The Shiny Attraction of GICs

In 1981 you could earn more than 15% in a 5-year GIC.  That’s the year we got married, and that meant less than nothing to me. (It meant a lot to me that my car loan was at 24%, but that’s another story).  From there, it was pretty much a downhill story for GICs, and they hit bottom in 2022 when the best five-year rate was barely above 1%.  

For many of the past 25 years, GICs have played the same role for Canadian investors.  They provide stability.  They are an investment that is universally understood in a sea of investments that are not.  People who use them generally cite “sleeping at night” as a key reason for owning them.

But, when the 5-year rate dropped below 3%, even die-hard GIC investors starting to say that sleeping at night was becoming a problem.  Most of them asked “what else is there that’s low risk?”  Some of them even made the move to bonds or balanced portfolios and abandoned the safety of GICs.  

Many of those who abandoned GICs in the last few years are unhappy about that decision.  2022 turned out to be the worst year for bonds, and the traditional balanced portfolio since the depression.  And GIC rates have ballooned rapidly, peaking around the 5% mark.   

Suddenly, GICs are in the spotlight – attracting the attention of not only former GIC investors, but everyone.   Should you be jumping on the GIC bandwagon?  That depends. 

If you are switching out of a portfolio of stocks and/or bonds, be careful.  Selling out of a portfolio that’s dropped in value to jump into a guarantee of even 5% is possibly giving away an upside on your portfolio that is considerably better than that.  (Investing 101 is buy low, sell high).  And you may compound this mistake if when your 5-year GIC matures in – uh – 5 years and you move back into a hot market that subsequently cools.  Market timing is tricky.  Best to avoid.

Got some cash that you are sure you won’t need for at least a year?  GICs could play a valuable role here.  Lock in whatever portion of that cash you can for whatever term you can.  Some people have cash in their investment portfolios which is there to deliver income for a number of years.  GICs laddered out to cover the cash flow needs could give that component of your portfolio a considerable lift. 

If you are seriously thinking about moving your investments into GICs “forever”, first test your plan.  Ask your planner to produce a scenario in which your returns lag inflation.  If you assume inflation is 3%, use a 2% return. If that plan looks good to you, then GICS could work.  If it doesn’t look good, then you need to keep working on the plan to determine what portion of your investments (if any) could be allocated to GICs and allow you to still meet long term goals.   

Should you wait for markets to rebound, and then switch to GICs?  That’s market timing and I’ve already commented on that.  If you do take that approach, be prepared to wait it out, it could take a while.  And by then, chances are high that GIC rates will be lower. 

And let’s not forget about taxes.  If the investment in a non-registered account (not your RRSP or TFSA), taxation is a big deal.  Interest from GICs on non-registered accounts is fully taxable as income.  Dividends on bonds, and capital gains on stocks are taxed much more favourably.  GICS may not look as good when comparing after tax-returns.

GICs are attractive at the moment.  And they may indeed deserve a position in your portfolio. But, understanding that GIC rates have lagged stock market returns by a wide margin historically may mean it’s time to put another important investment tool to work.  Patience.  

Bill Bell