Advice for GIC Investors
Written by Jim Yih
When markets take a hit, money market funds become some of the top sellers in the mutual fund industry. Investors get nervous about markets and jumped to safe investments like money markets, bonds and GICs (Guaranteed Investment Certificates). For any investors considering GICs (otherwise know as term deposits) for this years investments, consider some of these thoughts:
1. Don’t give up on equities. While I understand the psychology of investing, I also understand the necessity of logic. Investors will move to GICs simply on emotion – fear that markets could keep falling and that you may eventually lose all of your money. Remember logic states that everything goes in cycle and what goes down eventually goes up. I am a big believer that markets will come back up and it is likely to happen sooner than later. Selling out of equities now means selling low and crystallizing losses. Buying GICs now means you are passing up one of the greatest buying opportunities of a lifetime. After all, aren’t we supposed to buy low, sell high?
3. Shop for the best rates. Far too often I see investors settling for the rates that their financial institution gives them. Big mistake. The banks posted rates are usually the lowest rates. In fact, if you survey rates, you will find that the difference between the highest rate and the lowest rate offered on any given day is usually over a full percent. Often, the banks posted rates are among the lowest rates offered. If you compound a 1 percent difference over time, it makes a huge difference. In fact, lets assume two brothers Tom and Grant invest in GICs for a 20-year period. Tom invests at the posted rate every renewal while Grant has taken the time to shop for the best rates every time. After 20 years, Grant will have 22% more money than Tom. That’s significant.
5. Barter for rates. Let’s say you walk into a bank or trust company to buy a GIC. The person across the desk gives you a list of rates from 1 year to 5 year. Chances are, they are not putting forth their best rate up front. In fact, if you ask for a better rate, you just might be surprise at how easy it is to get a quarter percent. Now, let’s take this a step further and assume that you did your homework first and you looked in the paper or on the Internet for competitive rates. Now when that person tells you their rates, you give them your list of the competition. Your chances of getting an even better rate improve dramatically. Not every financial institution will do this. Some will give you their best rates right up front. If not, consider going to the institution that gives you the best rate up front.Some institutions will also ask for other business from you like loans or other investment products. Don’t let yourself get cornered into bringing other assets on the table.
6. Use a deposit broker. Deposit brokers typically shop for the best rates so you do not have to do the shopping on your own. You will not need to barter because your broker does it for you. Deposit brokers will also have a better understanding of making sure your deposit is insured. So what does a deposit broker cost? In most cases, deposit brokers do not charge anything for their services. They get paid by commissions from the institutions they place the business with. If you want to ensure you get the best rate without the hassle of bartering or shopping, then consider using a deposit broker. For more information on deposit brokers, visit www.RDBA.ca.
7. Ladder your GICs.
8. Laddering your GICs has been a long time strategy. It typically allows you to get better rates. Laddering works like this: Say you have $50,000 to invest in a GIC. What you do is take the $50,000 and divide it into 5 equal parts of $10,000. Invest $10,000 for 1 year, $10,000 for 2 years, $10,000 for 3 years and so on, giving you a ladder effect. What you’ve done is ensured that you have some money coming due every year to keep some liquidity but also to reduce the risk of fluctuating interest rates. Once the GIC comes due, you automatically shop for the best 5-year rate to continue the ladder and ensure that one fifth of your money comes due each year. This strategy also eliminates the need to decide on the best length of time to invest. One last benefit of laddering is it gets you a better overall return. By investing for 5 years, you typically get the best rate because the five-year rate is usually better than a 4, 3, 2 and 1 year rate.
As much as I understand the merits of investing in the markets, there will always be a place for fixed income investing in everyone’s portfolio. If GICs make up your fixed income component, then be sure to consider these 5 simple tips.