Adjusting Your Portfolio for the New Normal: Higher Interest Rates in Canada

Here’s how I would personally adjust my portfolio for today’s high interest rate environment.

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On October 25, the Bank of Canada made a decision: they kept interest rates steady at 5%.

Their goal? They want to keep it this way until things are more balanced with prices (that’s what they mean by “inflation is back at the long-term target”).

So, what does this mean for us? We’re now in a “higher for longer” interest rate environment. This is different from the last 10 years, when interest rates were pretty low.

Even though I usually don’t like changing my investments based on what’s happening in the economy, this situation is a bit special. It opens up a great chance for people who invest in exchange-traded funds (ETFs) to make some smart moves.

What the new normal means

The true winner in this updated financial scene is cash. But let’s clarify: this isn’t about the money you might have stashed under your mattress or the untouched sums in a standard checking account.

The focus here is on more strategic cash placements. Take bank savings products as an example. Some banks are now offering one-year GICs (Guaranteed Investment Certificates) with a rate of 5.75%.

Think about it: why venture into dividend stocks, which come with their inherent risks, hoping for a 5% return, when a risk-free option like a GIC offers even more? It’s food for thought in this “higher for longer” interest rate era.

My primary concern with GICs centers around their rigidity. Imagine this scenario: you’ve parked some money in a GIC, relishing in the risk-free interest it’s generating.

Then, suddenly, a golden opportunity arises with a stock you’ve been monitoring. But here’s the hitch: trying to liquidate that GIC to capitalize on the stock’s potential is no easy feat, as you’re locked in for a period of time.

How I would adjust my portfolio

In light of the current financial landscape, introducing an asset like CI High Interest Savings ETF (TSX:CSAV) to a portfolio seems prudent.

A potential allocation might look something like 70% in stocks, 20% in bonds, and a 10% position in cash reserves using CSAV.

What makes CSAV particularly appealing is its performance metrics. As of now, CSAV delivers a 5.16% net yield annually after accounting for fees.

Plus, it provides the convenience of monthly payments. This means investors can enjoy a consistent cash inflow while also benefiting from the security and higher interest environment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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