GICs are 'enticing' but only for shorter terms, says money manager
GICs are 'enticing' but only for shorter terms, says money manager

GICs are 'enticing' but only for shorter terms, says money manager

Banking 30 January, 2023 12:32 PM

With return rates for Guaranteed Investment Certificates (GICs) now above five per cent and interest rates widely thought to have potentially peaked, some investors might be considering locking in those high returns.

But investors should consider the possible opportunity cost of having their money locked up for several years, which is why a short-term GIC might be a preferable option, according to wealth advisors.

"The current GIC environment is enticing for shorter terms," said Diana Orlic, portfolio manager and wealth advisor at Richardson Wealth's Orlic Harding Cooke Wealth Management Group.

"GICs are competitive in the one to two-year range and the yields start to drop past two years. Once you are past two years, you are no longer being rewarded for locking in longer term."

Orlic tells Yahoo Finance Canada it's still worth considering taking some volatility out of a portfolio if the investor's income needs can be met with a GIC yielding five per cent.

GICs have come back in vogue with investors as their return rates rise alongside the Bank of Canada's benchmark rate. Many GICs now offer attractive returns after languishing for years in the one or two per cent range when interest rates were ultra low.

The extreme safety of a GIC is an added bonus, particularly for risk-averse investors.

"Whether or not someone should consider locking in to a GIC really depends on their saving goals. This holds true whether the GIC is paying 2 per cent or 5 per cent," said Frank Gasper, wealth advisor and founder of CSR Wealth Management.

He says GICs are best used for short-term savings goals, such as a downpayment for a home, a once-in-a-lifetime vacation, or to protect a portion of retirement income from temporary market volatility.

However, the main risk is having your money locked in when the future path of interest rates is unknown. The Bank of Canada signalled on Wednesday that it will pause its aggressive tightening cycle to evaluate the impact on inflation and the broader economy. But if high inflation is more persistent than expected, more rate hikes would be on the table.

An investor will "look like a genius" if they lock in a five-year GIC at today's returns and interest rates go down to one per cent, Orlic says. On the contrary, they might feel frustrated if they lock in now and see the Bank of Canada continue to hike its benchmark rate.

The risk of not having access to your money

"Locking into a GIC today means risking the potential opportunity to enjoy higher market returns in future. This is why GICs are not usually ideal for long-term savings goals like retirement," Gasper said.

"That said, for some people, especially older folks, using a GIC laddering structure puts them at ease. Despite the fact that they may be missing out on potential growth, this strategy is best for them personally. It helps them sleep at night. This is why whether or not to invest in a GIC depends on the personal circumstances."

As markets continue to recover from their widespread declines through 2022, Orlic says it might be worth holding funds in a high-interest savings account rather than a GIC, since the money can be withdrawn at any time.

"This will allow you to pivot as the markets dictate to take advantage of any opportunities that could present themselves," she said.

After the bond market was ravaged last year, some fixed-income experts are eyeing a potential recovery if North American interest rates do indeed reverse course.

Depending on risk tolerance, Orlic also suggests investing in financial services stocks, energy and pipelines, or healthcare because of their history of healthy dividends.