There are solid reasons to avoid the risk of investing in stocks and instead hold guaranteed investment certificates. Deking around the next recession is not one of them.
A 60-something reader recently raised the idea of GICs as a recession refuge. “What is the downside to taking [our] investments and setting up laddered GICs to generate income thereby eliminating the worry of losing principal if there is a recession?”
The Canadian economy came close to stalling in the final three months of 2018, growing just 0.4 per cent on an annualized basis. Economists have been talking a lot about slowing growth and the Q4 report on GDP is bound to increase speculation.
But making a drastic change in asset mix to respond to a potential downturn seems unwise. It’s just as likely the economy regains its equilibrium and continues along the slow-growth track it has been on for a while now. GIC rates simply aren’t high enough to satisfy investors who are used to long-term average annual stock market returns in the 6 per cent to 7 per cent range before fees.
Now for the case in favour of GICs for this reader. Forget the recession and instead consider that this person has a substantial seven-figure investment portfolio. if that’s enough money to meet his income and estate planning needs, then it could make sense to focus more on capital preservation than growth. Simply put, why take risks in the stock market if you don’t need to?
GIC returns lag stocks for sure, and they’re drifting lower these days. But they were still sufficient to beat inflation on a before-tax basis as of early March. One-year GICs from alternative banks that are members of Canada Deposit Insurance Corp. paid as much as 3 per cent, which compares with an inflation rate that hit 2 per cent in December and then fell to 1.4 per cent in January. The premium for locking in money for five years is modest right now – expect no more than 3.5 per cent at alternative banks. GICs from the big banks will pay much lower rates, although it’s sometimes possible to negotiate a rate bonus.
This reader has most assets in registered accounts, which limits the tax implications of moving to GICs from stocks. There certainly would be tax issues in a non-registered account, where GIC interest would be taxed as regular income and would not benefit from the tax breaks given to dividends and capital gains.