Downsides of Interest- or Market-Linked GICs?

[Eclectic12]

If the market-linked GIC rate is comparable to a non-market-linked GIC rate, then I would go with the market-linked GIC because you are guaranteed not to lose on the rate and you might get some bonus points from the equity link.

[ ... ]

Hmmm ... I haven't read the details in a while but the last I did, the index-linked GIC was a "rear view mirror" type product. The only rate guaranteed at purchase was to return the capital (i.e. 0%).

So at purchase, I'm not sure a rate comparison is useful as it would 0% versus something positive. The one I bought around 1998 or so would have had a purchase rate comparison of 0% versus 1.5% but on payout, compound interest of 22% versus 1.5%. In hind sight, it worked out.

Then too, as others have pointed out, the cap on payouts has changed dramatically. When I asked at the time of purchase, the cap was 98% of the index difference whereas a similar one a year ago was had a cap of simple interest of 40%.

The cap is a reminder of the benefit of asking questions/understanding the product. My tenant bought a similar product without asking questions a month later. He expected the same return but was annoyed when he discovered his cap was simple interest at 10%.


Cheers

[lonewolf]

It takes a lot of money to keep the markets well oiled & for most if they want exposure to the market the GICs that are market linked is perhaps the best way because it will limit the losses. But those buying the regular GICs my bet would be with them making the most money over the long hall. I bought a few market linked in Nov 08 & when fear is @ its max it could be something that is a little more easy to step up to the plate & buy. One can be good @ hitting a baseball from one of those machines that throws basballs to a batter. Its another story trying to hit a home run bases loaded in the 9th with thousands of beer soaked fans yelling your a bum.

[Eclectic12]

Brad:

Part of the question is whether you want to stick to fixed income or are willing to increase the exposure to equities. At the end of the day, whether the index-linked investment is bank run or DIY - it is still increasing the equities exposure, albeit with a limit.

If you don't want the equities portion, then it's the GIC or interest-linked GIC option.


Cheers

[Eclectic12]

It takes a lot of money to keep the markets well oiled & for most if they want exposure to the market the GICs that are market linked is perhaps the best way because it will limit the losses. [...]

True ... but with the complicated formulas, hidden costs and low caps these days (ex. 10% today versus 98% in 1999) - if I were to do it again, I'd implement a DIY one. The low caps is the most obvious drawback, IMO as I'm not sure I'd want to take on that much risk where if it works in my favour, it is such a small payback.


Thought I already have the needed brokerage accounts and am comfortable with the orders needed.


Cheers

[brad]

Brad:

Part of the question is whether you want to stick to fixed income or are willing to increase the exposure to equities. At the end of the day, whether the index-linked investment is bank run or DIY - it is still increasing the equities exposure, albeit with a limit.Cheers

As I mentioned up above, 85% of my portfolio is already in equities so I'm gradually trying to build up the conservative end of my portfolio as I get older.

The interest-linked GIC might be an option although if I construct a ladder I guess it wouldn't be necessary.

[Eclectic12]

As I mentioned up above, 85% of my portfolio is already in equities so I'm gradually trying to build up the conservative end of my portfolio as I get older.

The interest-linked GIC might be an option although if I construct a ladder I guess it wouldn't be necessary.

I suppose the interest-linked GIC might be a bridge until the enough money has been gathered to make a ladder feasible.
I haven't looked into it, other than to understand the concept.


Cheers