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Should Millennials Be Investing in GICs?

Last month, the Globe and Mail published an interesting article about the attitudes of so-called “Gen Y” Canadians towards the stock market and short-term saving. While no precise definition exists, this generation (also known as millennials) generally encompasses those born in the early 1980s to early 1990s. The Globe profiled a 26-year old woman for their piece, so she would be typical of this age group.

In short, the Globe explained that many Gen Y investors are confused about how to properly save for big long-term purchases, such as a house. On the one hand, they’ve been constantly told that stocks are the best bet for the long run. On the other hand, there have already been two financial crashes in the lifetime of a Gen Y Canadian. The first meltdown occurred at the start of the century when the technology-laded stock market imploded (think Nortel). And of course in 2008, the global financial crisis wreaked havoc on people’s portfolios. Since then, markets have mostly soared to new highs.

And so, this is the dynamic between which Gen Y feels caught. The overall trend seems up for equities, and the buy and hold mantra is espoused by most financial advisors. Yet the world has seen the wheels seriously come off the markets, not once, but twice since 2000.

What’s a Gen Y saver to do? Rob Carrick suggests the following: “A simple rule to consider: zero in stocks for short-term savings goals over the next five to seven years, and mostly stocks when investing for the long-term.”

Whether people should be mostly in stocks over the long-term is an interesting, and hotly debated question. We recently featured an interview with David Trahair, who advocates an all-GIC portfolio.

Nevertheless, it’s very difficult to disagree with Carrick’s 5-to-7 year advice. In essence, he argues that while markets may rise over the long-term, there is absolutely no guarantee over the shorter term that they will be up. This may come as a shock to some people, but as Carrick shows, the TSX has been down over 5-year stretches before (mostly recently going back to 2013).

The problem, then, when Gen Y investors invest in the stock market as a way to save for a down payment is that things might not go to plan. Carrick notes that a few things might get in the way:

  • The market could crash and not recover within the 5 years you plan to buy a house.
  • You might panic and sell at the bottom if the market crashes.
  • Life events, such as marriage or kids, may disrupt your house-buying plans, causing you to need the down payment money earlier than you thought.

There’s a time to take risks with your money and a time to play defense, so to speak. In the same vein, there’s a time to consider a healthy weighting of equities in your portfolio, and a time to bias your investments towards safer products such as GICs and high-interest savings accounts.

One way to think about putting money away is the distinction between saving and investing. Saving is geared towards preserving capital, whereas investing is more concerned with growing your money. The latter involves taking the risk that your capital may fall in value.

Granted, interest rates are low so you certainly won’t become rich by buying GICs or placing your money in high-interest savings accounts. But if you’re looking to buy a house in the foreseeable future, avoiding equities in favour of these more conservative vehicles may just ensure that you’ve got the down payment you need when you decide it’s the right time to buy a house.