[michika]

Since the season for buying is coming up (October to April), I've been having this regular recurring conversation with friends about why it is and is not a great choice as an investment.

Can anyone provide me some concrete feedback on why these are or are not a good choice for young investors? E.g. people like me who are just starting out and have yet to establish much of anything. Could you weigh in on this please?

The only arguments that I can come up with against them is that they make you almost nothing in terms of returns.

The benefits though are they are backed by the government, cost you nothing to purchase. They are reasonable simple, you buy, you hold, you cash out/reinvest.

Regardless though we always purchase one for each of our nieces/nephews, and close friends' children as their annual birthday/holiday gift.

 

[stardancer]

CSBs have their place in a portfolio. It depends on the purpose you have for your money and the type of investor you are.

If you are extremely conservative, use CSBs or GICs. If you are willing to take a bit of risk, look at other savings vehicles.

If you are saving for retirement, as a young person, there are better ways to grow your money. Over the years, I have gone through many downs- in the 80's, the 90's, the 2000's and just last year. In each case (except the last) the funds have bounced back to higher than what they were. I don't doubt that they will fully bounce back from last year's losses.

I have used CSBs in the past...
- through payroll deduction, then cash them in when I have a use for the $$ (vacation, Christmas, etc)
- a good liquid place to hold emergency funds; after the first 3 months the regular bonds are cashable at any time, but because they are not in a bank account, you can't access them on a whim giving you time to consider the situation
- great gifts for children, as you have noted
- short term savings (say, up to 3 years) when the rate of return doesn't matter

However, my RSP does not contain CSBs. Nor will my TFSA.

 

[DrStan]

Their pathetic rate of return is an excellent reason not to own. Even the "premium" bond redeemable once per year provides less than a 2% yield. Woopadidoo. The standard bond offers a 1% rate, which is lower than most high interest savings accounts. Not only are these rates below inflation, the income is fully taxable. In other words, they're a guaranteed losing investment in real terms.

For children, I think it would be far wiser to invest in equity and let it ride. Imagine a 50-year growth period? As of today, the TSX Composite yields about 3%, at a preferential dividend tax rate. That's purely dividends, accounting for no growth. Sure, the stock market could go nowhere for the next decades, but it seems like an unreasonable bet to make.

Savings bonds should be reserved for the most extremely risk averse short-term investors. And even then, there are high quality government bonds that offer better yields. I see no compelling reason to choose these.

 

[lb71]

I agree with Dr Stan. You can generally get better rates from GICs (or high interest savings accounts if you want more liquidity).

 

[OhGreatGuru]

For decades CSBs were a safe, secure, and reasonably liquid means of saving. A regular series CSB is more readily cashable without penalty than any GIC. And when purchased by payroll deduction they were a convenient "forced savings" plan for many. But at today's pathetic interest rates it's hard to recommend them. With the government going back into multi-year deficits again maybe they will have to offer better rates. But they and central bank are holding down rates to stimulate economy, so I wouldn't count on it.

 

[DuckConference]

I still hold some CSBs since I missed the last redemption date. Maybe it's just because of when I got them, but they were done as paper certificates, which makes remembering to get them for redemption (I keep them in my Dad's safety deposit box) something of an annoyance.

 

[Rox]

All countries and their respective Governments have this types of schemes, and they are usually very safe, but the returns are paltry, why ? Because of their safety, that's why the return rates are very low. This is the place where we park our Emergency Funds.

Anyway, I'll caveat my statements in the above, as in everything, there are exceptions. There are countries where the returns are quite admirable, something like in the region of 5% to 10% for their Government savings and bond schemes.

So, what's the catch ? Their currency is not strong and are easily attacked by speculators. Would you want to hold you money in such currencies ?

 

[the-royal-mail]

I recently cashed one in from 1995 that had expired in 2007. It was a $100 bond and I got about $162 for it. According to their website (last time I checked) the returns are less than what I can get by holding simple cash in any TFSA.

If you're interested in bonds and are comfortable with investing, why not invest in a bond fund instead? Claymore has a CDN one that is currently paying pretty decent returns.

And yes, while the banknote paper that bonds are printed on are cool, they can be easily misplaced. The one I just cashed in had been forgotten about! I found it when I was shuffling papers around and had a brief moment of horror when I learned that it had expired 3 years ago! Fortunately I was able to cash it in with no trouble.

Of course, I will have to pay tax on that investment return as this wasn't held in any type of a sheltered account like could be done with the aformentioned fund.

 

[Rox]

If the returns are good enough, and there is still room in the TFSA, it's a good deal,... but redeemable ones are not that good, in my opinion,.... that's where the bond fund comes in, which is able to mitigate the risks of bonds being redeemed. But a fund, as usual, talks about the MER and fees again,...

 

[michika]

You do realize this was a thread from last year?

Also one of the points was is it a reasonable gift to give? You can't really buy ETFs for small children as a birthday gift.

 

[Rox]

You do realize this was a thread from last year?

Also one of the points was is it a reasonable gift to give? You can't really buy ETFs for small children as a birthday gift.

Yes, thank you for the helpful and stiff reminder, I am fully-aware that this thread was from last year, and I'll tell you why I have been reading through all the threads (and replying and/or contributing where necessary), 'cos I like this forum, and I carry the belief that I can learn a lot about things related to money in Canada from this forum.

I also believe that I should learn up the "background stuff and the basic materials" from a forum before I start asking too many questions, lest.. the information has already been explained in earlier threads.

I am a seasoned forummer.

Back to your posting, I'm sorry, I have not mentioned about buying ETFs for children. Anyway, thank you for your reply.

 

[the-royal-mail]

I agree. We should be encouraging newer members to read up on existing threads. Whether something was discussed 1-2 years ago or yesterday doesn't change the principles in many cases.

As far as the second part, I think that was a response to my point that buying a bond fund can be easier and more effective for a lot of people than dealing in actual certificates that can go missing and then found many years after maturity. I did not realize that the question was being asked in the context of giving little johnnie a gift.

 

[Rox]

I agree. We should be encouraging newer members to read up on existing threads. Whether something was discussed 1-2 years ago or yesterday doesn't change the principles in many cases.

As far as the second part, I think that was a response to my point that buying a bond fund can be easier and more effective for a lot of people than dealing in actual certificates that can go missing and then found many years after maturity. I did not realize that the question was being asked in the context of giving little johnnie a gift.

Actually, a lot of information can be obtained from an active forum like this. Lots of things that can be learnt. The "practicalities side" of things are very true, and very, very applicable when learning from forums, rather than through a course or just reading from books.

Personally, I learnt a lot of things from active forums.