Don’t Invest In GICs, Unless You’re One Of These Investors

GICs get a bad rap in today’s low interest rate environment, but when stock markets are reeling, like they were this summer, investors often seek save 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 its nadir, I bought a five-year GIC after scrambling to meet the RRSP deadline. In hindsight it was a costly mistake; the Toronto Stock Exchange surged ahead for the next five years, earning annual returns of 9.52 percent, while my five-year stepper GIC from TD Bank earned an average return of 2.75 percent per year.

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

Why invest in GICs?

The truth is, there’s nothing wrong with stashing your savings in a GIC. Here are four times when it makes good sense to invest in GICs:

When your entire portfolio has been sitting in cash for years, 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 a term comes due.

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 1991 to 2010 the S&P 500 Index averaged 9.14 percent a year, but the average equity fund investor earned just 3.83 percent 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.

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 percent. 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 in 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 just a disaster waiting to happen.

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

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 at age 30, or even 40, but once you’re retired, or even a few years away from calling it quits, 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 five-year 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.

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. But many people are perfectly content with all, or a portion of their money in an ultra-safe GIC.

It might seem like a road to nowhere to invest in GICs, but they can play a role in your investment portfolio, no matter what age and stage you’re at in life. Ultimately you need to do what’s best for your portfolio and invest in a way that helps you sleep better at night.

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  1. Russ on September 28, 2015 at 8:30 am

    I am not sure that GIC vs Stocks is a fair comparison. If GIC are part of the Fixed Income portion of a balanced portfolio, then a better comparison would be GIC vs Bonds.
    In that regard it seems to me that the return on GICs always exceeds that of safe bonds with the same maturity, as of the date of purchase (i.e. ignoring possible capital gains in bonds). So GICs would appear to be the choice for Fixed Income when interest rates are stable or set to rise. Would you agree?

  2. Tim on September 29, 2015 at 8:27 pm

    I’m in the mid/latter stages of investing through a GIC ladder, and in my case it was because I inherited some $$ midway through university. Rather than make a bad decision, I invested it for a few years before determining what I was going to use the money for. Might not have been the best return, but was safe and allowed time for self-education on index funds, ETFs, etc 😀

  3. Grant on September 30, 2015 at 8:13 am

    Russ, I think the point of the article was the reasons for having GICs in a portfolio, rather than comparing the returns of GICs to stocks, which is not a fair comparison.

    It’s true the yields of GICs exceed the yields of bonds of the same maturity because of the illiquidity premium. You can’t sell a GIC (usually) until maturity, so investors are paid a premium for that illiquidity. You may want liquidity of you fixed income (eg. to buy stocks when they crash to maintain your asset allocation), so GICs may not be the best choice, depending on what you need them for.

    Whether interest rates are stable or rise or fall does not play a role in that decision. If interest rates rise you are stuck with the lower interest rate (opportunity cost) of both the GIC and the bond, unless you sell the bond but that will be at at a capital loss.

  4. Dan on August 24, 2019 at 8:43 pm

    I don’t think you are approaching this the right way. Buying a GIC and accepting the lower return is essentially an insurance premium to keep your money safe. Yes you could have made more money in hindsight investing in the stock market but how could you have known? You bought safety and the difference in the money you made from stock market to GIC is the insurance premium you paid to keep you money safe. How happy you would have been if it had gone the other way and lost you money.

    It’s like the house insurance I bought, yes I lost all that money because my house didn’t burn down but I am sure happy to pay that insurance because I will always have my house.

    When I hear of the money I could have earned by not buying GIC, I just think if it as the insurance premium I paid. Glad to pay it and have my money

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