Enough with the uninformed dissing of guaranteed investment certificates.
GICs have a rep as being the friend of unsophisticated, risk-averse investors who don't understand that that stock market risk is manageable through sensible diversification. But I'll be buying a GIC for my boys' registered education savings plan, and I don't care who knows it. After comparing the alternatives, the GIC proved to be most suitable choice.
First, I checked my online broker's inventory of government and corporate bonds. I know online brokers make a tidy profit off bonds, but the yields I was shown were just pathetic (remember, the higher the price a bond is sold at, the lower your yield). For federal and provincial government bonds maturing in one year or so, the best yield I could find was 0.9 per cent.
Next, I checked the selection of GICs available through my broker. Some 30 or more issuers were listed, with one-year yields ranging from 1.15 per cent to 1.55 per cent. Two issuers offered the 1.55 per cent rate, including Home Trust Co., which is a member of Canada Deposit Insurance Corp. Barring changes in rates, that's the GIC I'll be buying.
Here's the rationale for the purchase: I want a block of money kept safe to pay for my son's fourth and (I hope) final year of university in the late summer of 2015. In the next couple of months, I'll lock that money into a safe one-year investment.
Bonds with a term of one year are safe enough for me, even if they do fluctuate in value before the maturity date. But those yields – they're ridiculous at less than 1 per cent. The GIC alternative gives me a higher yield, though at a cost of liquidity. I could sell the bond before maturity, but a non-cashable GIC (they have the highest yields) is basically unsellable. That's no big deal because liquidity is a non-issue for my RESP needs.
One final thought is to keep the tuition money for 2015 in one of the investment savings accounts that smart investors now use for cash instead of money market funds. My broker has one of these accounts available with no buy or sell commissions, and the yield is 1.25 per cent. These accounts are usually CDIC-eligible, so they're also a good alternative to bonds for short-term money. In this case, though, I'll go with the GIC for a little extra yield.