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Stock Market Got You Down? Why it Might be a Good Time to Buy GICs

With the Bank of Canada keeping its overnight lending rate at 0.5%, savings accounts and GICs aren’t offering very high returns these days. But have you seen the stock market lately?

Earlier this month, the Royal Bank of Scotland advised investors to sell everything except for high quality bonds, warning that 2016 could be a “cataclysmic year.” The Wall Street Journal recently reported that many American mutual funds are holding more and more cash instead of investing it. And the S&P/TSX Composite Index lost more than 7% of its value in the first two weeks of 2016 after dropping 11% last year. No wonder the experts think cash is king!

Mind you, if you just stuff your money beneath your mattress, it won’t earn any interest, and will actually lose value due to inflation—the principle that things will cost more over time. At this time, you’d probably be better off putting your cash in a GIC.

One nice thing about GICs is that your money doesn’t have to be locked in for years. You can choose terms as short as 30 days, and there are many terms available that are less than a year, if you’re simply looking for a place to park your money and ride out the storm.

Right now, for instance, Oaken Financial and Equitable Bank are both offering 90-day GICs with guaranteed returns of 1.8% and 1.15%, respectively. Either one of those could potentially outperform the market over the next three months.

There are also high-interest savings accounts with interest rates of up to 3%.

Now, most younger investors should able to ride out the stormy stock market due to their long-term investment horizons—they won’t be tapping into their RRSPs for a while. But Canadians who have retirement in their sights, or those already in their golden years who need income during retirement, might want to stay away from market volatility altogether.

Over the longer term, some financial institutions are offering 2.5% returns on five-year GICs, though you would need to open an account with a provider like Oaken Financial to take advantage of those rates. But right now, providers such as Manulife are offering rates north of 2% on a five-year GIC that you can purchase through some discount brokerages and investment advisors.

Considering that the yield on five-year Government of Canada bonds was just 0.69% on Jan. 28, a five-year GIC seems like a pretty good investment right now!

Flickr: Andreas Poike