Guaranteed Investment Certificates (GICs) are tried and true Canadian investments. They’re stable and safe, guaranteed to preserve an investor’s hard-earned wealth. But as interest rates declined over the past few years, these products have become less popular with some investors striving for higher returns.
“You could draw the conclusion that GICs have lost some of their luster,” says Domenic Gallippi, Head of Term Investments at BMO in Toronto. “There are a lot of things an investor can do with their GIC portfolio, and new options that they may not have considered, that would actually put a shine back on their GIC portfolio.”
What you need to know
When you invest in a GIC, your principal is completely protected and, in most cases, you earn a guaranteed return based on a pre-determined formula.
GICs can be held in Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs), and are considered by many people to be “an anchor in their portfolio,” Gallippi says.
Go long, go short or ladder
GICs with longer maturity terms – about two to five years – usually pay the investor a higher interest rate than GICs with shorter maturity terms – from a few days to two years.
But just because the rate might be higher, a longer-term GIC isn’t always the answer. If you’re just looking for a safe place to park some funds for a few months, a shorter-term GIC might be right for you.
Then again, you could invest in both.
“There are strategies, such as laddering, that actually give you the benefits of both,” says Gallippi.
Laddering involves dividing your investable funds into equal portions and investing each portion in a combination of GICs with maturity dates ranging from one to five years. As the first one-year GICs mature, the principal and interest are used to buy new five-year GICs, thereby continuing the ladder but also giving you access to your money, in case you need it, as it matures every year.
Once you’ve created your GIC ladder, if interest rates rise, you can reinvest funds that have matured at that higher rate. If interest rates fall, you can rest assured that your portfolio is purposefully diversified to include higher-rate GICs.
Cashable or not?
When investing in GICs, another choice you’ll have to make is whether to buy cashable GICs, which let you access your funds at any time, without penalty, or non-cashable GICs, which only let you access your funds when they mature.
The advantage to cashable GICs, of course, is that you can withdraw your funds if you need to or want to. However, they’re usually associated with lower rates. Non-cashable GICs, on the other hand, usually offer higher rates.
“There’s a mindset that says, ‘I need cashable because I need access to my money,’” Gallippi says. “But our investment professionals, when they’re having their discussions with clients, are trying to get a better understanding of how much of their portfolio actually needs to be cashable and make a decision based on what the need really is.”
The best of both worlds
While traditionally offered at a fixed rate of return, variable-rate GICs, with potential for higher returns, have come on the scene in recent years.
“What’s becoming more popular in the market is a GIC that has market-linked returns or equity-linked returns,” said Gallippi. “These GICs give the investor the same protection of their capital but they calculate a rate of return at the end of the term based on the performance of an underlying portfolio of stocks or mutual funds or indices.”
Market-linked GICs offer the investor a guarantee that their capital won’t be reduced and also offer the possibility of returns that could be higher than those offered by fixed-rate GICs. For instance, the February series of the BMO Smart Return GIC offers a guaranteed return for the term of 1.2 per cent for the three-year term and a maximum rate of return for the term of nine and a half per cent over the same period based on the performance of two market indices.
“We’ve had some of our longer-term market-linked GICs returning between eight and 10 per cent on an annual basis,” Gallippi says.
Diversity is key
Diversification – making sure you don’t have all your eggs in one basket – is a key tenet when it comes to investing. So even if GICs seem right for you, they probably shouldn’t make up your entire portfolio. Likewise, if you invest in GICs, you should probably invest in several different types.
“Diversify with GICs for your overall portfolio, and then within that GIC portion of your portfolio as well,” says Gallippi, adding that a professional financial advisor can offer great guidance on shaping your overall portfolio and how to diversify within it.
