People who use guaranteed investment certificates have seen virtually no change in interest rates, and the same goes for high-interest savings accounts.Fuse
A question for worried investors: Would you prefer a one-year return as high as 1.95- to 2.4-per cent from a guaranteed investment certificate, or the potential to both make and lose much more than that?
We know the stock market has to pull back at some point after rallying for the better part of the past five years. If you're a long-term investor, this should mean nothing to you because you know that market gains overwhelm losses over the decades. But a lot of people have significant amounts of cash in their accounts right now and can't pull the trigger on investing it. They've been waiting for a correction that hasn't come.
Stocks could certainly rise further, especially if economic growth picks up. Beating the 1.95 to 2.4 per cent returns you can get from GICs seems doable, given the market's momentum in 2014. On the downside, a sharp correction could see the market fall by 10 per cent or more. While the stock markets are not insanely over-valued, there does seem to be more downside risk than upside potential in the short term.
Locking up your cash for one year in a secure investment is market-timing, which mean trying to outguess what's happening in the market. Usually, this is futile – investors guess wrong in the vast majority of cases over time. However, there are two reasons to consider locking up your cash for a year. One is that you're actually committing to doing something concrete with the cash that's idling in your account. Two, you'll get a better return than your cash is paying – potentially almost double.
Investment savings accounts, the smart investor's preferred place for stashing cash, have returns in the area of 1.25 per cent at best. One-year GICs from financial institutions covered by Canada Deposit Insurance Corp. start at 1 per cent or lower. But smaller independent firms accessible through one particular online broker's inventory offer returns as high 1.95 per cent (from Home Trust). You can get up to 2.4 per cent if you invest your money in a one-year GIC from Peoples Trust, or 2.35 per cent from Hubert Financial. However, you'll likely have to deal with these two firms directly, rather than accessing their products through your brokerage account.
When your GICs mature in a year, you'll once again have to decide what to do about the stock market. In an upcoming column, I'll look what to do then.
Rob Carrick