Weekend Reading: The Trouble With GICs Edition

I’ve never heard so much interest in GICs before this year, but with stock and bond markets down and interest rates up it’s no surprise that investors are looking for a safe and profitable place to park their savings.

Just two years ago, a five-year GIC was paying a paltry 1.5% interest, while a two-year GIC was paying just 1.05%. Fast forward to today and you can find a five-year GIC paying 5.2% interest and a two-year GIC paying as high as 4.88% interest (source: https://www.highinterestsavings.ca/gic-rates/).

Meanwhile, investors are reeling as stocks and bonds have suffered significant losses this year. A balanced 60/40 portfolio is down around 15% so far this year and an all-equity portfolio is down nearly 17%.

Investors want to stop the bleeding in their portfolio and are considering short-term GICs as a temporary solution. Those with new money to contribute don’t want to throw good money after bad, so they’re looking to GICs as a source of decent returns today.

GICs are a perfectly sensible investment for someone with a short-to-medium time horizon who is looking to maximize their return without taking on any risk (besides the risk of tying up your money for 1-5 years).

But the trouble with GICs as a market timing investment strategy is their lack of liquidity. We don’t know when stock and bond markets will turn around, but we know throughout history that returns after a bear market have typically been strong. If your capital is tied up in a GIC, even for a year, and markets start to rise quickly, you miss that opportunity to recover your losses and/or participate in those gains.

Consider my own experience with GICs.

Back in early 2009 I received a $7,500 bonus from work and decided to put that amount into my RRSP before the March 1st deadline. I was naive about investing, but knew enough that the mutual funds in my group RRSP were down substantially. With the RRSP deadline looming, and knowing that I had to put the money into *something*, I chose a 5-year GIC at TD Bank that paid 5.5% interest.

I still kick myself for this decision, because the Great Financial Crisis bottomed on March 9th, 2009 – shortly after I purchased that GIC. 

The result? The five-year GIC turned my $7,500 into about $9,800.

Had I invested the $7,500 into a Canadian equity fund (let’s use iShares’ XIC as the proxy), I could have turned that $7,500 into nearly $16,000 thanks to the roughly 16% annual compound growth rate in Canadian stocks from March 2009 to March 2014.

Now that’s an example using a relatively small sum of money. But I’ve had conversations with investors who want to put several hundred thousand dollars of their portfolio into GICs.

Some of these investors think we’re headed for many years of poor returns, so let’s assume they invest $200,000 in a five-year GIC paying 5.2% interest. After five years they’ll have about $257,700.

Maybe investment returns over the next five years won’t be as strong as they were from 2009 to 2014. But let’s make a not so unreasonable assumption that stocks return 10% annually between November 2022 to November 2027. That would turn your $200,000 into about $322,100.

I don’t have a crystal ball to see how this will all play out, but I do know that every bear market ends and that stocks and bonds will eventually reach new highs. It’s just a matter of when.

This Week’s Recap:

We had a wonderful time in Paris earlier this month. I’ve always heard mixed reviews about Paris – the negatives being that it was dirty and full of rude people. I didn’t find that at all. The city was clean and the people were lovely, despite my poor attempts at speaking French. 

Our apartment overlooked the Eiffel Tower, which made for great views but the neighbourhood was a bit too touristy for us. We wandered over to the 2nd arrondissement where we found some amazing vegan bakeries and restaurants. We’d definitely stay in that area next time.

I know I revealed in my anti-goals post that I did not want to ever go to Disney, but with eight days in Paris we decided to take a short train to spend a day at Disneyland Paris (for the kids!). It was fine. Lots of waiting in line, lots of overpriced souvenirs, but the kids had a blast in the Marvel and Star Wars areas (ok, Dad had fun there too).

We saw the Louvre, spent a fabulous day in Versailles, and even took the kids to a Michelin star restaurant for dinner. Out of all of our travels this year, Paris is definitely at or near the top of the list.

I managed to update and repost a reminder to fill out a T1213 form so you can crush your RRSP contributions next year.

And, the Canadian Financial Summit took place last week and I hope you got a chance to catch my session on retirement readiness planning.

Weekend Reading:

The biggest financial news story from this past week was the CBC Marketplace expose on real estate agents facilitating mortgage fraud for a fee. This practice of falsifying income through fake employment records, bank statements, and T4s helped unqualified would-be homebuyers get into the housing market.

Another big story is the fall out from a class action lawsuit against Visa and MasterCard, the result of which means businesses in Canada can add a surcharge to customers who choose to pay with a credit card.

This opinion piece on the credit card surcharge topic sums up a lot of my thoughts as well:

“The Canadian government needs to step in and cap interchange fees. With the cost of living already so high, it’s unreasonable to add an extra one to three per cent to our bills. This lack of consumer protection is massive negligence on the part of the Canadian government.”

Erica Alini writes, as interest rate hikes continue is it time to lock-in your variable rate mortgage? (subs)

PWL Capital’s Ben Felix says that investing in your own financial literacy might be one of the best investments that you can make:

Michael James on Money looks at instances of the inevitable masquerading as the unexpected.

Jason Heath addresses something I wrote about in the intro of this post – is now the time for long-term investors to abandon stocks – with a similar response.

Want to retire earlier and stay healthy? Andrew Hallam shares an investing strategy to do just that (tl;dr it’s VBAL, XBAL, or ZBAL).

I love these first-person retirement stories in the Globe and Mail. Here’s one who’s struggling with the new-found freedom that retirement brings:

“But who was I these days? No longer a professional and yet not ready to embrace the “retiree” label, either: I don’t golf. I don’t yearn to travel. I don’t have grandchildren. Maybe the classic retirement profile of family and leisure activities doesn’t fit everyone, but it sure didn’t fit me.”

Retirement can mean a loss of identity — how to bring happiness to your next act.

Most rich-looking people are just folks with high salaries who spend a lot. Discover how the fake rich and your work colleagues could be hurting your wealth.

Travel expert Barry Choi reports that Aeroplan is now freezing accounts due to travel hacking.

Finally, a great episode of the Freakonomics podcast on whether personal finance gurus are giving bad financial advice. Some economists apparently think so. 

Have a great weekend, everyone!