1. Government of Canada bonds
â€¨Federal bonds are among the safest investments around. The biggest risk is that a country will default, but it’s highly unlikely that Canada, which is one of the fiscally strongest G7 countries, will go bankrupt. (The same can’t be said for Greece.)
Because it's so safe, the yield -- or interest investors receive for holding a bond -- is lower than other bonds. It's especially small today because of our extremely low interest rates -- as of October 2011, a five-year Government of Canada bond pays about 1.61 per cent. Still, if you're scared of stocks, it’s a great way to save your money.
2. Guaranteed Income Certificates (GICs)â€¨
GICs are just like bonds, but they’re issued by banks. You "lend" the bank money by buying a GIC and, when the investment matures, you get your money back, plus interest. Banks usually use the dough to fund other investments. GICs are protected by the Canada Deposit Insurance Corporation, so in the unlikely event that a financial institution defaults, you'll get your money back up to $100,000. The interest you earn depends on the length of the GIC. You can purchase bonds that mature in just 30 days or between one and five years. The longer the term, the higher the rate, but in a time of low interest rates, you're not looking at huge yields; Ally's five-year GIC, for example, pays 2.75 per cent, the highest of the bunch.
You can't sell GICs, so most people use them to park some cash for a short period of time. If you know you'll need to buy a new car next year, put your savings in a GIC. When it matures, you’ll make a little more cash than what you'd receive in a standard bank account. Check out ratesupermarket.ca to compare GICs and get the best deal for your needs.
3. High-yield savings accounts
If you just want to park some cash in a bank account, consider a high-yield savings account. These accounts have higher interest rates than regular savings accounts, though some of them require a minimum balance -- often $5,000 -- to get that high yield. If you fall below the minimum you could get dinged with a not-so-insignificant fee. Be careful to avoid accounts with transaction fees if you think you'll be making frequent withdrawals.
Online banks, such as Ally and ING, often have better interest rates (lately between one and two per cent) and no minimum balances or fees.
4. Corporate bondsâ€¨
Corporate bonds can be risky, but they can also give your portfolio a much-needed income infusion. Essentially, you're lending a business money and in return they're paying you interest. A company is more likely to go bankrupt than a country, so investors get a higher yield on corporate debt than on federal bonds -- often at least two per cent higher, with some corporate bonds offering even more income.
Corporates are still considered safer than stocks, but make sure to stick to highly rated bonds (all bonds are rated by rating agencies such as Standard & Poor's) -- BBB and above. Be careful with lower-rated bonds (ratings go from AAA, which is the best, to D, the worst) as there's more of a chance the company will default on its loans -- and you'll lose your investment.
5. Segregated Fundsâ€¨
"Seg" funds are a lot like mutual funds -- they're funds that hold a basket of stocks -- but they're issued by insurance companies. Yes, you're playing the market, but there's one big difference between seg and mutual funds: Your principal is guaranteed. That means the market can fall to nothing and you'll still get back what you put in; and if it rises, you get your money plus the higher returns.
Sounds great, right? There is a caveat: You have to hold the fund for between 10 and 15 years before getting that principal guarantee. Fees are also higher. Only consider this option if you really think the market won’t improve much over the next decade.
As you can see, there are myriad places for nervous investors to flee. If you're thinking about putting your money under a mattress though, think twice. As low as interest rates are today, you get absolutely nothing keeping your cash at home. As the saying goes, "Make your money work for you."