# When are GICs a good idea?



## purple.platypus (Dec 10, 2012)

See thread title.

Seriously, I can't think of a single scenario where a GIC would be my first choice, at least at current rates.


----------



## mrPPincer (Nov 21, 2011)

I used to keep most of my money in gics way back when rates were like 12%ish but right now rates have no place to go but up, so I can't think of a better place atm to keep cash/fixed income than a HISA. 
Bonds aren't paying better and there's risk involved unless you're holding them to term, and if you're locked into a GIC at a point in time when rates are rising you lose as well.

Seems to me HISAs are the place to keep the cash when interest rates are bottomed out or rising
Once rates have peaked or at least reached a more reasonable level, bonds or gics would then be preferable imho


----------



## brad (May 22, 2009)

See this thread: http://canadianmoneyforum.com/showt...RRSP-contribution-Any-thoughts-on-a-bond-fund

Also keep in mind that "a good idea" depends on one's risk tolerance and the size of their portfolio. There are some people on this forum who are 100% in GICs.


----------



## Guigz (Oct 28, 2010)

Does anybody have a table showing the spread between GIC yield and inflation over time? 

I suspect that even at 12%, GICs are a poor idea since inflation would be at or over this amount.

My theory is that it is generally a poor idea* to invest in GIC regardless of the rate of return *unless you can expect the rates to go down in the future*.



*if your idea of investing is growing your money. If, to you, investing means preserving capital (!=purchasing power), GICs are a great idea.


----------



## brad (May 22, 2009)

Yes, I hope nobody considers GICs "investment" vehicles. They're really a form of savings. Some people with very low risk tolerance are perfectly content with the idea that their GICs will lose purchasing power over time due to inflation; they prefer the certainty that they will lose a relatively predictable amount of buying power over the uncertainty that they might lose a significant portion of their capital if they invest in equities or bonds.


----------



## Guigz (Oct 28, 2010)

Ok, so I found an interesting study looking at GICs and taxable versus non taxable accounts:

http://www.google.ca/url?sa=t&rct=j...WLnJuhbBZo7weY3PwTgKQ&bvm=bv.1355534169,d.dmQ

They conclude that, GICs, in aggregate, can serve a purpose if kept in long maturities, in the long term if they are held in non taxable accounts. They also conclude that, when held in taxable accounts they are : "...a sure way to destroy long-term wealth". Not too rosy!:hopelessness:


----------



## brad (May 22, 2009)

Guigz said:


> They also conclude that, when held in taxable accounts they are : "...a sure way to destroy long-term wealth". Not too rosy!


This certainty is part of what makes them appeal to the risk-averse. Uncertainty is a key component of risk; if you have a certain outcome there is no risk, even if paradoxically this means you end up losing money. For the risk averse, the cost in terms of lost buying power is the price they are willing to pay for certainty. And there are people who've argued forcefully that some of the impacts of inflation on future buying power can be avoided through changes in purchasing habits (read "Your Money or Your Life" for example).

I'm not a big fan of GICs myself and they account for less than 1% of my portfolio right now; I'm just pointing out that some people have done just fine, by their standards, with GICs. If you have a really big nest egg and are interested in preserving most of your capital, and unconcerned about the impact of inflation and loss of buying power, GICs can be okay. Right now of course you can find HISAs with rates equivalent to those of 5-year GICs so I'm not really sure why one would want to buy a GIC today.


----------



## Guigz (Oct 28, 2010)

brad said:


> If you have a really big nest egg and are interested in preserving most of your capital, and unconcerned about the impact of inflation and loss of buying power, GICs can be okay.


This must be a very limited segment of the population. :biggrin:

I agree that very risk averse people might be perfectly fine with "only" preserving their capital. 

Older people that want to leave an inheritance spring to mind.

Either way, I am agreeing with you.


----------



## the-royal-mail (Dec 11, 2009)

Why are you opposed to GICs? The rates are similar to what you get in HISA and TFSA cash balance. Govt has been keeping interest rates low to pump up the RE market. I keep my cash in HISA and TFSA for flexibility but I know 1-2% is the going rate and am fine with that for my emergency savings.


----------



## stardancer (Apr 26, 2009)

One reason I have used GICs in the past was to lock in a set amount for a year because something specific was coming up. That way I didn't dip into and spend some/all of the $$. When you are raising a family, something always comes up and if I didn't lock the $$ away, they wouldn't be there to pay the bill.

Of course, that was cash management, not investing. And now the children are all grown up and my spending is not so impulsive.


----------



## underemployedactor (Oct 22, 2011)

I don't think that HISAs are a replacement for GICs for the simple fact that the HISA rate is not guaranteed whereas the GIC rate, however unpalatable it may be, is.


----------



## dubmac (Jan 9, 2011)

I purchased a GIC ladder - right now I have 4 rungs in the GIC ladder. There are some benefits. To learn more about GIC's - check out scomac's wisdom at the folllowing thread
http://canadianmoneyforum.com/showt...RRSP-contribution-Any-thoughts-on-a-bond-fund
He argues that GIC's earn more than XBB. Read some of his contributions here - he writes well and convincingly.
I take the interest earned on the GIC each year and top up dividend-producing stocks like TRP, banks, telecoms etc. They in turn, make money that is taxed more forgivingly.
GIC's aren't sexy - they are boring, reliable, and albeit not very prolific - they do play a role in my pf.
Having learned a thing er two from scomac - GIC's ROR is equal if not better than short term bonds and bond funds. Scomac suggests that inflation is your enemy - but with GIC's, when rates rise, so will your income from these interest-bearing certificates.


----------



## andrewf (Mar 1, 2010)

GICs are no worse and sometimes better than HISA or government bonds. GICs often yield more than gov't bonds, so any critique of GICs applies to bonds as well, except liquidity.


----------



## lonewolf (Jun 12, 2012)

It takes a lot of money to keep the markets well oiled. It would not surprise me if the average investor would have done better over thier live time if they bought GICs instead of playing the market. There is no way everyone @ the poker table comes out ahead the odds are best for the strongest player.


----------



## purple.platypus (Dec 10, 2012)

the-royal-mail said:


> Why are you opposed to GICs? The rates are similar to what you get in HISA and TFSA cash balance.


Seems to me you just answered your own question.


----------



## purple.platypus (Dec 10, 2012)

andrewf said:


> GICs are no worse and sometimes better than HISA or government bonds. GICs often yield more than gov't bonds, so any critique of GICs applies to bonds as well, except liquidity.


Okay, in case my above response doesn't make the point clearly enough, if your returns are below about 3% it doesn't make much difference, over the lifetime of the great majority of GICs with which I'm familiar, _what_ the exact number is. For example, looking at the highest rates offered by Outlook Financial, let's say you put $10,000 in a HISA with them and $10,000 in their best GIC, then forget those savings exist for five years. When you check them five years later, you'll have:
* HISA @ 1.95%: $11,013.77
* GIC @ 2.85%: $11,508.57
Not enough of a difference to really care much about (4.4% over five years - that's _total_, not annualized; neither, in my opinion, is likely to keep up with inflation anyway). And the real difference is likely to be smaller still, because the HISA's real final number will probably be larger, for two reasons - it compounds more frequently (monthly, not yearly) and they only lowered the HISA's rate to that level this week, it's been slightly higher for most of the lifetime of their HISA and likely will be again. (I know people have been saying this for a long time, but interest rates can't stay at these historical lows forever.)

But most likely, this is beside the point anyway. In a situation where you're prepared to settle for those returns (I don't deny the existence of such situations, or anything like that) it's obvious returns aren't your priority anyway - you want either liquidity or safety, or some combination of the two, with returns being a nice extra if you can get them. But those considerations should both push you toward the HISA, not the GIC - and the difference in returns, at least to me, is _way_ too small to push me back the other way.

I don't know much about bonds, but if these GICs are giving better rates than government bonds, then things are even worse than I thought vis a vis bonds.


----------



## OptsyEagle (Nov 29, 2009)

"When are GICs a good idea"

Answer: When you don't need the money. 

There is a considerable number of people in this world that have accumulated enough wealth for themselves and then some. Their top priority is simply not to lose it. We can argue whether a bond or some other guaranteed vehicle is better for this purpose, or not, but when you say that they are not a good idea, keep in mind that you only speak for yourself.


----------



## andrewf (Mar 1, 2010)

PP:

Usually the yield differential between GICs and HISA are larger. I take your point, but if you don't need liquidity, why leave the extra yield on the table? 4.4% might sound small on the scale of $10,000, but when you start adding zeroes, it starts to matter.

The better question is why hold a government bond fund over HISA or GICs?


----------



## Robillard (Apr 11, 2009)

Deposits and GICs can be considered to be almost as risk-less as government bonds, since the federal government owns the Canada Deposit Insurance Corporation. Technically, government bonds (particularly the ones issued by the federal government) represent a lower credit risk than GICs or other bank deposits, as government has the ability to raise money through tax, or by printing it. An insured bank deposit is an indirect claim on the credit of the government, whereas a bond or t-bill is a direct claim. This is why savings accounts and GICs generally yield more than comparable T-bills and short-term government bonds.

In my opinion, GICs' only use is as a short term investment, i.e. if you have a known cash need in the future that you are setting aside funds for now. And you would only hold GICs if the yields on high interest savings accounts (or their restrictive account "features") are not competitive. I set aside some money in short-term GICs every other month to set aside money for vacation. My bank's minimum balance requirements on high interest savings accounts make them less attractive than GICs under the circumstances. (Please don't just say I should find another bank; I know this. Also, I value the convenience of having most of my accounts under one roof.)


----------



## CanadianCapitalist (Mar 31, 2009)

GICs or Short-term bond funds may be worthwhile even for younger, long-term investors because fixed income can act as a ballast to a portfolio. If you start out with a target allocation, you can rebalance between asset classes when allocations stray from your target.


----------



## Koala (Jan 27, 2012)

Right now, I haven't seen any worthwhile. I have held them when rates were higher. Locking in a 5 year rate about 5 years ago probably would have put some people ahead  I had thought about doing so with my savings, but 5 years was just too long at that age. Scholarships only pay out for so long. I wasn't sure when I would get married or buy a house. Looking back now, it wouldn't have been a bad idea.


----------



## Karen (Jul 24, 2010)

GICs are probably not the best idea in these days of low interest, but they certainly had their place for me years ago. In fact, I suspect I'm one of the people Brad referred to earlier in this thread when he mentioned that several members of the forum kept all their money in GICs. I was divorced at age 40 after nearly twenty years of marriage to a mining-promotor-type on the old Vancouver Stock Exchange. He talked millions but never had ten cents to his name. I worked full-time but was unable to save anything because I had to spend my earnings to pay all the bills because everything my ex-husband made went straight back into supporting his stocks. Needless to say, that experience left me worrying about having no pension plan and no money saved for retirement at the time of my divorce, and it also left me very leery of the stock market. I started putting making maximum contributions to my RRSP in GICs; I was fortunate in that interest rates were quite high at the time and after a few years I had accumulated enough that my bank started giving a bonus on their standard interest rate.

My financial picture improved considerably over the years; I got a job with the federal government, which meant I had a pension plan; I remarried twice and was widowed twice, but both marriages were to men who shared my financial goals and we continued putting our money in GICs. Today, I've been retired for six years, I'm very comfortable financially, and I still have every dollar I own in GICs, except for an emergency fund of about $25,000 in a HISA. I'm well aware that I probably would be better off if I had made more an an effort to overcome my fear of investing in the stock market and learned more about real investing, rather than the VSE speculative market, but I didn't do that when I was younger and I see no point to it now. I have plenty of money to look after myself for the rest of my life and still leave some for my family, I never have a moment's worry about my money, and I don't really care what the interest rates are when I renew a GIC. I renewed one at 2.5% just last week, and that was okay, although naturally I look back fondly on the days when I was getting 14%!


----------



## doctrine (Sep 30, 2011)

You could do worse than holding rolling 5 year GICs, for example. As Karen noted above you can still get 2.5% for 5 years, that does beat inflation, and if you're rolling every 5 years then your inflation risk is reduced - GIC rates will pick up as inflation and interest rates increase. Certainly better than sticking your money under a mattress, and great if you're worried about a 50% drop in the stock market. In my opinion, they are a good choice for RESPs, especially with less than 10 years to go.


----------



## Cal (Jun 17, 2009)

Karen, I see no real reason to change now either. When I am retired perhaps I will put some money into GIC's as well. That is many years away.

It gives you peace of mind, and you sleep well at night.

At this point GIC's are not for me, but for someone in retirment, it is something to consider.


----------



## marina628 (Dec 14, 2010)

I have laddered GIC since late 80s and usually bought more each year.In fact 2011 was first year in 20 years I did not purchase any new GIC products.I made myself a spread sheet many years ago and my goal was to be able to purchase $1000 GIC every month for 5 years and keep rolling them over so one day I would have a renewal every month.I did that for much longer than 5 years and then in 2007 started combining them into new 5 year GIC.The last of the 7%+ GIC are coming up now and I am slowly taking about 50% of the value into Dividend stocks and keeping the rest in the 3 year 1.9% GIC.
I am overweight in financials because all my GIC redemption is split between BNS ,TD CM but last year I seen a return of 7.43% - 8.71% because I am purchasing every other month.


----------



## Toronto.gal (Jan 8, 2010)

GIC's definitely play an important role, and have a time and place for mainly preserving capital these days [at current low returns], but not for me, at least not yet!

As Guigz & others mentioned, it's *not* the best idea for *growing* one's money.

*The power of visuals* - how long it would take to double your returns at various rates [rule of 72]:










http://en.wikipedia.org/wiki/Rule_of_72


----------



## Ihatetaxes (May 5, 2010)

I keep 10% of our portfolio in 5 year GIC's in a 5 year ladder. Just fine with them as a secure portion of our portfolio.


----------



## james4beach (Nov 15, 2012)

purple.platypus said:


> See thread title.
> 
> Seriously, I can't think of a single scenario where a GIC would be my first choice, at least at current rates.


These days I usually keep money in cash savings accounts instead of GICs (for me, the GICs do not pay enough yield to compensate me for locking up my money versus keeping it in cash, especially with the uncertainty and very likely domestic recession coming within next 48 months).

So I put "cash/GICs" in the same bucket, in that they're both CDIC-insured and have similar rates. But I think cash/GICs always have a role to play and I'm always holding plenty of this variety (though these days, mostly cash).

Bonds, for instance, don't have a guaranteed return. Corp bonds can decline or even default. Government bonds can decline, unless you hold them to maturity.


----------



## pwm (Jan 19, 2012)

I don't consider GICs to be investments but rather a savings vehicle, which may be quite appropriate depending on your situation. I used them to save to pay off my mortgage many years ago but have not held any since then. That was 1984.


----------



## Sherlock (Apr 18, 2010)

I had GICs when I first started working because I had no investment knowledge and the lady at the bank recommended something called a "flexible GIC" and I trusted her. But now I don't see the point of locking my money away for 2.5% or whatever when low-risk dividend paying stocks pay much more, and at my age I'd be foolish to be afraid of a bit of market risk. If GICs ever start payign 14% again then I will probably consider them.


----------



## MrMatt (Dec 21, 2011)

GICs make sense when 
The effective rate is higher than that expected from other similar options.
You don't need the money (if it is locked it)

Personally I think a HISA is a better option in most cases right now.


----------

