Best Low Risk Investments in Canada Right Now

In a perfect world, we’d all find the best low risk investment opportunities, and then watch our investments grow and grow unabated without dropping a single cent.

We’d all sleep soundly at night knowing our hard earned money is safe and secure. 

The truth is that we’re all searching for safe investments with high returns. 

If only everyone had a guaranteed return investment plan. 

Unfortunately, that guaranteed reward-without-risk perfect world does not exist. There is risk inherent to every investment opportunity. Investing is all about balancing potential reward with your tolerance for risk. It’s important to understand this fundamental concept, and to know that markets are pretty darn good at correlating risk and returns over the long term.

Take a look at the chart below comparing annual returns of three different investment vehicles over the last 10 years. Tangerine 3-year GICs provide stable returns that don’t fluctuate much year over year. The average GIC return over this past decade was 2.26%.

Bonds, represented by the ETF XBB, have returns that fluctuate between -1.5% in one year to 9.38% another year. Average bond return was 4.90%.

Stocks, represented by the ETF XIU, fluctuate wildly in return between a low of -9.23% and a high of 21.72%. Average return from stocks over this time period was 7.39%. This simple example illustrates that the riskier the asset, the more potential fluctuation in its value, the higher potential gain over time.

investment returns canada

Had you invested $1,000 at the beginning of 2010 into each of these three investment vehicles, you’d have $1,251 in your GIC account, $1,613 in your bond fund, and $2,039 in your stock index fund. Higher risk equals higher reward.

investment growth graph

When most people look for the best low risk investment opportunities available to them, they define risk as the possibility of losing part or all of your capital (the initial sum of money that you put into an investment). I think that’s a reasonable definition. Long story short – most people don’t want to lose their hard earned money!

If you are a conservative investor with a low risk tolerance or an investor looking for ideas for conservative, safe options to balance your higher risk investments, then read on to find out about the safest investments in Canada. Parts of this article will also apply to those of you looking for places to park some money for the short term.

Myth: Sitting in Cash is a Low Risk Investment Opportunity

Let’s first all agree that simply storing large cash sums in a safe (or under the mattress, or in a low-interest chequing account) is not an option. Sure, the dollar amount will never go down, but the value of that cash will be eroded by inflation. Each dollar is worth less over time. Idle money loses its purchasing power. Simply storing cash may sound risk-free, but it’s actually a strategy that guarantees loss.

We might have an image of Scrooge McDuck diving into a pool of money as the pinnacle of wealth, but he’s actually a poor money manager. He wasted the vast growth potential of all his money by keeping it locked away in his mansion!

Money must be invested to at least maintain – or better yet, grow – its purchasing power.

How to Avoid Losing Money on Investments

The best way to avoid losing money on investments is to have a long time horizon and a diversified portfolio that has balanced portions of high risk investments and low risk investments/instruments. The high risk investments earn you high returns over the long term and the low risk investments can be used for short term savings, for waiting out temporary stock market volatility, and for providing stable returns to smooth out volatility in other parts of your portfolio.

The high risk investments like stocks require longer time horizons because stock market returns can fluctuate a lot year over year. In our example chart above, the S&P/TSX index (represented by the ETF XIU) dipped into negative returns three years out of ten. But it still managed to average 7.39% return overall.

You can lose money in the stock market for a year or two or more. But over time, the stock market tends to generate positive returns. In order to ride out the down years and enjoy the positive, overall returns, you need to stay committed over a long time period.

People have different risk tolerance and different investment time horizons. So everyone has their own unique balance between high risk investments and low risk investments.

The Ultimate Low Risk Investment Opportunity For Canadians: Guaranteed Income

The simplest low-risk instrument is a High Interest Savings Account. For example, you can put your money into an EQ Bank Savings Plus Account. See Kornel’s updated EQ Bank review for more details. Your deposits into an EQ Bank Savings Plus Account is CDIC insured up to $100,000 and will earn you some of the highest interest rates in Canada right now. It’s a convenient way to start your saving and investing journey, or to park some money in the short term while you look for investments with higher potential gain.

Aside: CDIC is the Canada Deposit Insurance Corporation, a federal crown corporation that provides insurance against loss of eligible deposits at their member institutions. All major banks in Canada are members of CDIC. Be careful, provincial credit unions are not CDIC members. Those credit unions should still be insured by other means. Check your coverage if you bank with a local credit union.

For the medium term, you can put your money into a Guaranteed Investment Certificate (GIC). When you buy a GIC from a bank, you lock in your deposit for a fixed length of time. In exchange for that locked in deposit, the bank promises you a high interest rate on your deposit. You are essentially lending the bank your money.

Interest rates on GICs vary depending on the term length (the amount of time the deposit stays locked in). The longer the GIC term, the higher the interest rate. Typically, GICs offer slightly higher interest rates than High Interest Savings Accounts. GICs are considered to be very safe. The interest rate is guaranteed and your deposits are CDIC insured up to $100,000.

GICs are good places to park your money for the medium term. Maybe you’re saving for a house downpayment that you don’t plan to make for 2 to 4 years. The stock market may be too volatile for such a short time frame. If you want to make sure there is no chance of losing your money, then GICs can be a good option.

High Interest Savings Accounts and GICs are really the best guaranteed rate of return in Canada. From here on out, there will be no guarantees.

Fixed Income, Low Risk Investments

Now we’re getting into instruments that do not have any kind of guarantee nor insurance against loss, but are still considered low risk.

Money Market Funds are low risk mutual funds that contain high quality, short term money market securities like Government of Canada Treasury Bills, debt instruments, or cash equivalents. Money Market Funds, although not insured, are very safe because they contain very safe underlying securities. For example, a Treasury Bill is a loan to the Canadian government, which, I think, we can reasonably trust to pay back its debt. But there is always some chance that a Money Market Fund value can go down. That chance is just very low.

Aside: You could also buy Government of Canada Treasury Bills directly but it’s most likely more convenient to just buy a Money Market Fund.

Safety has a cost. Money Market Funds do not promise any fixed interest rates like savings accounts or GICs, nor is it expected to grow very much at all. Money Market Funds, being mutual funds managed by fund managers, also carry fees or Management Expense Ratios (MERs). Those MERs are a drag on your potential returns.

However, Money Market Funds do typically outperform most GICs. And they are quite convenient to buy directly from your brokerage account. Many banks and financial institutions offer Money Market Funds. They are great places to park your money for the short term.

Next, we need to talk about bonds. A bond is a debt instrument. When you buy a bond, you are lending money (principal) to the seller for a set term in exchange for interest payments in the interim. In principle, buying a bond isn’t so different from putting your money into a GIC. However, bond returns are not guaranteed and your principal is not insured.

Bonds can range widely in risk level. On the safer end of the spectrum are bonds issued by stable governments and mature businesses. Towards the risky end of the spectrum are bonds issued by businesses with highly uncertain futures. For example, Canadian federal government bonds are safe but have low potential return, and a junk bond from a small oil exploration company likely promises a high interest rate (or yield) but also has a good chance of defaulting.

There are countless bonds all along the risk spectrum being offered in the market. Thankfully, various agencies like Moody’s and Standard and Poor’s exist to rate the quality (and risk) of bonds out there. The rating or grade of a bond can range from AAA, AA, A, BBB/BB/B, through CCC/CC/C, and D.

The highest grade AAA bond is deemed to have the lowest risk while bonds with grades BB through to D are considered junk bonds. Bonds rated AAA to BBB are considered investment grade. If you’re looking for a safe investment, stick with investment grade bonds. Even better to just buy into a bond fund such as XBB, the iShares Core Canadian Universe Bond Index ETF.

Aside: Most of the time, the ratings agencies’ grades are reliable. But the 2008 financial crisis revealed the fallibility of these ratings agencies. Blind faith in the safety of mortgage debt led these agencies to give high ratings to what turned out to be very risky mortgage debt bundles. Bottom line, ratings can be trusted most of the time but there is always risk. It’s a good idea to look past the rating and study the bond you want to buy, at least a little bit.

High quality, investment grade bonds or bond funds can be great sources of stable, fixed income for the low risk portion of your investment portfolio. You can read more about this in our fixed income faceoff article, where we compare between HISA, GIC and bond ETFs.

Low Risk Equity Funds and Low Risk Stocks

Not all stocks are risky investments. There are some stable options that can be considered quite safe, so long as you are disciplined and have at least a medium length investment horizon (say 5 years or so).

Many of us here at MillionDollarJourney are fans of a solid dividend growth investment strategy. FT, achieved financial independence thanks in part to his carefully curated portfolio of dividend-paying stocks. Checkout FT’s latest update on the Best Canadian Dividend Growth Stocks and his update on the Dividend Kings List.

Stocks of mature businesses, in stable sectors, that consistently pay out high dividend yields can be low risk investment opportunities for a conservative investor. Here are just three examples from FT’s extensive list:

  • Canadian Utilities (CU)
  • Fortis Inc. (FTS)
  • Canadian Western Bank (CWB)

These are examples of Canadian companies that have strong business models, robust financials, and long histories of increasing their dividend yield year over year. Of course, there are no guarantees that their prices won’t ever decline but these stocks compensate for price risk with generous dividend yields. And their proven track record of consistent dividend increases instil some confidence that they will continue the high dividend payout into the future.

On top of all that, dividends from Canadian companies are also given favourable tax treatment by the Canada Revenue Agency. Mature, stable Canadian dividend stocks can be great low risk additions to an investment portfolio.

Of course, dividend focused mutual funds or ETFs are convenient options to diversify across multiple stocks. For example, the iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ) is a good, simple ETF to start with. See FT’s articles on How to Build a Dividend Growth Portfolio and the Best Canadian Dividend ETFs for even more information.

If you’d like more guidance for your dividend portfolio, you can subscribe to Dividend Stocks Rock (DSR), a platform that helps DIY investors maximize returns from their dividend stock portfolio. Check out Kornel’s review of Dividend Stocks Rock.

Remember that there are no guarantees in the stock market. Even mature stocks with stable price history and long history of dividend payout are still at the mercy of investor emotions. Their prices will still fluctuate with overall market sentiment from day to day. High dividend yields certainly offset price risk, but your ability to stay calm and stay invested through market volatility is still the best insurance against risk.

Best Low Risk Investments in Canada – Final Thoughts

Hopefully you now understand what belongs in your portfolio as you look for the safest investments in Canada.

In summary, keeping cash idle is a terrible thing to do. It’s not a low risk strategy. It actually guarantees loss of value.

The next best thing is to keep money in a High Interest Savings Account or in GICs where it can grow modestly while insured against loss.

Fixed income investments like Money Market Funds or high quality Bonds/bond funds can enjoy higher returns compared to savings accounts. High quality fixed income investments are not insured but are still relatively safe.

Finally, the world of stocks does have some safe, low risk islands formed by mature companies paying consistently high dividend yields. See our latest article about investing in wide moat stocks for more examples on these.

Nothing in life is without risk, but risk can be managed.  While there are many options available for Canadians looking for low risk investment opportunities, it has to be understood that investment risk exists on a continuum, and that if the perfect low risk investment ever existed, everyone would want to get in on it – so the associated returns would be quite low.

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Yang is a mechanical engineer by day and an avid learner by night. He has a wide range of interests and hopes to turn his interest in personal finance into helpful articles for other Canadians along their path to financial freedom.
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