Let’s face it: GICs aren’t exactly the most exciting investment option out there. You’ll get all the money you invested back, plus a little interest. While that may sound like a knock against GICs, it’s not, and the fact GICs are simple, straightforward, and low risk are their biggest advantages.
GICs can offer great value either as one part of a well-diversified portfolio, a guaranteed way to earn solid single-digit gains in uncertain economic times, or as a means to moderately grow your money as you work towards achieving shorter-term financial goals.
Below are some reasons why GICs are worth it and when opening one makes sense.
1. You have a short investment horizon
If you haven’t heard the term before, an investment horizon refers to how long you plan on keeping your money invested before you cash it out.
If you have a long investment horizon – think 20 or 30 years – funnelling most of your money in a high-risk stock portfolio can be worth it since you won’t need access to your money anytime soon and can weather market fluctuations. But, if you have a shorter time horizon or are working towards a specific goal for the near future, a more conservative investment approach can be the better move.
With a GIC, you’re guaranteed to see returns and won’t have to worry about the risks of cashing out your investments too early or at the “wrong time” when the market is down.
You may have a short-term investment horizon if you’re:
- Saving for a down payment and plan on buying a home within the next five years or less
- Setting aside money to pay for an upcoming wedding
- A parent whose child is in high school and you’re looking to provide them with some financial support as they head to college or university
- Planning to make a big purchase (i.e. a car) in the near future by a set date
- Close to retirement and will need access to a significant amount of your investments as cash
Time horizons should play a key role in informing your investment approach. Putting your money in stocks for only a short period of time can be riskier, and while it’s possible you could end up with a lot more money than what you started with, there’s also the possibility you could lose a chunk of your savings when you need the money most.
A good strategy is to hold multiple investments, each with different time horizons and unique goals – like setting aside some money in a GIC for an upcoming home purchase, while, at the same time, investing some of your cash into a high-risk investment to build up your retirement savings.
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2. You don’t want to be tempted to spend money
If you have a habit of spending money because you know you have some sitting in your account, stashing some cash in a high-interest savings account may not be the best idea. Putting money in a GIC will make it harder to access. A cashable (or redeemable) GIC is easy to cash in so instead consider a non-cashable (or non-redeemable) GIC. The funds in a non-cashable GIC usually can’t be withdrawn before the term ends and you’ll earn a higher rate of interest than a cashable GIC.
3. You don’t want to lose any money/take investment risks
If you can’t cope with stock market fluctuations and a drop in your portfolio could lead you to react negatively, worry, and potentially withdraw your investments, a GIC can be a better option. A GIC is a safe investment and you’re guaranteed to get your money back.
Plus, if you want the safety of GICs but with the potential to earn more, there are other options out there like market-linked (or equity-linked) GICs. These types of GICs offer exposure to the stock market without the risk. One problem is your returns are capped. For example, if the S&P/TSX 60 Index rises 20% in three years, your return on investment might be 10% because you’ll only be entitled to half of the index’s return. If the market drops, the value of your investment won’t go into the negatives but you might earn a smaller rate of interest than you would with a traditional GIC.
4. You want a portion of your money in fixed income
GICs and bonds are considered to be types of fixed-income investments. Allocating a portion of your portfolio to fixed income can help reduce risk and volatility. GICs are easy to understand while bonds can sometimes be a little more complicated. You should ideally buy a variety of bonds to reduce your interest rate risk and credit risk. An alternative is to buy a bond mutual fund or a bond exchange-traded fund. Both are diversified and very liquid investments.
5. Unlike savings accounts, GIC rates are guaranteed
GICs and high-interest savings accounts have quite a bit in common. Both are extremely safe investments that offer guaranteed (albeit, modest) gains while ensuring you won’t sustain any losses.
However, the two differ in some respects.
For one, the rate on a savings account isn’t guaranteed and can change at any time, even after you opened the account. We’ve already seen it happen in the midst of COVID-19, as cuts in the Bank of Canada’s prime rate has had knock-on effects leading several financial institutions to lower their savings account rates for new and existing clients. With a GIC, you won’t have that same problem, as your interest rate will be locked in from the time you opened the account to however long your term lasts. In short, rates on a GIC are guaranteed so you won’t have to worry about abrupt changes, especially in an ultra-low interest environment.
That said, savings accounts do offer the advantage of flexibility by letting you withdraw your funds at any time, while with a GIC, your money will be locked in for a set period of time (anywhere between 90 days to 5 years, depending on the terms of the GIC you open).
The bottom line
GICs can have a place in your investment portfolio, depending on what your savings goals are. If you’re buying a home, they’re a good option. But if you’re trying to save for retirement and you’re young, you might want to consider whether holding GICs makes sense.