Disclaimer: This post may contain affiliate links, but they’re not just random banners. I like Wealthsimple and recommend them to everyone I know, including my clients who are looking for a balanced portfolio of ETFs and don’t have the time or patience to manage their own portfolio. If you have any questions about Wealthsimple before you click on the banners, please send me a note on my contact page.
Who’s buying Ontario Savings Bonds? Not me!
But I have a long time horizon and have no need for super-safe investments at this time in my life. My profile is more of a balanced portfolio with moderate risk, since I have at least 25 more years before I would think about selling stuff and using it to live.
But let’s say you are about to retire, or are retired already. Should you buy Ontario Savings Bonds (OSBs)? They only offer them from June 1-21, 2016 so you have to decide now! RUN TO YOUR BANK!
Note: This article was written in 2016, but the basic concepts are the same as the numbers haven’t changed much. The best Ontario Savings Bond rate for 2018 is 2.85% over 10 years. You’d seriously be better off heading to Wealthsimple.
ONTARIO SAVINGS BONDS AND INFLATION
The first thing to consider is inflation. Any investment is pointless if it doesn’t keep up with inflation.
These things are hard to predict but for the purpose of making our decision today, let’s use 2.5% as an average inflation rate over the next little while.
So, how do the Ontario Savings Bonds fare vs. our current and future inflation rates?
The highest interest rate offered by the Government of Ontario is 2.2% for a 10-year fixed-rate bond. This is less than our predicted long-term 2.5% average inflation rate.
The highest interest rate other than the 10-year fixed-rate bond is 1.50%, which is only for the final year of a 5-year “step-up” bond. This is less than our current 1.7% inflation rate.
What does this mean?
It means that if you put $10,000 in an 10-year fixed Ontario Savings Bond, and factor in inflation, you will only have $9,711.14 in 10 years. Your $10,000 makes 2.2% in interest every year, but what also happens every year is that $10,000 doesn’t buy $10,000 worth of stuff anymore. What you always want is for your $10,000 to be worth at least $10,000. In this situation, it loses its purchasing power bit by bit every year.
The only way to keep your initial investment from fading away into inflation oblivion is to invest in something that pays you a higher return than the inflation rate.
In my opinion, Ontario Savings Bonds do not pass this test.
BUT COULDN’T I LOSE EVEN MORE MONEY INVESTING IN OTHER THINGS?
In the short term(5 years), sure, even a balanced portfolio can have negative returns. And maybe you have enough capital that all you want to do is preserve that capital and you don’t need it to grow. So you put it in something “safe” like an OSB that at least doesn’t have negative returns, and you cross your fingers and hope for inflation to be lower or stay flat to your OSB interest rate. Perhaps you’ve been through losses in the past and you just can’t tolerate any risk.
Maybe OSBs are the right choice for you.
But wait, there are other safe options, right? What about Guaranteed Investment Certificates(GICs)?
They don’t pay much but right now you can get a 5-year GIC from a small Canadian bank, and they’ll give you 2.75%. That beats the 10-year rate for OSBs and happens to exceed our average inflation estimate, but not by much And banks are insured by the CDIC so you’re super safe. Not the best option, but better than losing money every year.
BUT THAT’S ONLY 5-YEARS, WHAT IF I STILL HAVE 10-15 YEARS BEFORE I REALLY NEED TO DRAW DOWN ON MY SAVINGS?
Well then, I have good news for you. If you have 10 years, you don’t have to settle for a paltry 2.2% rate from an OSB because you could invest in low-fee balanced index funds or exchange traded funds and make something closer to a 5-10% return over 10 years.
Even in the worst 10-year period(from 1999-2009), the average return on a balanced portfolio was 2.3%, which beats the best OSB 10-year option, and that was a truly exceptional 10-year period, which included in the stock market crash of 2008.
WHAT ABOUT INVESTING IN MY COUNTRY?
Ok, I understand you might want to choose OSBs because you’re helping the Ontario government. But despite the good nature of your intentions, I still can’t recommend something that’s going to potentially lose you money, or make you barely anything over 10 years. The baseline of profitability has to be met before we start talking about social or political benefits of certain investments. Unfortunately all other factors are irrelevant if you are essentially paying money to lend your money to the government. Haven’t you paid enough taxes in your life already?
Sorry OSBs, you don’t make a lot of sense for those of us who like to invest wisely.