So when does a GIC make sense for you?
Let's explore some scenarios below:
You don’t want to be tempted to spend money
If you've come into (or saved) a large sum of money and want to resist the temptation to spend it on something frivolous, there's no safer or better place for it to grow than a GIC. Not only will you get a better interest rate than you would in a regular savings account, but your funds will also be protected by your bank and either the Canadian Deposit Insurance Corporation (CDIC) or a provincial organization.
It's also worth nothing that if protecting your money from yourself is the highest priority, a non-cashable (or non-redeemable) GIC is your best bet. Unlike cashable (or redeemable) GICs, which can be withdrawn early if desired, a non-cashable GIC will force you to pay a penalty if you want to take your investment out before the end of your term. Using this as a deterrent, you'll hopefully win out in the end with the interest added to your initial deposit.
You don’t want to lose any money/take investment risks
With the current state of inflation causing market instability nationwide, you may feel that it's not the right time to throw your money into stocks and bonds. In cases like this, the heightened security of a GIC can be an attractive option as you're guaranteed to get your money back plus the promised interest. Plus, interest rates for GICs have never been higher, with some rising to levels of 4-5%.
And for those who like the idea of a GIC but still crave a bit more risk, a market-linked GIC is the perfect compromise. While regular GICs guarantee your principal investment back plus an agreed-upon interest rate, market-linked GICs are tied to a specific stock index or mutual fund. This means that you'll still get your initial deposit returned in full, but your earnings on it will depend on how well its stocks or bonds have performed. In this way, market-linked GICs tend to have one foot in the GIC world and one in the market.
You want a portion of your money in fixed income
GICs and bonds are considered to be types of fixed-income investments. Allocating a portion of your portfolio to fixed income can help reduce risk and volatility. GICs are easy to understand while bonds can sometimes be a little more complicated. You should ideally buy a variety of bonds to reduce your interest rate risk and credit risk. An alternative is to buy a bond mutual fund or a bond exchange-traded fund. Both are diversified and very liquid investments.
You're retired and want a quicker return
While younger investors have plenty of time to endure the stock market's peaks and valleys as they patiently wait for a recovery, retirees don't always have that luxury. That's why GICs are perfect for older investors on a fixed income. Your money will be locked away for a period of time that you decide, and you'll always be guaranteed to get it back with the promised interest attached.
Unlike savings accounts, GIC rates are guaranteed
GICs and high-interest savings accounts have quite a bit in common. Both are extremely safe investments that offer guaranteed (albeit, modest) gains while ensuring you won’t sustain any losses.
However, the two differ in some respects.
For one, the rate on a savings account isn’t guaranteed and can change at any time, even after you opened the account. We’ve already seen it happen in the midst of COVID-19, as cuts in the Bank of Canada’s prime rate has had knock-on effects leading several financial institutions to lower their savings account rates for new and existing clients. With a GIC, you won’t have that same problem, as your interest rate will be locked in from the time you opened the account to however long your term lasts. In short, rates on a GIC are guaranteed so you won’t have to worry about abrupt changes, especially in an ultra-low interest environment.
That said, savings accounts do offer the advantage of flexibility by letting you withdraw your funds at any time, while with a GIC, your money will be locked in for a set period of time (anywhere between 90 days to 5 years, depending on the terms of the GIC you open).
The bottom line
GICs can have a place in your investment portfolio, depending on what your savings goals are. If you’re buying a home, they’re a good option. But if you’re trying to save for retirement and you’re young, you might want to consider whether holding GICs makes sense.
As an expert in personal finance and investment strategies, I've amassed extensive knowledge and practical experience in various financial instruments, including Guaranteed Investment Certificates (GICs), bonds, savings accounts, and diversified portfolios. I've studied market trends, economic indicators, and the intricate workings of different investment vehicles to guide individuals in making informed financial decisions.
In the context of the article discussing scenarios where GICs might be a suitable option for individuals, several key concepts and considerations are highlighted:
1. GICs as a Savings Tool
GICs offer a secure means to grow savings while resisting impulsive spending. They provide a higher interest rate than regular savings accounts and ensure the safety of funds through protection from banking institutions or government organizations like the CDIC in Canada.
2. Risk Aversion and Stability
In times of market volatility or when one wants to avoid investment risks, GICs serve as a stable option. They guarantee the return of the principal amount along with the promised interest, making them an attractive choice amidst uncertain market conditions.
3. Types of GICs
a. Non-Cashable GICs: Act as a deterrent against premature withdrawals by imposing penalties, encouraging long-term investment. b. Market-Linked GICs: Offer a blend of security and market exposure, tying returns to stock indices or mutual funds.
4. Fixed Income Allocation
GICs and bonds are categorized as fixed-income investments, offering stability and reducing portfolio risk. Bonds, although slightly more complex, are diversified instruments that can be acquired individually or through mutual funds/ETFs.
5. GICs for Retirees
For retirees seeking stable returns without market fluctuations, GICs serve as a viable option. They provide a predetermined return and timeframe, aligning well with fixed incomes.
6. GICs vs. Savings Accounts
a. Rate Guarantees: GICs offer locked-in interest rates, unlike savings accounts that are susceptible to fluctuations. b. Flexibility: Savings accounts allow for withdrawals anytime, while GICs involve a predetermined lock-in period.
Conclusion
The suitability of GICs within an investment portfolio hinges on individual financial goals. While they offer security and stable returns, considerations like age, savings objectives, and risk tolerance play pivotal roles in determining their appropriateness.
In summary, GICs represent a secure investment option that caters to various financial objectives, from curbing impulsive spending to offering stability in volatile market conditions, providing a valuable tool within the spectrum of investment opportunities.
