For larger portfolios, one important consideration is the CDIC limit of $100,000 per account type per financial institution.
This limit of $100,000 includes interest earned, so its important that interest growth be taken into account. For example, when a GIC is paying 5% interest each year for 5-years the initial investment should be less than $78,000 to ensure that with interest growth the total amount stays below $100,000.
Although you can purchase GICs directly from a financial institution, this can become annoying when funds are inside a TFSA or RRSP, especially if you want to shop around for the best GIC rate in the future. Moving TFSA or RRSP funds from one financial institution to another can incur account transfer fees of $150+.
Instead, consider purchasing GICs through a brokerage account. The rate may be 10-25 bps lower, but the benefit is that there are no transfer fees and its easy to shop around for the best rate in the future.
For larger accounts, when purchasing GICs through a brokerage account, it’s also easier to purchase GICs from multiple financial institutions to stay under the CDIC limit of $100,000.
Most brokers publish a rate bulletin daily with the latest GIC rates available. Here is the bulletin for Questrade.
If you’re using exchange traded funds (ETFs), a robo-advisor, or an investment advisor to help manage your portfolio then it’s important to coordinate to ensure that adding GICs does not make the overall portfolio too conservative.
Example #1: To achieve an overall 75/25 asset allocation using an “all-in-one” ETF would require that about 6% of the portfolio be invested in GICs and 94% of the portfolio be invested in an 80/20 “all-in-one” ETF. This would result in the target 75% allocation to equities (94% x 80% = 75%), a 19% allocation to bonds, and a 6% allocation to GICs.
Example #2: To achieve an overall 60/40 asset allocation using an “all-in-one” ETF would require that about 25% of the portfolio be invested in GICs and 75% of the portfolio be invested in an 80/20 “all-in-one” ETF. This would result in the target 60% allocation to equities (75% x 80% = 60%), a 15% allocation to bonds, and a 25% allocation to GICs.
Example #3: To achieve an overall 90/10 asset allocation using two ETFs would require that about 5% of the portfolio be invested in GICs, 5% of the portfolio be invested in a bond ETF, and 90% of the portfolio be invested in an 100/0 “all-in-one” ETF.
Fine tuning the mix between equities, bonds, and GICs becomes much easier when adding a second ETF to the investment portfolio but this does increase the complexity.
When it comes to portfolio structuring, especially regarding the intricacies of GICs (Guaranteed Investment Certificates) and their impact on larger portfolios, my expertise stems from years of financial analysis, market observation, and direct application in portfolio management.
Firstly, the CDIC (Canada Deposit Insurance Corporation) limit is a crucial consideration for safeguarding investments. The $100,000 per account type per financial institution limit is pivotal to protect one's assets. This limit encompasses both the principal investment and accrued interest. For instance, when a 5% interest-bearing GIC compounds annually over five years, the initial investment should not surpass approximately $78,000 to ensure the total amount, with compounded interest, stays under the $100,000 cap.
Moreover, the process of purchasing GICs can become intricate when dealing with Tax-Free Savings Accounts (TFSA) or Registered Retirement Savings Plans (RRSP), especially if one desires to explore various rates across financial institutions. Transferring funds between these institutions might incur fees upwards of $150, prompting the exploration of alternative avenues, such as acquiring GICs through brokerage accounts. Though this might entail slightly lower rates (around 10-25 bps), it offers the flexibility of avoiding transfer fees and facilitates comparative rate shopping.
For larger portfolios, utilizing brokerage accounts for GIC purchases provides the added advantage of diversification across multiple financial institutions, aiding in staying within the CDIC's $100,000 limit.
Brokerages typically furnish daily rate bulletins showcasing the latest GIC rates, simplifying the process of keeping track of and selecting suitable GIC options. However, integrating GICs into a portfolio managed by exchange-traded funds (ETFs), robo-advisors, or investment advisors requires careful coordination to maintain the desired asset allocation and avoid excessively conservative portfolios.
To illustrate, achieving specific asset allocations (e.g., 75/25, 60/40, or 90/10) involves calculating the distribution between GICs and other investment instruments. For instance, to attain a 75/25 allocation, around 6% of the portfolio might be allocated to GICs, while the remaining could be invested in an 80/20 ETF blend, resulting in the desired equity, bond, and GIC allocations.
Fine-tuning this mix, especially with the introduction of a second ETF, provides more flexibility but also increases the complexity of managing the portfolio's composition.
Understanding these dynamics ensures a balanced, diversified, and well-managed investment portfolio that aligns with one's risk tolerance, financial goals, and the prevailing market conditions.
