Strategies for investing in GICs
Re-balancing portfolio asset classes
Financial advisors recommend an investment portfolio balanced with equities such as stocks or mutual funds, together with fixed income instruments including bonds and GICs. Generally speaking, equities are considered higher risk than fixed income as equity values fluctuate depending on market conditions. Fixed income securities, as their name implies, produce a stable return for the investor.
Because equities represent greater risk than fixed income instruments, the expectation is that they have a higher return potential. For this reason, the ratio between equities and fixed income within your portfolio depends on your growth targets and personal risk tolerance.
For instance, a 60 / 40 split of equities to fixed income is seen as fairly typical for a retirement portfolio for younger investors. Because they have a longer time to contribute, these investors can take on a higher degree of risk as they have time to recover should they have a few losing years.
For those investors nearing their planned retirement date, their investing objective moves from growth to capital preservation. In this case, increasing the fixed income portion of the portfolio is advisable.
Having said that, even if retirement is still some time off, you may wish to rebalance your portfolio to take advantage of, or to protect your portfolio from, an anticipated change in future market conditions. For example, if you feel that equities are due for a correction, you might consider moving more of your holdings into fixed income and GICs. The guaranteed nature of GICs ensures protection for your funds and you can select a term length that best suits your outlook.
Laddering multiple GICs
Laddering is a strategy designed to continuously reinvest maturing GICs back into new GICs. The strategy requires you to divide the funds you have earmarked for investment into several equal amounts which are then used to invest into GICs with increasing maturity dates ranging from short-term to long-term.
Then, as each GIC matures, the funds are rolled-over into additional GICs that expire after the remaining ones. In this way, you will continuously be reinvesting funds as GICs mature.
For example, in the following scenario you have $100,000 in which to invest. To ladder this amount across 5 years, divide the $100,000 by five. Then, acquire 5 GICs for $20,000 each with maturing dates of 1, 2, 3, 4, and 5 years.
As each GIC matures, reinvest in another 5-year GIC to continue the ladder.
The Bank of Canada overnight lending rate is the benchmark interest rate the banking system uses to determine retail interest rates.
Laddering is also a strategy to protect you against future interest rate changes. For instance, if the Bank of Canada cuts the benchmark overnight lending rate, the retail interest rate is also likely to fall. By spreading out the maturity dates, you ensure that your longer term GICs will continue to earn interest at the higher rate.
Conversely, should interest rates move higher, you can start to move your investments to higher paying GICs as the original GICs mature.
We hope you have found this series on GICs helpful. If you have any further questions or would like to learn more about Oaken Financial and our savings and investing solutions, we’re always here to help you. Here’s how you can get in touch with us for more information.
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