It’s an important distinction, and one that advisors and investors should consider before opting out of the markets in favour of so-called safer investments—in this case, GICs and bonds. Here’s why:
Will the real rates of return for GICs grow wealth?
While the lure of a guaranteed return is particularly strong in volatile markets, it’s important to consider what you’re actually walking away with and at what cost.
Since 2000, GICs have only made money for investors in four years (2001, 2006, 2009, 2020), once tax and inflation have been factored in, according to a report from Mackenzie Investments. The other years, the real rate of return was negative.
At the time of writing this article, GIC rates were at their highest levels in years. Tangerine was offering a one-year GIC at 4.7%. Inflation was sitting at 7%. The real rate of return is -2.3%. With these numbers, investors are not growing their wealth.
There is also an opportunity cost to investing in GICs: You cannot always cash out when you want to. When buying a GIC, it is to be held to maturity. Flexibility and liquidity can be an issue. And while there are flexible GICs, the returns are much lower, in the 2% range, which is not high enough in my view.
Why bonds may be better than GICs
Like GIC rates, bond yields are better than they’ve been in years. In the U.S., two-year government Treasury bonds hit 4.266% in September—a 15-year high. Ten-year Treasury bonds hit 3.829%—an 11-year high. In some cases, government and corporate bonds are paying more than double compared to the start of 2022.
In this regard, bonds may be a viable option for money you want to park. That said, this is still well below the inflation rate and will not grow your portfolio over time. But the reason I prefer bonds to GICs is because bonds have flexibility and liquidity.
If the financial markets turn—and, as we’ve seen in the past, they can change very quickly—then you might be able to take your money out of bonds and possibly move it back into stocks. You may lose a bit on the principal, but you’re out, and you can invest in Microsoft or Apple or TD Bank, for example, and reap the rewards of a market rebound. If you’re invested in GICs, however, you would be locked in and have to wait until they mature.
Allan Small
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