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My wife and I manage more than $2-million of assets in several accounts with TD Direct Investing, including a registered retirement savings plan, registered retirement income fund and tax-free savings accounts. We are thinking it is prudent to draw down something in the order of 20 per cent to 25 per cent because we fear the market is getting a bit frothy. Our question is where to park a large quantity of money, make a little bit while we wait, and still have liquidity and access to our cash if buying opportunities present.
Before I make any suggestions about where to park your cash, I’m going to push back on your reasons for selling such a large percentage of your portfolio. This is a potentially much more consequential decision, and it deserves careful consideration before you do something that might not work out the way you had hoped.
For as long as I can remember, I’ve been hearing from people who worry that the market is “getting a bit frothy” and wonder if it’s time to get out. Sometimes their gut instincts are correct, and stocks pull back. Other times they are wrong, and the market – which seems to delight in doing the opposite of what people expect – keeps marching higher. Such has been the case for most of 2024, as technology stocks have led indexes to fresh record highs, defying skeptics who point to the market’s historically lofty valuations.
I understand your desire to protect your capital. But the truth is that you don’t know where markets are going next. Nobody does. If you sell and a correction comes, you’ll feel like a genius. If you’re wrong and stock prices rise, you’ll be kicking yourself. Then you’ll have another decision to make: Do you get back in, possibly at higher prices, or keep waiting for that elusive correction?
Rather than try to time the market’s ups and downs, which nobody can do consistently, there’s a better way: Choose an allocation of stocks and fixed income that suits your risk tolerance, then resist the urge to tinker with your portfolio.
You didn’t provide any information about your current asset allocation, but it sounds like you might be uncomfortable with your equity weighting. If that’s the case, you could rebalance to a level that won’t keep you up at night. You should also make sure that your equity exposure is adequately diversified across economic sectors and geographies. On the other hand, if you already have a sufficient chunk of your portfolio in fixed income and cash – the “right” balance is different for everyone – staying the course might be the right approach.
If you do decide to sell some of your stocks, you have a few options for parking your cash. Since you are a TD Direct Investing client, a simple option is the TD Investment Savings Account, which currently yields 4.3 per cent, calculated daily and paid monthly.
One benefit of the TD ISA – and similar high-interest savings products offered by other brokers – is that it’s covered by Canada Deposit Insurance Corp. To avoid any of your accounts exceeding CDIC’s coverage limit of $100,000, you can even spread your money across different versions of the TD ISA. There are four to choose from, issued by Toronto-Dominion Bank TD-T, TD Mortgage Corp., TD Pacific Mortgage Corp. and Canada Trust Co. These products are bought and sold like mutual funds, with no trading commissions or ongoing charges.
Another option is a money market fund. One example is the TD Cash Management ETF TCSH-T, which was launched in February and is also aimed at investors seeking a relatively safe place to stash their cash. One drawback, however, is that you may have to pay a trading commission to buy or sell. Another is that, because the fund holds an ever-evolving mix of short-term corporate and government debt securities, the distributions vary from month to month.
In early April, TCSH’s inaugural distribution was 28.5 cents per unit. That was followed by 23.6 cents in May, 22 cents in June and 20 cents on July 8, the most recent payment. TD Asset Management’s website lists the portfolio’s yield-to-maturity – that is, the yield assuming all securities were held to maturity and redeemed at face value – at 4.88 per cent. Subtracting the maximum management fee of 0.15 per cent produces a net yield-to-maturity of 4.73 per cent. (No management expense ratio is provided as the ETF is relatively new.)
Also keep in mind that TCSH is not covered by deposit insurance, although the risk of default by any of the debt issuers in the fund is likely very small.
Another thing to note: The yield on investment savings accounts will also change when the Bank of Canada raises or lowers interest rates. With the central bank widely expected to make another quarter-point cut to its policy rate at its July 24 meeting, which would lower the target for its overnight rate to 4.5 per cent, investment savings account rates will also likely drop. Similarly, as short-term interest rates trend down, the yield-to-maturity of money market funds such as TCSH will also decline.
People spend a lot of time and energy trying to squeeze out an additional fraction of a percentage point on their savings, which is fine. But, as I said, the bigger decision here is whether you should be selling part of your equity portfolio and, if so, how much.
Before you do anything, ask yourself how confident you are that the correction you expect will in fact arrive and, just as important, what you will do if it doesn’t. As always, keep your portfolio diversified, with an allocation to stocks and fixed income that matches your goals and risk tolerance.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.