Guaranteed Investment Certificates (GICs): the Income Investment for the Young and Old

One of my best investing moves was nabbing a 5.15 per cent five-year guaranteed investment certificate (GIC) for my boys’ registered education savings plan. If you ever get a chance to get a virtually risk-free return like that, jump on it. I know I will. If there’s one thing I regret about that GIC purchase, it was that I didn’t buy more.

Seniors are usually considered to be the prime market for GICs, which banks, trust companies and credit unions sell to investors in order to raise money to lend out for mortgages, etc. GICs are backed by federal deposit insurance if issued by a bank or trust company, so they’re as close to risk free as you can get as long as you keep your investment below $100,000 per bank. Credit union GICs are covered by provincial deposit insurance plans that, in some cases, offer unlimited protection.

Safety for seniors – that’s the value proposition for GICs. So what was I, a man in his late 40s, doing with them? Just recognizing that GICs are very often a better choice than bonds for investors of all ages.

The one thing you give up with GICs is liquidity, which is a fancy investing term referring to the ease with which you can buy and sell an investment. There are cashable GICs, but you pay an interest rate penalty in exchange for that flexibility. Otherwise, GICs must be held to maturity to get the return you expect. The offsetting benefit you get from GICs is higher rates than you’ll typically receive from individual bonds – bond funds, too.

The GIC market is highly competitive. In order to pry people away from the big banks, small banks, trust companies and credit unions offer substantially higher rates. Thanks to deposit insurance, you can get those higher rates and still address any concerns you might have about bank failures. Here’s a quick comparison. In late September, big banks had posted five-year GIC rates of 1.55 per cent to 1.85 per cent. Alternative banks were offering between 2.5 per cent and 3.5 per cent. As for bonds, five-year Government of Canada bonds had yields of about 1.5 per cent.

Bond funds charge fees that look hefty by today’s low-interest rate standards, but that’s not the only drawback with them. Unlike GICs and individual bonds, they never mature. Instead, they float along over the years, rising in value when interest rates fall and losing value when rates rise. Bond funds can still deliver good long-term returns, but investors who like certainty might prefer GICs. That applies to investors of all ages.

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