Weekend Reading: The Trouble With GICs Edition

Weekend Reading_ The Trouble With GICs Edition-1

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!

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  1. Mark on October 22, 2022 at 5:54 pm

    While interest rates are up, they are still modest in the long term horizon. Only when rates reach truly high levels can you feel secure in locking in for a 5 year term. Back in my university days in the early’80s I had a great summer job that left me with a sizeable surplus for the coming year. I put the extra into a Canada Savings Bond paying 20.5% interest! Not much risk in that situation.

    Paris – certainly should be on every list, though I enjoy travelling around the French country side and small towns better.

  2. Betty Therriault on October 22, 2022 at 8:43 pm

    Surprised to see the Nina Cloak advertisement on your sight. Last month I received an order withshoddy goods and although I was promised I cold return at no cost., I was not able to find a return address. Short answer itis now in Visa’a hands as fraud!

    • Robb Engen on October 23, 2022 at 7:25 am

      Hi Betty, it’s called display advertising and what the readers see depends on their own search history and online behaviour (I don’t see an ad for the item you described, but it makes sense that you did if you had already searched for it or interacted with the company website before). I can restrict certain types of ads (gambling, get rich quick schemes, etc) but I have no control otherwise.

      • Betty Therriault on October 23, 2022 at 5:32 pm

        Thank you for youir prompt reply. Robb
        You learn some thing everyday! However I am not sure I agree with you about display advertising. If YOU can’t monitor it I think you could be sending your readers on a bad trip (Ha Ha) I do pay any attention to your adds however this one appeared smack in the middle of your article thus my attn was drawn to it. BAAD
        Regards Betty

  3. DH on October 23, 2022 at 5:48 am

    From 2000 to 2010 the s p 500 had virtually no gain. This could also happen for the next 10 years. In which case a 5% GIC would look pretty good.

    • Robb Engen on October 23, 2022 at 7:20 am

      Hi DH, I’d say that’s an argument for global diversification:

      During the 10 years ending in 2011, U.S. stocks (measured by the S&P 500 in Canadian dollars) delivered negative returns, while developed markets in Europe, Asia and Australia (measured by the MSCI EAFE index) were just barely positive. Meanwhile, Canadian stocks delivered more than 7% annually.

      • DH on October 24, 2022 at 7:53 am

        Totally agree with global diversification. However when doing go forward analysis, sensitivity analysis should be done over a range of possible returns, based on available historical information for the investments you have, for the time period you plan on holding the investments.

  4. Robert C on October 23, 2022 at 6:55 am

    Your 7500 investment mistake was to lock into a 5 year term. By laddering it over 6 12 and 18 months you would have the flexibility of reinvesting a portion in a more favourable investment. Lumping your investment under the umbrella of a tax free account would be a better plan.

    • Robb Engen on October 23, 2022 at 7:22 am

      Hi Robert, yes that was a mistake and one of the points I was trying to make. 5 years is a long time to lock up your capital – especially if that capital is typically invested.

  5. Bruce W on October 24, 2022 at 9:56 am

    The ability to take risk will always be countered by the willingness to take risk. As a retiree in my 80s I am less willing than I was in my working years. As a result, I see no reason to diss on 5% GICs at the present time.

    • Robb Engen on October 24, 2022 at 10:02 am

      Hi Bruce, you’re 100% correct. GICs have their place and can absolutely make up part of an overall investment or retirement income strategy. There’s certainly a segment of retirees who are very pleased to finally see some yield on their savings.

  6. Barb on October 25, 2022 at 2:25 pm

    Welcome back Robb. Timely article. I was thinking of putting some of my “emergency money” into maybe laddared GIC. I’m in a 60/40 and I’m reading all kinds of things about how it hasn’t preformed like its historically data. Nothing is guaranteed, maybe this big increase that has happened after every bear market will surprise everyone and not materialize either.

    I enjoyed a number of presentations during the “Canadian Summit”, including yours. Thank you. “Fred V” made a very compelling presentation to consider Annuities as part of the 40% but guaranteed more so than bonds with less risk (other than future returns increasing elsewhere) and eliminating the ” living too long risk.” he sad that with interest rates increasing annuities may appeal to some. There was also a presentation on annuities by an insurance company and the various steps and what to consider. Barb

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