How to Use GICs in Your Investment Portfolio



A Guaranteed Investment Certificate, or GIC, is issued by a financial institution and offers a guaranteed rate of return for a specified term (from 90 days up to 5 years) plus the safe return of your initial investment, or principal, at maturity.

By “locking in” your money until the end of the term, you will typically earn a higher rate of interest on a GIC than you would in a high interest savings account. The longer the term of the GIC, the higher the interest rate. But GICs aren’t as liquid as a savings account, so they’re only appropriate if you know you won’t need the money during the term.

GICs in your Asset Mix

Most investment portfolios contain a mix of traditional asset classes such as cash, fixed income and equities. Fixed income investments are less risky or volatile and generally produce fixed returns in the form of interest income. Your principal is also guaranteed.

Equities, like stocks for example, are more volatile or riskier than fixed income: you may lose some or all of your initial investment. In exchange, equities have higher expected returns. Instead of paying a steady stream of interest, they offer opportunities for growth in the form of capital gains, and may also pay dividends.

If you hold GICs in your portfolio, they will either be considered cash or near cash if their term is under one year, or fixed income if their term is between one and five years. Generally, you won’t pay fees for buying or holding a GIC. The interest you earn on a GIC is normally taxable, unless it is held in a Tax Free Savings Account (TFSA). If held in a Retirement Savings Plan (RSP), tax will be deferred until the plan is collapsed at the end of the year you turn 71.

Building a GIC Ladder as Interest Rates Rise

Because interest rates were low for the last 10 years, GICs were not as popular as other investments. However, as interest rates go up, banks and credit unions can offer more competitive interest rates on GICs. By buying a collection of individual GICs with different terms, called a GIC ladder, you can take advantage of rising interest rates to increase your returns.

For example, to build a five-year GIC ladder, you would take the amount of your savings, say $50,000, divide into five equal amounts, and purchase five GICs as follows:

Term

Principal

Interest Rate

1 Year

$10,000

1.95%

2 Year

$10,000

2.20%

3 Year

$10,000

2.35%

4 Year

$10,000

2.50%

5 Year

$10,000

2.60%

 

With the proceeds of each maturing GIC, you buy a new 5 year GIC, and repeat the process each year. Because you'll have a GIC maturing every year, some of your money will become available each year if you need it.

By staggering the maturity dates, you can benefit from the higher interest rates associated with longer terms, and take advantage of rising interest rates when the GICs mature. For example, if rates continue to rise, you will get a higher rate on a new five-year GIC when it matures in one year, than the previous five-year rate of 2.60%. And the same will be true one year after that.

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