Skip to main content
investor clinic

I have more than $15,000 of cash that I want to invest in a guaranteed investment certificate to wait out the market turmoil. What do you think of this approach?

It’s natural to want to seek safety when markets are tanking. But before you lock up your money in a GIC, consider using the market’s weakness to your advantage. You could, for example, invest a portion of your cash in dividend-paying stocks or exchange-traded funds, which are trading at more attractive valuations and offering higher yields now that the S&P/TSX Composite Index has dropped about 15 per cent from its April high.

It’s counterintuitive, but scary periods like this are often the best times to invest.

On the other hand, if you don’t want to take on any market risk at all, then GICs are certainly a worthy choice. And, for the first time in a long time, they are paying more than peanuts.

With bond yields up sharply and central banks hiking interest rates, many five-year GICs now yield as much as 4.5 per cent. Tying up your money until 2027 has its own risks, however. If you need the cash before then, you’ll be out of luck. What’s more, if interest rates continue to rise – as many economists expect – you’ll be stuck collecting the same yield for the next five years.

The good news is that, because the GIC “yield curve” is relatively flat right now, you can shorten the term of your GIC without giving up a lot of yield. Many financial institutions are offering one-year GIC yields of 3.75 per cent and two- and three-year yields of about 4.3 per cent.

Rather than invest all of your cash in one GIC, consider “laddering” your GICs across terms of, say, one, two and three years. When the one-year GIC matures, reinvest the cash in a new three-year GIC. A year later, do the same with the proceeds of the maturing two-year GIC. And so on. The beauty of laddering is that it gives you access to a portion of your money every year, and by rolling that portion into a new three-year GIC, it lets you benefit from rising interest rates. Laddering also exposes you to falling interest rates, but that doesn’t seem to be in the cards right now.

As enticing as GIC rates appear, keep in mind that what matters is the real return after inflation, and it’s not nearly as attractive. In April, the consumer price index jumped 6.8 per cent on a year-over-year basis. If inflation continues at its current pace, even the highest-yielding GICs will lose money on a real basis.

Bottom line: If you’ll be needing your money to make a major purchase in the next few years, or if you can’t tolerate any market volatility, then by all means consider GICs for the certainty they provide. But if you’re investing for the long run, you may be better off looking at stocks or ETFs, which have a long track record of beating inflation, albeit with more volatility along the way.

I’m thinking of selling some stocks in my tax-free savings account to free up cash to help pay for a renovation. I realize it’s not an ideal time to sell, so what’s a good approach? My TFSA has a mix of ETFs, real estate investment trusts and individual stocks. I follow the buy-and-hold approach so I’m tempted to hang on to my stocks that have losses (such as Air Canada) and sell stocks where I have gains (such as TD). Thoughts?

Whether a stock is showing an unrealized gain or loss in your account shouldn’t be a factor in your decision. Just because Air Canada (AC) has dropped in price since you bought it doesn’t mean it will outperform Toronto-Dominion Bank (TD) in the future, and TD’s positive return doesn’t make it any more likely to underperform Air Canada. Nor do you need to consider capital gains – or capital losses – when deciding which stock to sell, because there are no taxes in a TFSA.

The only thing that matters now is your expectation of each stock’s future performance.

Airlines are notoriously volatile businesses. They carry a lot of debt, operate in a highly competitive marketplace and face an array of risks including unpredictable fuel prices, economic downturns and health-related travel restrictions. Air Canada’s stock ran up in price in the years before the pandemic, but it’s now back to where it was in 2017. Will it take off again? Beats me.

Banks are much more stable businesses, particularly in Canada where the five largest financial institutions have their fingers in everything from personal and commercial lending to wealth management, investment banking and insurance. Banks also pay dividends that have risen steadily over the years. Including dividends, TD has posted an annualized total return of 12.5 per cent over the past 20 years.

Past performance is no guarantee of future results. But TD and the rest of the big banks have been cranking out rising profits and dividends for a very long time. I know which stock I would hang on to, but it’s your call.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.