How to get the most out of GICs
GICs provide a great low-risk opportunity with a guaranteed return on your investment.
Investing can be one of the best ways to supercharge your savings and plan for your future — but at the end of the day, it's also a game of managing risk. Depending on your risk tolerance, you may want to have more aggressive investments that garner a higher return, or you can help balance out your portfolio by having lower risk, tried and true investments that can produce a lower return. So what's the solution to offer security and stability? A great low-risk addition to your portfolio are GICs.
What is a GIC?
Guaranteed Investment Certificates (aka GICs) are a specific type of deposit given to a financial institution for a specific period of time (often called a term). In exchange for lending the financial institution money for a set period of time, you'll be guaranteed to get your deposit in full as well as interest earned, once you hit your maturity date at the end of the term.
What are the benefits of GIC investing?
As an investment vehicle, GICs have a number of benefits that can help investors of all types. GIC benefits include:
It's a low-risk investment, with a guaranteed return on the amount you invested
It's a good option for short, medium and long term goals
You can create a laddering strategy — where you space out the maturity dates on your GICs at different intervals — to maximize your returns and avoid the risk of changing interest rates
There are flexible terms from several months to several years
It can help you balance out your portfolio and reduce overall risk. Even if you are a more aggressive investor, there can be a place for GICs inside your investment portfolio.
Market-linked options are available for those looking for security with a higher return potential
These numerous benefits make GICs an attractive option for investors looking to boost their fixed-income assets in their portfolio, and reduce their risk profile.
Compared to bonds, GICs are much less volatile — which is exactly what you want when you are needing to use your money in the near future, whether for retirement or a major purchase, such as a home. Just ensure the Term of the GIC is aligned to the time horizon for when you will need the money.
And here's some good news: when GICs are held in a tax-sheltered account like an RRSP, you don't need to report your interest income.
GICs can be the bedrock of any solid investment portfolio. Because your principal investment is “guaranteed" — hence the name — you can rest easy knowing that no matter what happens in the market, your GICs will be holding strong.
Myths about GICs
GIC investing can often be seen as something for new or conservative investors. In reality GICs can be good for just about anyone. The guaranteed returns can help offset your higher-risk investments and be a great option for the fixed-income part of your asset allocation.
Also, GICs aren't just a good fit for older investors who may have less risk-tolerance. It can also be a good investment vehicle for younger investors looking to save for their next vacation or a down payment on a house. You can use GIC terms to your advantage, while saving for your goals.
Some investors may think they shouldn't even bother with GICs due to the lower interest rates. While it's true that GICs may not offer the same rewards as stocks and bonds, they also don't come with the same level of risk. Smart investors can utilize GIC benefits to their advantage and get consistent and stable returns.
How can you make the most of your GIC investment?
One way that you can make the most out of GICs is through laddering. Laddering is a technique where you divvy up your investment and spread it out through various GICs at different maturity dates.
So for example, you might have a one-year GIC, a 2-year GIC and a 5-year GIC. As your GICs mature and you have access to that money, you can reinvest that into a new GIC.
Because longer term GICs have higher interest rates, this strategy can help you maximize your returns and minimize risk. Staggering your GIC investments through laddering also allows you to access cash if you need it with the shorter-term GICs, while taking advantage of the higher rates offered by the longer-term GICs. You can check out the BMO RateOptimizer® Plus GIC for a great GIC that has a built-in laddering strategy.
You can also invest in market-linked GICs to complement your traditional GICs or mutual fund investments. Market-linked GICs are similar to traditional GICs in that your initial investment is guaranteed. Where it varies is in the interest you may earn, which is tied to the equity markets.
So there is more risk with market-linked GICs, but it can also get you a bigger return. Having traditional GICs and market-linked GICs in your portfolio is a win-win — though GIC rates can change, you have the safety of a guarantee on your principal investment and the possibility to earn even more in interest.
The bottom line
GIC investing can be a great way to minimize risk in your portfolio and provide a consistent return. Though GICs may not be as sexy as other investment vehicles, they can be used to your advantage through laddering and diversifying between traditional and market-linked GICs. Think of GICs as your best friend — they're reliable and will always be there when you need them.
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