The GIC haters got it right – these safe investments were losers in 2022 on an after-inflation basis.
Guaranteed investment certificates had plenty of company, though. The benchmarks for both stocks and bonds were down about 6 to 12 per cent last year. With inflation running at 6.8 per cent late in 2022, we’re looking at double-digit losses after the cost of living is factored in.
GICs ramped up steadily through the first half of 2022 and hit 5 per cent at mid-year. By November, rates of 5 per cent or slightly more were available for terms of one through five years from alternative banks and, now and again, from big banks as well. After inflation, GICs were losers, too. Roughly speaking, the real return on GICs was minus 2 to 3 per cent, depending on what rate you were able to lock into.
Let’s not overplay the benefits of GICs. They’re illiquid if you don’t settle for the lower rates of cashable ones, and the interest they pay in non-registered accounts carries a full tax hit, unlike dividends and capital gains. Also, GICs lock you into annual returns that you should be able to beat if you hold an exchange-traded fund tracking the Canadian or U.S. stock market over a minimum of five to 10 years.
But the comparison of after-inflation returns for 2022 reminds us of a compensating benefit of GICs. If you stay within deposit insurance limits, you have pretty much no risk of losing (a) your initial investment and (b) the interest you’re entitled to.
Five-per-cent GIC rates were still available in early January – but from a slowly dwindling number of alternative banks and credit unions. Should you manage to lock in some 5-per-cent money, you’ll have to accept that better returns may be had elsewhere. Or, not.
Bonds could absolutely rebound in 2023 in a total-return sort of way. That means prices of bonds and bond funds plus interest could combine to create a strong rebound from the losses of 2022. The risk here is that inflation can’t be contained and the Bank of Canada has to raise rates a few more times. That could make it uncomfortable to hold bonds again.
Stocks have had a choppy 2022, and now seems an okay time to buy in if you’re patient and risk-tolerant enough to accept some declines before you make money.
For certainty in an uncertain world, look into GICs while returns remain at recent levels. GICs did lose money after inflation in 2022, but a lot less than other investments.
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Rob Carrick