Guaranteed investment certificates are a safe and easy way to earn interest on your savings deposits. There is no fee or really any hassle get a GIC setup. They are readily available at any banking institution, who will typically run new promotional offers every 3-6 months. How they work is simple: they pay a guaranteed interest rate (on top of your original investment principal) upon maturity. GIC time periods can span from as little as 30 days, all the way up to 5 years. It doesn’t matter how well the bank does in profits for the fiscal year—you will get paid regardless. Because a guaranteed investment certificate is almost zero risk, you will not find GIC returns anywhere close to potential returns in the stock market.
A great strategy to utilize when investing into GIC’s is what is referred to as GIC laddering. The concept is simple: You divide your investment funds into normally equal portions and invest them into staggered maturity dates, whereby a portion of your investment will mature in the first year, another portion in the second year, and so on. The idea is to capture new investment opportunities as they arise because interest rates constantly change. An investor can then roll matured funds (principal and interest) into a new, typically higher GIC rate offering.
Opportunity Cost
There is an interest rate risk inherent in investing into this type of vehicle, which centers around opportunity cost (the loss of value one would incur if they engaged in one activity over an alternate activity with differing cost/benefits). The best GIC rates will be locked-in, meaning you would only be able to access them under a lengthy hardship process and be assessed a hefty penalty (usually a percentage invested). During this locked-in period, an investor runs the risk of missing out on rate hikes and having a lower return over the course of their investment period than they could find investing elsewhere. A locked-in GIC is referred to as a non-redeemable GIC. Redeemable GIC’s are also available but will carry a lower interest rate. Redeemable GIC’s are great if you expect to use your funds at some point.
Inflation Risk
Inflation risk should also be a consideration, because $100 today will be worth less by this time next year because of the changes in consumers’ purchasing power. If a GIC has a low enough return, in real terms you will be losing money by locking your funds over a period. Therefore, it is essential to keep an eye on the long-term interest rate forecast usually dictated by a central bank authority.
Contingency Planning
Another benefit to GIC laddering is having access to your funds on a more immediate basis. If you lock-in all your savings into one investment over a 5-year period, for example, a lot of circumstances may arise where you will have to access a portion or all your investment for an unforeseen cost. You always want to keep a sizeable portion of your savings liquid.
Great Addition to an Investment Portfolio
A balanced portfolio should always include GIC’s or other low-risk investments like treasury notes. They are a great way to hedge risk, ensuring that an investor is not overexposed to a downturn in the stock market. During my retail banking tenure, I found that the savviest savers and stock market investors had a great GIC strategy in place to keep maximizing the return on otherwise inactive savings funds.
