# GIC ladder strategy ?



## kalie (Jun 19, 2021)

Recently retired at 65 and pondering strategy of how to structure a GIC ladder with $100,000 today. I have HISA with Oaken but their GIC rates are pretty good now. I am thinking 5 years is too long as rates may go up. I have other cash for liquidity to last for a few years in HISA with Laurentian Bank and Tangerine. My investments are mostly in VBAL and a conservative mutual fund so don’t expect to touch that for awhile. Thanks in advance for your suggestions.


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## Thal81 (Sep 5, 2017)

You could build a 3 year ladder as there is not much difference between 3 year and 5 year rates right now, but keep in mind that there could be benefits to locking a "low" rate for 5 years. Even though it looks like rates will go up some more, every time they raised rates in the last 20 years they swiftly fell back down within 1-2 years. People who locked money for longer terms when rates were not done rising ended up winning. I'm not saying that this will happen, but I'm saying it's pointless to try to time interest rates, they're a lot less predictable than they seem.


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## kalie (Jun 19, 2021)

Thal81 said:


> You could build a 3 year ladder as there is not much difference between 3 year and 5 year rates right now, but keep in mind that there could be benefits to locking a "low" rate for 5 years. Even though it looks like rates will go up some more, every time they raised rates in the last 20 years they swiftly fell back down within 1-2 years. People who locked money for longer terms when rates were not done rising ended up winning. I'm not saying that this will happen, but I'm saying it's pointless to try to time interest rates, they're a lot less predictable than they seem.


Thanks Thal81, I was thinking about 3 year or less ladder but you make a good point about 5 year term too. However at the 5 year mark i will also start collecting CPP and OAS so might drive income level higher than desired for tax purposes.


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## like_to_retire (Oct 9, 2016)

kalie said:


> pondering strategy of how to structure a GIC ladder with $100,000 today.


It takes 4 years to have a 5 year GIC ladder running on all cylinders, so you will pick up the new rates of the day (higher or lower) on each new GIC over that time period.

To build a new 5 year ladder you buy a 1,2,3,4,5 year GIC. After one year, you buy a new 5 year when the 1 year matures, and so on. In 4 years it will be fully functional. This allows you to take part in any increases over that time period.

ltr


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## kalie (Jun 19, 2021)

like_to_retire said:


> To build a new 5 year ladder you buy a 1,2,3,4,5 year GIC. After one year, you buy a new 5 year when the 1 year matures, and so on. In 4 years it will be fully functional. This allows you to take part in any increases over that time period.


Thanks for that. So would it be prudent to do equal tranches of $20,000 each for each year 1-5?


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## like_to_retire (Oct 9, 2016)

kalie said:


> Thanks for that. So would it be prudent to do equal tranches of $20,000 each for each year 1-5?


That's what I would do - yes.

ltr


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## GreatLaker (Mar 23, 2014)

Here are some good articles on fixed income ladders:
Guaranteed Investment Certificate - finiki, the Canadian financial wiki
Fixed income ladder - finiki, the Canadian financial wiki 

I am retired and don't have any workplace pensions. I keep enough in two 5-year GIC ladders so that the maturing amount plus CPP & OAS will cover my non-discretionary expenses. So I have two GICs mature every year, and I make sure that they are from different banks, in case one bank becomes insolvent and it may take a while for CDIC to pay out. I use my discount broker (TDDI) to purchase the GICs, because I don't want to have to manage money scattered over many different banks. It's a conservative strategy, but I don't think it is wise to go into a retirement that could be 30 years or longer with the expectation that the bull market of the last 12 years will continue forever.

Over the long-term, 5-year GIC ladders should give better returns than shorter ladders, but of course that will not always be true, especially when rates are rising. When rates are falling, longer ladders perform better, because it takes longer for lower rates to impact your returns. When rates are rising, shorter ladders perform better because the ladder starts so get higher rates sooner. I remember back around 2010, many investors were saying rates have to rise, so keep your fixed income short. And rates stayed low for another decade. So I don't try to guess where rates are going on something that is a fundamental part of my retirement investing strategy.


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## kalie (Jun 19, 2021)

Thanks GreatLaker. That sounds like a good strategy too. I am also with TDDI, but I already have account with Oaken and I don’t see that GICs at TDDI can match their rates. I am in Quebec so may be more limited than you.


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## AltaRed (Jun 8, 2009)

kalie said:


> Thanks GreatLaker. That sounds like a good strategy too. I am also with TDDI, but I already have account with Oaken and I don’t see that GICs at TDDI can match their rates. I am in Quebec so may be more limited than you.


It is fine to have GIC ladders at digital online banks for higher* rates but what do you do if you have $500k that you want to have in GIC ladders and don't have a spouse to double or triple up at Oaken? Accounts in at least 5 digital online banks to stay within $100k CDIC insurance?

* That is not entirely true right now. For whatever reason, one can get equivalent rates via at least some discount brokers as they can retail through online banks. Not sure what has driven the rate gap to almost zero and whether it will last for any length of time, but it is interesting none the less.


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## kalie (Jun 19, 2021)

AltaRed said:


> It is fine to have GIC ladders at digital online banks for higher* rates but what do you do if you have $500k that you want to have in GIC ladders and don't have a spouse to double or triple up at Oaken? Accounts in at least 5 digital online banks to stay within $100k CDIC insurance?


I know that at Oaken there are 2 entities I have (Home Bank and Home Trust) that are each 100,000 CDIC insured so at least 200,000 would be insured. I don’t have to worry about too much more unfortunately


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## TomB16 (Jun 8, 2014)

kalie said:


> Thanks for that. So would it be prudent to do equal tranches of $20,000 each for each year 1-5?


It sounds like you are in good shape but I will share my perspective so you folks can point and laugh. TDDI here also, so my options are lousy.

I use GICs as insurance against sequence of return risk. This is theory, as we are recently retired and have not tested this approach.

Our goal is to have three years worth of minimal spending cash idling, in case the market tanks and our companies stop distributing for a period of three years. That goal is accomplished with two GICs (1yr and 2 yr).

The money to handle a financial cataclysm tomorrow is sitting in TDB8150 making 0.45%. Also, we have a 1yr GIC at Laurentian Bank and a 2yr GIC at EQ Bank.

When we get within two months of a GIC maturity date, I will convert the TDB8150 into a 2 year GIC so we have three GICs for a couple of months. This move isn't much but it is a tiny rate optimization that minimizes our HISA exposure to 10 months, allowed by the fact we can always float a couple of months.

The point is, when the 2 yr GIC matures, it will drop into cash and provide 1 year of *austerity* spending money taking us to the three year mark so 2 GICs covers 3 years.

The bulk of our retirement portfolio is held in distributing companies which produce far, far better than any GIC. The GIC ladder is nothing more than insurance to provide austerity subsistence, should the market be invaded by Putin. As such, the numbers are as small as we feel we can manage with.

If the market tanks and our companies stop distributing for more than three years, I will be forced to sell into a down market. I feel that corner case is so extreme, it is highly unlikely to happen and survivable if it does.


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## gardner (Feb 13, 2014)

FWIW, I decided on 10-way ladders with GICs maturing every 6 months. I put the June ones in Home Trust and the October ones in Home Bank. Initially I set it up by putting half the money in 1,2,3,4,5 year GICs, then put the rest into a 6 month GIC and when the 6 months rolled around, started the other branch. Having a chunk coming up every 6 months is fine for me.


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## james4beach (Nov 15, 2012)

The standard 5 year GIC ladder may sound like a long maturity to people, but it actually has an average term of just 3 years. Once up and running, at any point in time, the portfolio's maturity is (1+2+3+4+5)/5 = 3 years

And 3 years is about as short as you want to get in fixed income. Those *are* short term bonds.

I would absolutely keep refilling it with 5 year GICs once established. This strategy is appropriate no matter which direction interest rates are moving. Sticking with the standard strategy will also simplify your life, as the rollover strategy is simple: just buy the highest yielding 5 year GIC.

My dad has been improvising and trying to time interest rates for years, picking and choosing different maturities. As a result he often hesitates to roll over amounts, has cash drag, and gaps in his ladder.


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## londoncalling (Sep 17, 2011)

I tried to play that game as well and the result was that the rungs became uneven and bumpy. As this ladder was tax sheltered, I was less restrictive and would let things slide a quarter this way or that. It takes some time to get things back to uniform and relatively equal rungs. I will note that I also tried to do this with rates near or at all time lows. I still question the importance of fixed income in my own portfolio. I have a feeling this will be tested with the pending rate hikes impact on my dividend growth portfolio. At a certain rate level, equities will fall as competition from other sources of yield are made available.


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## Covariance (Oct 20, 2020)

londoncalling said:


> At a certain rate level, equities will fall as competition from other sources of yield are made available.


I agree. The US Fed minutes released earlier this afternoon showed that when they start up QT (as early as May, June) they will pull $60Billion a month out of Treasuries and $35B a month out of agency MBS (with a possible 3 month ramp). Private money will flow in there and it has to come from somewhere.


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## TomB16 (Jun 8, 2014)

james4beach said:


> The standard 5 year GIC ladder may sound like a long maturity to people, but it actually has an average term of just 3 years. Once up and running, at any point in time, the portfolio's maturity is (1+2+3+4+5)/5 = 3 years


That's a 6 year ladder with 5 rungs. Also, I don't understand how average term is a relevant metric? Can you shine some light?

Eg - 3 year GIC ladder with $50k/yr:

$50K - HISA or pillow case buried under rhododendron.
$50K - 1 yr GIC
$50K - 2 yr GIC


The point being, you need the cash at the_ start_ of these periods to provide the necessary SoRR insurance.


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## AltaRed (Jun 8, 2009)

A 5 year GIC ladder has a duration of 3 years based on (1+2+3+4+5)/5 = 3 years and is always 3 because when the first GIC matures in one year, it is replaced by a commitment to a 5 year GIC. It does not matter if 6 months from now, what is left is (0.5+1.5+2.5+3.5+4.5)/5 = 2.5 years because the yield commitment was made at the time of investment. Duration (whether for a bond fund or GIC ladder) is always calculated from commitment date.


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## GreatLaker (Mar 23, 2014)

TomB16 said:


> Also, I don't understand how average term is a relevant metric? Can you shine some light?


Maturity enables comparing different fixed income securities or ladders or funds. For example XSB has a weighted average maturity of 3.04 years, very similar to a 5-year GIC ladder, so they should perform similarly except the GIC ladder should have a liquidity premium. XBB has a weighted average maturity of 10.3 years, so it should have higher return, but more volatility.




AltaRed said:


> A 5 year GIC ladder has a duration of 3 years based on (1+2+3+4+5)/5 = 3


To be a bit pedantic,   the average maturity is 3 years. The average duration would be somewhat less.

Duration is a measure of how long a bond must be held to guarantee that the bond's market value plus the coupon interest payments will be equal to the par value, i.e. the investor will not lose any capital. It is also a measure of volatility. If interest rates rise after the bond is issued the price will drop, then increase to the par value on the maturity date. Duration is the point where the interest payments will have offset the capital loss. The higher the interest rate, the shorter the duration, i.e. a 10 year bond with 5% interest will have shorter duration than a 10 year bond paying 3%.

XBB has a weighted average maturity of 10.3 years, vs. an effective duration of 7.5 years.

Similar to individual bonds, bond ladders and bond funds have a duration, which is an indication of how long you should hold them to not be at risk of losing capital.
Holding Your Bond Fund for the Duration


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## AltaRed (Jun 8, 2009)

I stand corrected as regards duration vs maturity. Not one of my finer moments earlier today.


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