# GIC.........the good old days



## sags (May 15, 2010)

There was a time, when savers were considered worthy of receiving something for their diligence. Those who spent money paid for their pleasure.

Unlike today, where savers are punished and debtors are catered to.

I copied this from a comment on Garth Turner's Greater Fool blog..............

Interesting numbers.....................

_My friend in 1995 bought a small fixer upper and he saved net *$50,000*. 

He had an account at Midland Walwyn in 1995 but now it’s CIBC Wood Gundy and his investment adviser told him to buy Canadian 30 year strip bond maturing in 2025 because government bond yields reached their peak. He told me it was the best move he did investing $50,000 in his RRSP at 9.13%. The maturity value is *$687,534.76* in 12 years from now.

He had no more RRSP room but invested the *$20,000 refund *in his wife’s name since she little income. The maturity date is 2020 and the bond yield is 8.89%. In 7 years the maturity value is *$168,162.80.* _

Now THAT............is how a lot of people used to save for retirement, without risk, through GICs, until the whole world got turned upside down and savers were punished and debtors coddled.

My mom and dad got even higher interest on CSBs for many years.


----------



## cedebe (Feb 1, 2012)

I remember being in late teens/early 20s (late 80s) and buying a GIC from Sun Life (I think). I could only afford $1000 at that time and it was only for 1 year, but the interest rate was 8.25%. I'd kill for rates like that now. Hell, I'd do a jig for 5%...


----------



## sags (May 15, 2010)

Back when I started working...........there was one older guy who used to sit at his bench and read the one page of stock quotes. He was "in the stock markets" everyone said.........and they thought it a bit eccentric.

I got to know the man, and he was basing his stock buying on lists of stock prices from the day before. That's it. No internet, no business channels, no analysts, no nothing else.

As I remember he was buying some good old companies...........so I imagine he did quite well, despite what we would consider investing with a complete lack of information today.

Everyone else was taking CSB automatic withdrawals from their pay.............."for their retirement".


----------



## sags (May 15, 2010)

cedebe said:


> I remember being in late teens/early 20s (late 80s) and buying a GIC from Sun Life (I think). I could only afford $1000 at that time and it was only for 1 year, but the interest rate was 8.25%. I'd kill for rates like that now. Hell, I'd do a jig for 5%...


If Sun Life (or other companies) had 30 year GICs............would they still be stuck paying out those interest rates today?

I seem to recall that one of the big insurers was trying to buy out high interest, long term annuity and GIC holders, with little success.


----------



## james4beach (Nov 15, 2012)

Sigh. I remember the days of at least 5% interest. And bond yields easily 6% and higher.

And this is why many of us will never be able to retire now. Virtually zero interest rates, and zero (or negative) real rates of return. Thanks, Bank of Canada! You really screwed us savers.


----------



## uptoolate (Oct 9, 2011)

Sounds like a good investment. Except that you needed to have the 50K on hand 30 years before you needed it. If you invested the same money in an S&P500 index fund, you would have had a return of about 8.4% net of fees. Not as good but not too bad considering two nasty downturns in the period.


----------



## andrewf (Mar 1, 2010)

I thought GICs had to mature in 5 years or less to be eligible for CDIC insurance. Anything longer term and you were essentially buying a corp bond.


----------



## Nemo2 (Mar 1, 2012)

sags said:


> There was a time, when savers were considered worthy of receiving something for their diligence.


In early 1989, after returning from Saudi, we were receiving 11.75% on GICs...but this was due to inflation/monetary policy at the time, rather than any 'concern' for savers...we just happened to be on the upside of the equation.


----------



## brad (May 22, 2009)

Nemo's point is important. I remember back in the early 80s when a 5-year CD was returning 10%. But the inflation rate was higher than that, so you were losing money if you only got 10% interest. We're actually better off at today's rates. Interest rates have little meaning outside of the context of inflation: you have to consider the two together.


----------



## My Own Advisor (Sep 24, 2012)

Savers are no longer rewarded in this interest rate climate, even though it is the right thing to do. Sucks.


----------



## HaroldCrump (Jun 10, 2009)

When I was getting my first mortgage, I remember my dad telling me to get a fixed rate mortgage and never to get a variable rate mortage.

"Learn from my experience", he said, "interest rates went up from 11% to 18% within a couple of years and your mother and I sat there wondering just where the hell we are going to get an extra $1,000 a month from."
"Don't make the same mistake", he said.

My current mortgage is 2.15%. He shakes his head sitting on his rocking chair.


----------



## sags (May 15, 2010)

Add in all the "extra" costs we pay today, that our parents didn't have..............cellphones, internet, cable tv...........and this generation will have a much more difficult time coming up with that extra 1000.

I read somewhere to consider your paycheque and deduct any long term payment obligations from it.......and that is what you now actually earn.

Doing that today..........our paycheques don't look as good.


----------



## Eclectic12 (Oct 20, 2010)

sags said:


> ... My mom and dad got even higher interest on CSBs for many years.


The best for me was when I loaded up on CSB's the year the anticipated rate of 18% ended up being over what the rest of the market paid in the 1980's. :biggrin:


Cheers


----------



## jamesbe (May 8, 2010)

They were pushing CSB's at work this year and I just laughed. Signs up everywhere, buy your CSBs today with payroll deduction!

Why? Interest rates were below 2% ...


----------



## 6811 (Jan 1, 2013)

I used payroll deducted CSB's for years as a way of paying myself first. They're like a bank account where you can withdraw amounts anytime, transfering it directly to your bank or brokerage account (though it takes three days to complete the transfer). As soon as I would acquire enough to make it worthwhile (over $1K or so) I'd transfer it to my brokerage account and invest in something with a better return. Sure the interest isn't much, but it's something for a shorter term deposit with no risk; and it was convenient for me.


----------



## Koala (Jan 27, 2012)

sags said:


> Add in all the "extra" costs we pay today, that our parents didn't have..............cellphones, internet, cable tv...........and this generation will have a much more difficult time coming up with that extra 1000.


Although that *should* make it easier to come up with extra money if needed. It's easier to cut out cable or reduce a data plan than it is to reduce food or medical costs. Sadly, many would rather just rack up more debt though.


----------



## sags (May 15, 2010)

I think the "risk" of inflation is a little overstated, because inflation affects the "purchase power" of money........and retirees generally "purchase less".


----------



## warp (Sep 4, 2010)

In 1985 I had about 40K in my RRSP, and wasn"t as smart about these things as I am now, although I suppose we could all say that.
Anyway I was dealing with a new youngish broker, and I myself was youngish then too! 
He called me one day and said they had a "new" product called a zero coupon bond, or "strip bond".

It was a government of Canada bond, totally safe, maturing in 2007, and paying 12.25% interest compounded over 22 years . You invested $3,730.00 for the bond in 1985 , and it matures in 2007 at $ 50,000,00.
I knew there would be inflation over the years but thought it was a good idea, and so I told him to buy me 10 of these bonds for an investment of $37,300.00 that would mature after those 22 years at $500,000.00. I figured half a million dollars would still be a solid figure in 2007, after 22 years, even after inflation took it's toll.

This broker told me,,"no, you don't want to do that, don't invest all your money in one place, buy just one bond for $3,730.00"....... which , like a dummy, I did. Sure enough that 1 bond I bought did mature in 2007 for $50,000.00, which was great. However I have regretted listening to him , many , many , many times over the years, because that one decision I was talked out of , cost me a lot of money in my RRSP, as you can imagine.

Keep in mind that there was always also a "market" in these bonds all the time, which ment that you could sell it at any time, and with yields dropping and dropping, the value of the bonds went up every year, if you wanted to get out. I just held it to maturity.

I did wonder over the years why he would talk me out of it, and then it occurred to me that he was well trained. Brokers and "financial advisors", are always thinking about whats best for them, not neccessarily whats best for you. If I had of invested almost all the funds in my RRSP into these bonds, he would have made a commission ONCE. If he could convince me to leave my funds in my RRSP,,he probably figured out that he could make commissions over and over thru the years, by buying and selling stocks and funds and bonds , etc, etc.

Live and learn!.............that's why , theses days, I am strictly a do-it-myself investor!

These zero coupon bonds still exist, and there are ETF's that hold them I think. However with interest rates now so LOW, it would be foolish to buy now, and tie up money over many years at these low rates. Those days are, unfortunately, long gone, and the replies here about savers, and particularly seniors, who want a need a safe reasonable return are correct. 
Governments all over the world are keeping interest rates artificially low, because they are debt up to their eyeballs!
The USA would prob already be bankrupt if they had to pay higher rates on all their debt, and CANADA is not far nehind,
( as well as Ontario).


----------



## HaroldCrump (Jun 10, 2009)

Bingo, warp, very well said on all counts.

And yes, strip bonds is a huge market, primarily institutional.

$500K is indeed a tidy sum these days, by any standards.


----------



## 6811 (Jan 1, 2013)

warp said:


> Governments all over the world are keeping interest rates artificially low, because they are debt up to their eyeballs!
> The USA would prob already be bankrupt if they had to pay higher rates on all their debt, and CANADA is not far nehind,
> ( as well as Ontario).


Not to mention QC.


----------



## Hobotrader (Feb 10, 2013)

Central Banks to citizens: "Spend bitches! It's a celebration!'


----------



## james4beach (Nov 15, 2012)

Beware with strip bonds though, that if you hold them in a taxable account the tax accounting is very ugly. Because the strip bond doesn't actually pay anything to maturity, you have to calculate "notional interest" each year and pay tax on that virtual interest income. It's awkward.

No point in strip bonds that these low rates anyway.


----------



## warp (Sep 4, 2010)

james4beach said:


> Beware with strip bonds though, that if you hold them in a taxable account the tax accounting is very ugly. Because the strip bond doesn't actually pay anything to maturity, you have to calculate "notional interest" each year and pay tax on that virtual interest income. It's awkward.
> 
> No point in strip bonds that these low rates anyway.


Thats exactly right james......
the govt, ( CRA), expects you to pay tax even if you never actually received the interest payments in cash every year, so you'd have to find the money to pay the tax somewhere else.

It's actually a 2 edged sword, because if you held Strip bonds in a taxable account, and didn't include the nominal interest every year onto your income, as the CRA demands, you would probably have a huge amount of interest income to report in the year the strip bond matures, which would mean a huge tax bill as well, no doubt.

Maybe they are trying to "protect you"......or more probably, they want their sticky hands on the tax money NOW!

Anyway james is right,,,keep strips, if the interest rates ever go up in future years and they are worth buying again, in your REGISTERED accounts.


----------



## james4beach (Nov 15, 2012)

Thanks warp, good additional observations. Definitely keep strips in the sheltered (RSP or TFSA) accounts. Ideally, all fixed income (GIC, bonds) should be in sheltered accounts.


----------

