Guaranteed Investment Certificates (GIC) are a low risk investment were you lend banks, trust companies and credit unions money for a defined time frame and get a certain interest rate in return. This interest rate is based on the length of time you agree to lend the money and what the current interest rates are like at that time. While many of us with mortgages think of low interest rates as a good thing, when you’re investing in GICs you’ll be hoping for interest rates to rise up quickly.
The risks when investing in Guaranteed Investment Certificates
GICs have a guaranteed interest rate and the principal is insured by the CDIC. However, inflation rates and lack of preferential tax treatment are risks associated with Guaranteed Investment Certificates. Inflation rates can potentially be higher than the guarenteed interest rate of the GIC you invest in. This would actually mean you are losing money after adjusting for inflation. GICs are taxed at your marginal tax rate, so you may want to consider placing them in an RRSP, TFSA or RESP to shelter the interest you earn.
How to invest in Guaranteed Investment Certificates
Since GICs provide higher interest rates when locked in for a longer period of time, you may want to consider building a Guaranteed Investment Certificate ladder. To do this, you split your money available to invest into five equal portions and invest those amounts into 1, 2, 3, 4 and 5 year GICs. From that point, you are set to decide each year whether to reinvest your annual amount for another 5 years. If rates are good, you could continue reinvesting for 5 year terms. When rates are low, you may decide to move your annual amount to a different investment. By building a GIC ladder, you have the benefit of the long term high rates and the flexibility of access to a portion of your investment each year.
While not very attractive with the current interest rates available today, rates will eventually come back up to the pre-recession levels. Once interest rates have moved back into normal territory, you might decide that Guaranteed Investment Certificates would be a worthwhile addition to your portfolio leading into retirement.