On October 25, the Bank of Canada made a decision: they kept interest rates steady at 5%.
Their goal? They want to keep it this way until things are more balanced with prices (that’s what they mean by “inflation is back at the long-term target”).
So, what does this mean for us? We’re now in a “higher for longer” interest rate environment. This is different from the last 10 years, when interest rates were pretty low.
Even though I usually don’t like changing my investments based on what’s happening in the economy, this situation is a bit special. It opens up a great chance for people who invest in exchange-traded funds (ETFs) to make some smart moves.
What the new normal means
The true winner in this updated financial scene is cash. But let’s clarify: this isn’t about the money you might have stashed under your mattress or the untouched sums in a standard checking account.
The focus here is on more strategic cash placements. Take bank savings products as an example. Some banks are now offering one-year GICs (Guaranteed Investment Certificates) with a rate of 5.75%.
Think about it: why venture into dividend stocks, which come with their inherent risks, hoping for a 5% return, when a risk-free option like a GIC offers even more? It’s food for thought in this “higher for longer” interest rate era.
My primary concern with GICs centers around their rigidity. Imagine this scenario: you’ve parked some money in a GIC, relishing in the risk-free interest it’s generating.
Then, suddenly, a golden opportunity arises with a stock you’ve been monitoring. But here’s the hitch: trying to liquidate that GIC to capitalize on the stock’s potential is no easy feat, as you’re locked in for a period of time.
How I would adjust my portfolio
In light of the current financial landscape, introducing an asset like CI High Interest Savings ETF (TSX:CSAV) to a portfolio seems prudent.
A potential allocation might look something like 70% in stocks, 20% in bonds, and a 10% position in cash reserves using CSAV.
What makes CSAV particularly appealing is its performance metrics. As of now, CSAV delivers a 5.16% net yield annually after accounting for fees.
Plus, it provides the convenience of monthly payments. This means investors can enjoy a consistent cash inflow while also benefiting from the security and higher interest environment.