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Thursday, September 20, 2012

What are you Buying?

The annoying question investors are always asked, by their friends, is “what are you buying?” I’ m saying “annoying”  because I know how it feels when all people ask you is your opinion on which stocks to buy while yourself you are so mixed up you don’t know where to start. Obviously you are not buying anything at the moment and your investment cash is “resting” in an online brokerage accounts.

Before figuring out how to answer your friend (another stranded investor) on what to do with his/her cash he they enventually lose it, you should take care of yours first. Here are a few ways to park your money in relative safety and take home at least a small return even as you decide what to buy:

When You have $50,000 lying uninvested in an online brokerage account
Your expected return on the$50,000: zero (most brokerage firms needs much higher balances before they can give a token amount of interest)
When you put the money in high-interest savings account trading like a mutual fund
Your expected return on the $50,000: at 1.2% (Renaissance High Interest Account, fund code ATL5000)
Supposed annual return/gain: $600
Risk factor: Normally covered by deposit insurance
When you settle on a short-term bond ETF
Expected return: 1.25%
(Claymore 1-5 Year Laddered Government Bond ETF, CLF-TSX)
The theoretical annual return: $625 (assuming this ETF's share price is flat)
Risk factor: Income paid is very low risk, but unit price could decline if rates rise.
You use a one-year GIC
Expected return: 1.75% (various small banks and trust companies)
Risk factor: typically covered by deposit insurance
Hypothetical annual gain: $870

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