How safe is your money?

Insurance starts and stops with cash deposits

Novice investors often ask me whether the money they invest in a mutual fund, an exchange-traded fund, or shares of a company traded on an exchange “guaranteed” against loss. The answer here is, “no.” There are very few guarantees of any kind in the market. There are really only levels of risk – that is, the lesser or greater probablity of losing money on a particular asset. On the other hand, there is one asset that does have certain kinds of protection or guarantees against loss, depending on where you place it: cash.

Deposit insurance

Cash that you deposit in one of Canada’s chartered banks comes with protection against loss. The Canada Deposit Insurance Corporation (CDIC) insures eligible deposits held at its member financial institutions against loss should the institution fail. The insurance covers eligible deposits up to $100,000 (principal and interest combined) per depositor. You don’t need to apply – your deposits are automatically covered. Savings, chequing accounts, and term deposits (e.g., GICs) of up to five years’ maturity and not exceeding $100,000 are covered.

Only cash deposits are covered. Investments purchased through your bank, like mutual funds, ETFs, stocks, government bonds, notes, T-bills, debentures, and so on are not covered. Neither are such assets held in RRSPs or TFSAs or any other registered plan or account.

The only potential investment guarantees for assets held within an RRSP or TFSA are those that have some type of internal insurance or guarantee specific to that product. For example, segregated funds and Principal Protected Notes may offer certain types of principal guarantees offered by the issuer of the investment and not any government agency like the CDIC.

Guaranteed Investment Certificates

Guaranteed Investment Certificates (GICs) are a slightly different animal. They are not really a liquid deposit like a savings or chequing account, but they are a type of locked-in deposit, where the principal amount (but not the interest) is covered by the CDIC or in the case of credit union GICs, by a provincial equivalent, to a maximum of $100,000 per institution. Check the terms of your prospective GIC to determine your specific coverage.

In return for leaving your money with the financial institution for a fixed term, GICs offer a slightly higher rate than you’d get with a savings account, a money market fund, or a short-term Treasury bill. GIC terms range from six months to as long as 10 years, with five-year terms being the most popular, and increasingly so as interest rates climb. Your money is locked in until maturity, and you’ll pay a penalty if you decide to cash out early.

Some financial institutions offer so-called “redeemable” (that is, cashable with no penalty) GICs. However, the tradeoff with these is a much lower guaranteed annual rate than the non-redeemable version.

You might be offered a “market-linked” GIC, with a variable rate of return linked to a market index, such as the S&P/TSX 60 Index or the S&P 500 Composite Index. Interest will typically be paid at maturity, so if you’re relying on a regular income stream from these, choose some other instrument.

While the principal amount of the GIC is protected, at maturity, you may also receive a lump sum if the market has performed well, or you may receive a pittance – or even worse, nothing at all – if the market has underperformed or tanked. This type of GIC has plenty of drawbacks and is in effect a high-risk bet on the stock market rising sometime in the future. Most advisors stay away from these kinds of products, looking at them as neither fish nor fowl, but some awful combination of the worst characteristics of both.

Looking for guarantees or insurance on investment assets is a common mistake many novice investors make. They exist only in low- or zero-return cash deposits insured by a governmenet agency, or are too expensive if offered by a financial institution. It makes more sense to develop a financial plan that includes a diversified investment portfolio tailored to your financial objectives and tolerance for risk – one that can smooth out the inevitable bouts of volatility that infect markets and that steadily builds wealth over the longer term.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.