The (Renewed) Case for GICs

**This is a sponsored post written by me [Robb Engen] on behalf of EQ Bank. However, as always, all opinions are my own.

A guaranteed investment certificate (GIC) is unlikely to spark an exciting dinner party conversation but when stock markets are reeling, like they were earlier this year, investors often seek safe havens to wait out the storm. Cash is king for those who don’t have the stomach to watch their portfolio plunge in value, and GICs at least offer the promise of a modest return.

Back in February 2009, when the global financial crisis had just about reached rock-bottom, 30-year-old me was scrambling to meet the RRSP deadline and bought a five-year GIC. It was a costly mistake in hindsight. The Toronto Stock Exchange surged ahead for the next five years, earning annual returns of 9.52 per cent, while my five-year GIC earned an average annual return of 2.75 per cent.

Instead of turning my $7,000 contribution into nearly $10,000, I only had $7,800 to show for my decision. At the time, though, I thought the GIC was a smart move because I had to make a quick decision on what to do with my contribution, and the stock market still looked downright nasty.

Why invest in GICs?

The truth is there’s nothing wrong with stashing your savings inside the comfort of a GIC. Here are four times when it makes good sense to put your money in GICs:

1.) When your entire portfolio is sitting in cash, waiting for “the right time” to get into the market

If you’re the type of investor who can’t ignore the doom-and-gloom economic headlines, and who’s convinced that a market meltdown is always imminent, maybe the stock market isn’t right for you.

Having your retirement savings constantly sitting in cash and earning nothing is like sitting on the fence and being paralyzed to move for fear of making the wrong decision at the wrong time.

A GIC ladder, which might involve purchasing equal amounts of one, two, three, four, and five-year terms, will maximize your risk-free returns and still give you the option of dipping your toes in the market each year when one of the terms comes due.

2.) When your investing strategy boils down to chasing last year’s winning stocks or mutual funds

If you’re the type of investor who’s constantly looking for the latest fad, you might be falling victim to the behaviour gap – the difference between investment returns and investor returns.

Consider that, according to DALBAR, from 1986 to 2016 the S&P 500 Index averaged 10.16   a year, but the average equity fund investor earned just 3.98   a year.

When you think about our poor investor behaviour, coupled with sky-high mutual fund fees (at least, here in Canada), those investors who just can’t help themselves might be better off parking their savings in the best five-year GIC and earning a guaranteed return.

3.) When you just can’t stand the thought of losing money in the stock market

Some investors simply can’t stomach the fact that a stock portfolio may drop by up to 50 per cent during a market crash. They can’t handle the volatility, and can’t stop listening to pundits and economists who constantly push the fear button.

There’s no sense trying to convince this type of investor about the merits of investing in stocks for the long run. A nervous investor is just the type to bail when the going gets tough – which is a disaster waiting to happen.

A GIC might just be better for peace of mind. One caveat is that you’ll need to save a lot more to make up for the lower returns of an all-GIC portfolio.

4.) When you’re retired (or close to retirement) and need to keep a portion of your portfolio in cash or guaranteed products

Having all of your retirement savings in the stock market might make sense for a 30-or-40-something, but once you’re retired, or you’re close to calling it a career, you’ll want to keep three-to-five years of expenses in cash or GICs.

An investor who hopes to retire in a year could structure his or her portfolio in a way that places equal amounts (i.e. one-year of expenses) into a GIC ladder. The first rung of the ladder matures the year the investor retires, which then gets cashed out and put into a chequing or savings account to cover living expenses. Rinse and repeat each year, pulling one-year of expenses out of your stock portfolio to replace the five-year tranche of your GIC ladder.

Here’s an example to illustrate:

EQ Bank currently offers GICs with competitive interest rates and flexible terms. A retiree could take a slice of his or her portfolio, say $100,000, and implement a GIC ladder strategy that looks something like this:

To see how much you could be earning in interest, check out EQ Bank’s online calculator.

Final thoughts

I was quite happy to cash in my $7,800 GIC when it matured and put that money to work in the stock market. In fact, I’m an all-equities investor at this time. But many people are perfectly content having all, or a portion of their money in an ultra-safe GIC.

It might seem like investing in a GIC is akin to treading water after inflation and taxes rear their ugly heads, but interest rates have started to tick up and savers are beginning to take notice. They see that GICs can play an important role in their investment portfolio, no matter what age and stage you’re at in life.

There’s a renewed case for GICs, but ultimately you need to do what’s best for your portfolio and invest in a way that helps you sleep better at night.

Rates shown are in effect as of May 28, 2018 and are subject to change. For GIC terms equal to one year, simple interest is calculated on a per annum basis and paid at maturity. For GIC terms of over one year, interest is calculated on a per annum basis and paid either annually (simple interest) or at maturity (compounded annually). Interest is accrued for the entire GIC term. Non-Redeemable.For more GIC rates and information, visit eqbank.ca. EQ Bank is a trade name of Equitable Bank.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on June 7, 2018 and is republished here with his permission.