GIC Strategy For All Times

Guaranteed investment certificates (GICs) are appropriate short term investments when you have a specific financial need at a specific time because they are can be set to mature just at the time that you know you’ll need the money and there is no risk of losing your money.  Even so, in and of themselves, GICs are not particularly good long-term investments as they offer very little return.  They may however, be a beneficial component in a long-term investment portfolio in that they are fully guaranteed and they help to diversify your portfolio. 

When buying GICs for the long term, the question becomes: “how long a term should it be invested for?”  First of all, in a normal interest rate environment, the longer you commit your money for, the higher the interest rate you’ll be paid.

If interest rates are higher than they have traditionally been, locking in for a longer term to get a higher interest rate may seem to make the most sense.  If interest rates are low when you’re ready to invest (as they are right now), you may decide to take a shorter term – say a one year GIC.  The problem with either strategy is that you don’t know what will happen with interest rates during the time it’s invested or where they’ll be at the time the GIC matures and needs to be reinvested.

If you plan to use GICs as a long-term, strategic allocation for a portion of your portfolio there is a strategy that will solve this problem.  It’s called “laddering” your GICs. 

The theory is this: If you invest ¹/₅ of your GIC funds in each of one, two, three, four and five year terms, regardless of what happens with interest rates, you won’t have all your money maturing at a time when interest rates have either reached the bottom or reached the top.  Every year, ¹/₅ of your money will mature and will be automatically re-invested into a five year term (which as mentioned earlier normally gives you the best rate).  After the fourth GIC matures, all of the money will be invested in five year GICs and ¹/₅ of the total will continue to mature each year.  This strategy will reduce the volatility of the interest rates earned on your GIC portfolio year to year.

The diagram below gives a visual illustration of the strategy:

GICs are not the best option for everyone but if your risk tolerance has been tested recently and you think GICs may have a place in your long term investment portfolio, this is a strategy that works.  We have access to GIC products from numerous financial institutions and we generally can get better rates for our clients than what the institutions post in their branches, so please contact our office for more information. 

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