongoing income to grow, looking toward using it as a means of funding an early retirement. Especially if someone plans to retire early, say at your current age of 60, to provide some extra income before the Old Age Security adds to their income (and their spouse's income) at age 65 (supposing that they fulfill the residence requirement).

Just some more thoughts for you to consider.

Again, good wishes as you work toward a decision as to what to do with your money.

ole joyful

    Bookmark   October 12, 2005 at 7:52PM
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Ditto what Steve_o said. My DH is an independent financial advisor and they are the only ones who give truly objective advice. Everyone else, even if it appears they are not tied to a product, get some compensation for their recommendations. Most people aren't even aware that products they are encouraged to buy have hidden fees.

    Bookmark   December 6, 2005 at 7:58PM
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