Savings versus savings bonds: which is better?
To help you decide, let’s take a historical look at the returns of investments and 30-day Canadian Treasury bills, after inflation. Currently, the 30-day CND T-Bill yield is 5.04%, a little less than your promo rate on the high interest savings.
Historical inflation-adjusted returns from 2003 to 2022
All figures are in Canadian dollars, even the S&P 500 Index, and are adjusted for inflation.
| 1 year | 5 years | 10 years | 20 years | |
|---|---|---|---|---|
| S&P 500 | -17.4% | 7.7% | 13.4% | 6.7% |
| TSX | -11.4% | 3.5% | 5.2% | 6.2% |
| 30 Day T-Bill | -4.4% | -2.1% | -1.4% | -0.6% |
| Inflation | 6.3% | 3.2% | 2.4% | 2.1% |
Building a portfolio
The main purpose of investing in equities is to grow your money faster than the rate of inflation. And the reason you want to do this is to protect your purchasing power. That’s so what you can purchase today you could purchase in the future for the same inflation-adjusted dollar.
When you look at the chart above you can see that both the S&P 500 and TSX had positive, after inflation returns over the last 5-, 10-, and 20-year time frames. Both, however, have a big negative return in 2022, and that is the risk part you are concerned about.
Look at the T-Bill returns after inflation. They are all negative, and that is before adjusting for tax, which would make the returns even lower. What’s not shown in the table, though, is that if you invested the $100,000 in the T-Bills, you would not have seen it drop in value. You would always have, at a minimum, $100,000.
No risk, right? Not exactly.
Are there any risks with interest income? Is inflation a risk?
The risk with holding T-Bills, and I would add HISAs and guaranteed investment certificates (GICs), too, is that the rate of growth may not keep pace with inflation. So, although it seems you’re not taking a risk, you do risk purchasing power. That’s a different type of risk than what you mentioned. In cases where inflation is not a big concern, a HISA or a GIC can make sense. Examples of such situations may include saving for a near term purchase, transitioning from accumulation to decumulation, or as you age and get closer to death.
The other reason you may want to include savings in your portfolio is because there’s no way to know for sure when equity investments will be positive. The table above shows equities were positive over the last 5, 10 and 20 years. But that’s not always the case.
Allan Norman, MSc, CFP, CIM
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