What does the future hold for GICs? – November 2024
Interest rates are coming down. What does that mean for GICs?
Do you have money tucked away in Guaranteed Investment Certificates?
A lot of Canadian investors do, and for good reasons. Your principal is one hundred percent guaranteed, and your interest rate is locked in. On the surface, there is a lot to like about GICs.
“GICs can be suitable for investors that have a specific goal in mind for their money in the shorter term such as big item purchases, or cash flow needs,” says Godfrey Yu, a Wealth Planner and Relationship Manager with JCIC.
Looking at the trend in return rates over the past five years it is easy to see why some people have moved their money into GICs. Just last year, it was possible to lock your money up for a 6% return.
Rates can change dramatically over time
What is worrisome for today’s investor is that rates are dropping steadily, and every time the Bank of Canada lowers the prime rate, GIC rates come down even more.
“We had a period of higher interest rates when inflation was rising, but it is starting to come back down,” says Yu. “After tax consideration, GICs usually hardly beat inflation. Remember, the interest rate was rising because of high inflation: 6.8% in 2022 and 3.9% in 2023.”
There is also a tax implication. With GIC’s, you are giving up what would be unrealized capital gains in favour of current income. That income is subject to immediate and punitive taxes.
In an environment when interest rates are falling, other types of investments become more appealing. They key is to identify which sectors are poised to succeed in the new reality.
JCIC has been working to answer that question and the results so far have been good. In the past 12 months, our Balanced, Growth, Income, and Equity portfolios have all seen incredible rates of return, well above the market average.
So, what does that mean for people currently holding GICs? Well, it means that when they mature, we can provide options with the potential to deliver a higher rate of return, and thus stand a better chance of out-pacing inflation.
“Our balanced portfolio is actively managed and has cash components that allow us to be tactical: either parking money temporarily as part of a rebalancing strategy or to seize new opportunities. The fixed income component produces income and can be used to fund on-going expenses if structured correctly. This approach supports growth potential and also provides stability for the portfolio. The key is managing the volatility of the equity component of the portfolio that will provide the bulk of the growth over the long term,” according to Yu.
One of the biggest factors to consider is what your timeline is: Are you investing for next year? Or are you looking for growth over the next five years? The answer to that question will go a long way in determining what your best route is.
“I think any investment should be considered based on the individual's goals and time horizon rather than based on market conditions,” says Yu.
Fixed investments might not fit your timelines. Since GIC’s are often not liquid, you are forced to make a choice according to the bank’s calendar, not your own. Our suggestion is to have a plan for that situation before it occurs.
Talk to our advisors to understand how our solutions can help reduce tax obligations and increase the compounding effect of investment returns. Click the button below to have a conversation with Godfrey Yu or one of our other relationship managers about what path will work for your specific goals.
Upcoming dates to remember
Thursday, November 28th – American Thanksgiving
Friday, November 29th – Black Friday
Wednesday, December 25th – Christmas & First Night of Hanukkah
Thursday, December 26th – Boxing Day
Wednesday, January 1st - TFSA contributions can be made for 2025
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Although we obtain information contained in our newsletter from sources we believe to be reliable, we cannot guarantee its accuracy. The opinions expressed in the newsletter are those of JCIC Asset Management, its editors and contributors, and may change without notice. Any views or opinions expressed in the newsletter may not reflect those of the firm as a whole. The information in our newsletter may become outdated and we have no obligation to update it. The information in our newsletter is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. It is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor or a group of investors. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. We strongly advise you to discuss your investment options with your Relationship Manager prior to making any investments, including whether any investment is suitable for your specific needs.
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