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Money and Happiness | The Mount Royal Owl and our investments



In the newsletter money and happiness, sent by email on Tuesday, our journalist Nicolas Bérubé offers reflections on enrichment, the psychology of investors, financial decision-making. His texts are repeated here on Sundays.

For a long time, I thought the Mount Royal owl was an urban legend.

I was cross-country skiing past a large tree where rumor had it that there was a barred owl. Five or six meters above the ground, I could see a deep, black cavity in the tree that looked like it had come straight out of the pages of a children’s story. In theory, I told myself, an owl could live there.

In practice, there was no owl. I skied dozens of times in front of the tree. Each time, the cavity was empty.

It had even become a joke in my family when we passed by. “Yes, dad, we know that. It’s the owl’s hole, but there’s no owl. »

I was skiing with my friend Laurent during a snow storm last month when we arrived in front of the tree. Out of habit, I turned my head towards the owl’s hole.

The owl was there! It even looked like she was smiling.

In a second, we went from urban legend to reality.

Risky funds?

The Mount Royal owl came to my mind last week, when the question of the transition from theory to reality arose in the news.

We all know that the failure of a large American bank is possible. But we haven’t seen that often, not since the crash of 2008-2009 that pushed the global banking system to breaking point.

A bank can experience a rush, when a large number of customers lose confidence and decide to withdraw their money at the same time (the old banks had large entrance halls to avoid a line forming on the sidewalk and scare everyone).

That’s what happened when the US government had to save Silicon Valley Bank, the 16e largest bank in the United States last weekend.

For 39 years, 3 months and 4 weeks to be exact, the customers of this Californian bank led their lives as they saw fit. Then, within a day, they were emotionally catapulted into a state of extreme stress, wondering how their business and family would survive without money.

And millions of investors around the world wondered if the global banking system was under threat.

All of a sudden, theoretical questions related to the safety of our disaster investments didn’t seem so theoretical.

“I wonder if there are risks in investing money in large funds in the United States or Canada,” Éric writes to me. It is not very sexy as a subject, but it would have the merit of reassuring many (including myself). »

So, should we be afraid?

The short answer: no.

The long answer: the funds we invest in are highly protected.

Canada, a model

“The Canadian industry is one of the best structured in the world,” says Richard Morin, President of Archer Portfolio Management in Montreal. Even that we serve as a model internationally. »

Each mutual fund, including exchange-traded funds (ETFs), is a legal entity (often referred to as a “legal entity”) – a trust or a division of a trust – that is separate from the promoter or manager of the mutual fund. funds.

“For example, as a custodian of value, State Street Canada holds the assets of BMO, Vanguard and Blackrock ETFs,” says Richard Morin. This is an extremely unlikely scenario, but the bankruptcy of one of these promoters would not put the assets of these funds at risk. »

Ian Gascon, president and founder of Placements Idema in Montreal, agrees.

The fund is a separate legal entity from the fund manager. So the manager, even if he goes bankrupt, it doesn’t matter, the legal entity that owns the assets remains viable. The assets it owns, it still owns.

Ian Gascon, President and Founder of Placements Idema

Readers have sometimes written to me to say that they invest in two very similar funds, one at BMO and one at Vanguard, for example, in order not to put everything in one fund.

“Given the structure of the funds, such a gesture offers no additional protection,” says Ian Gascon, who is also the author of the blog Les FNBs démystifiés, from the Deals. There are no advantages to doing this. It’s not worth splitting our investments. »

In the event of the bankruptcy of his broker, the company with which he does business to hold, buy and sell funds, the client is covered by the Canadian Investor Protection Fund (CIPF) up to $1 million. by type of account held, notes Richard Morin.

“For example, CIPF covers up to $1 million for non-registered accounts and Tax-Free Savings Account (TFSA), $1 million for Registered Retirement Savings Plans (RRSP), Registered Income Fund (RRIF) and others, and $1 million for Registered Education Savings Plans (RESP). »

As for bank accounts, the Canada Deposit Insurance Corporation (CDIC) protects up to $100,000 in a checking account in the event of the extremely unlikely failure of a major bank.

Those who hold investments in the United States are also protected. THE Securities Investor Protection Act (SIPA) offers US$500,000 protection on money and assets per type of account held with a brokerage firm. In almost all cases, when a brokerage firm goes out of business, client assets are simply transferred to another brokerage firm.

Finally, the greatest risk for investors is to sell when the market is believed to fall, and then buy when it is believed to rise. Bringing in this “visceral” element definitely lowers our returns relative to someone who doesn’t pay attention to what the markets are doing.

In short, the greatest risk to the security of our investments does not come from a world event, but rather from the person we see when we look in a mirror.

The question of the week

Are you worried about the security of your investments?

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