Given the current stock market turbulence, should someone in their seventies put all of their registered retirement income fund in guaranteed investment certificates?
A reader asked this question after the March stock market plunge, a particularly sudden and vicious decline that shook the confidence of investors at all stages of life. Some wonder whether they want to ever go through that experience again, which leads to questions about chucking stocks and just using GICs. Here are five questions to ask yourself if you’re thinking of making the switch.
Can I meet my financial goals with GIC returns?
Will the modest returns of GICs be enough to keep your RRIF from running dry before you die? A 70-year-old might easily have two decades or more of retirement ahead. Switching to GICs is easiest for investors who know they have enough for a lifetime and don’t need to take risks.
Will I be tempted to get out of GICs when the stock markets are hot again?
Buy a GIC and you may find yourself coming up for a renewal at a time when stocks are flying again. The risk in switching back to stocks is that you buy in well after big gains have been posted. There may be limited upside before the next bad year.
Do I need more liquidity than GICs provide?
There are cashable GICs, but you pay for that feature through lower interest rates. The traditional GIC can be redeemed prior to maturity, but you should expect a stiff, prohibitive penalty. A high-rate savings account might be a better spot than a GIC for money you may need to dip into.
Do I have access to the best GIC rates?
The highest GIC rates come from alternative banks and credit unions that typically sell directly to investors. If you hold your RRIF at an investment dealer or online brokerage, your selection of GIC issuers probably won’t include these players.
What is more important to me – avoiding losses or making gains?
In the field of behavioural economics, there’s a concept called loss aversion that weighs the pain of losses versus the pleasure of making gains. It’s generally thought that the pain of losses is double the pleasure of gains.
-- Rob Carrick
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Compiled by Globe Investor Staff