In case you don’t know, our team loves to talk about personal finance. We’re always oversharing personal experiences, looking at new tools and talking about our strategies – including what we’re all doing with our investments. When it comes to investing, there are some basic formulas for what makes a good portfolio, but the general concept is that you should have a portion of both equity and fixed income investments in yours. Without giving our last point away, investing in guaranteed investment certificates (GICs) is one way to make up part of your fixed income portfolio.
Here are 5 reasons you should buy GICs:
1. Your principal is guaranteed.
With most investments, safety of principal is not at all promised. Have you ever heard a story about someone buying an investment property or a stock and having a guarantee that their principal would be returned? Exactly. It doesn’t happen. Granted, the returns on GICs aren’t always high, but if you’re more concerned about losing what you already have, a GIC can guarantee that won’t happen. It won’t make you rich, but it will help keep what you already have.
2. Interest is also – almost always – guaranteed.
Keep in mind, the general rule of thumb with GICs is that they won’t make you rich, but you will earn a return on your investment – so long as you don’t withdraw early, or invest in a market-linked GIC (where the market could go down). Generally speaking, the longer you’re willing to invest your money for, the higher the GIC rate you’ll receive. In addition, non-redeemable GICs tend to pay higher rates of interest than cashable ones, so you should give some thought as to whether you might need early access to your funds.
3. GICs protect you from yourself.
Because you opt to invest your money for a specific period of time, you’re taking away your ability to access it on a moment’s notice, the way you could with money in your regular savings account. Of course, if you find yourself facing a financial emergency, some financial institutions will let you take your money out of a GIC early, but it comes at a cost – typically in the form of no interest payout.
4. GICs can be purchased for registered accounts.
Have an RRSP or TFSA for yourself, or even an RESP for a child? Good news. GICs are eligible investments for thes kind of savings vehicles. In the case of RRSP GICs and RESP GICs, it means that you won’t pay any tax on the interest earned while it’s in the structure. And of course with TFSA GICs, you won’t have to pay tax on interest earned or on any money withdrawn, in the future. It’s a win-win!
5. GICs can fulfill part of your fixed income portfolio.
A balanced investment portfolio should include a good mix of equities and fixed income products. The former will provide you with capital growth over the long-term, while the latter helps protect your principal while generating income. GICs are a kind of fixed income investment. Especially at a time when government and corporate bonds yield very little, by comparison a GIC is now more attractive. Just be aware that the longer your GIC term is, the greater the risk that inflation will eat into your returns.