CONSIDER the money you are losing with today's low savings interest rates as a form of insurance.
The main reason you would keep money in a savings account, term deposit, Canada Savings Bond or similar guaranteed instrument is to insure yourself against the kinds of losses you could experience in non-guaranteed investments like the stock market, real estate, a business and so on.
After income tax outside a registered plan like an RRSP, RRIF, RESP and TFSA and also after inflation, your money is probably losing value. Consider that loss as the insurance premium you pay to keep your money safe - to protect it from greater losses.
If you know you will need money in the near future - to buy a home, to pay for education, to go on a trip, to pay for a wedding - you need to know all that money will be available when you sign the cheque. Your time horizon(s) will determine how much money you put into different investments.
As a 30-year-old you could, for example, invest 30 per cent in guaranteed instruments and 70 per cent in stocks, equity mutual funds, real estate, etc.; as a 70-year-old, you could do just the opposite.
But if as a 70-year-old you had enough money to cover the slow erosion of inflation and tax, and would lose sleep with any money in the stock market, then you could have all the money in guaranteed deposits.
On the other hand, Canada's tax system favours risk-takers. You get a tax break on the dividends of Canadian shares; capital gains compound tax-free until you sell, and then only half the gain is taxable.
How long is "long term" when it comes to growth investments like the stock market and real estate?
Advisers say five to 10 years; I say that's a good place to start - but also consider how you would cope if your particular "long term" produced more losses than gains.
Mike Grenby is a columnist and independent personal financial adviser; he'll answer questions in this column as space allows but cannot reply personally - email [email protected]
