GICs, or Guaranteed Investment Certificates, were once very popular. Essentially a GIC is a loan you make to a financial institution for a fixed rate of interest for a fixed period time. With interest rates currently very low the GIC seems to have fallen out of favour but let’s give it a second chance.
The G stands for guaranteed and even with low interest rates that guarantee can mean a lot. Your emergency fund (which everyone should have) should hold cash in a high interest savings account so its immediately available. If a cashable GIC (so immediately available) pays interest at a higher rate than the high interest savings account, then go for the GIC.
For medium term savings like saving for a trip, a car, a home renovation, where the time when you expect to use the funds is within 5 years then GICs make sense. The return is low but it is guaranteed. That’s what you want. You don’t want those funds invested in stocks to find they have declined in value just when you need the money. So have a GIC(s) that come due when you plan on using the funds.
For retirees consider your RRIFs or other funds you are living off of. If the funds you need for the next five years are invested in a GIC ladder (5 equal GICs each maturing in one of the next five years) then you have time to wait out stock market declines without having to sell when the market is down. If at the end of the first year the stock market has done OK then you cash out the GIC coming due to live on, and cash an equal amount out of stocks and invest those funds in a five year GIC (thus re-establishing your ladder). If at the end of the first year the stock market is down you use the GIC again but leave your stock investments alone and give them time to rebound. When they do rebound you again re-establish your GIC ladder by cashing out stocks and purchasing the GICs you need. Using this strategy, you can wait for up to five years of a stock market dip without having to sell your stocks. Hopefully this gives them enough time to recover. This will reduce your overall risk to stock market fluctuations.
So, should we still own lowly GICs? YES!
Disclaimer: This article is for informational purposes only. You should not infer any such information as legal, tax, investment, financial, or other advice. This information is general in nature and does not address the circumstances of any particular individual or entity.