GICs are 'tempting' but only for a shorter period, money manager says

GICs are ‘tempting’ but only for a shorter period, money manager says

GIC yields are once again attractive to investors, but at least one money manager says choosing a five-year GIC may not be the best choice.

With Guaranteed Investment Certificates (GIC) yields now above five percent and interest rates widely believed to have potentially peaked, some investors may be considering locking in those high yields.

However, investors should consider the potential opportunity cost of having their money locked up for several years, which is why a short-term GIC may be a better option, according to investment advisers.

“The current GIC environment is attractive for shorter maturities,” said Diana Orlic, portfolio manager and wealth advisor at Richardson Wealth’s Orlic Harding Cooke Wealth Management Group.

“GICs are competitive in the one- to two-year range, and yields start to decline after two years. Once you get past two years, you’re no longer rewarded for locking in for a longer time horizon.”

Orlic narrates Yahoo Finance Canada it is still worth considering removing some volatility from the portfolio if the investor’s income needs can be met with a five percent yielding GIC.

GICs are back in vogue among investors as their returns rise along with the Bank of Canada benchmark rate. Many GICs now offer attractive yields after years of languishing in the one or two percent range when interest rates were ultra-low.

The extreme safety of GICs is an added bonus, especially for risk-averse investors.

“Whether someone should consider locking in a GIC or not really depends on their savings goals. That’s true whether a GIC pays 2 percent or 5 percent,” said Frank Gasper, wealth advisor and founder of CSR Wealth Management.

He says GICs are best used for short-term savings goals, such as a down payment on a home, a once-in-a-lifetime vacation, or to protect a portion of retirement income from temporary market volatility.

However, the main risk is locking up your money when the future development of interest rates is unknown. The Bank of Canada signaled on Wednesday that it would pause its aggressive tightening cycle to assess the impact on inflation and the broader economy. However, if high inflation is more persistent than expected, further rate hikes would be on the table.

An investor will “look like a genius” if he locks in a five-year GIC at today’s yields and interest rates fall to one percent, Orlic says. Conversely, they might feel frustrated if they locked in now and saw the Bank of Canada continue to raise its benchmark rate.

Risk of not having access to your money

“Locking into a GIC today means risking the potential opportunity to enjoy higher market returns in the future. This is why GICs are typically not ideal for long-term savings goals such as retirement,” Gasper said.

“That said, for some people, especially older people, using a laddered GIC structure is comforting. Despite the fact that they may be missing out on potential growth, this strategy is personally best for them. It helps them sleep at night.” This is why whether or not to invest in GICs depends on personal circumstances.”

As markets continue to recover from their extensive declines through 2022, Orlic says it may pay to hold funds in a high-interest savings account rather than a GIC because the money can be withdrawn at any time.

“This allows you to pivot as the markets dictate to take advantage of any opportunities that might arise,” she said.

After the bond market was ravaged last year, some fixed income experts are eyeing a potential rebound if North American interest rates actually reverse course.

Depending on your risk tolerance, Orlic also suggests investing in financial services, energy and pipeline or healthcare stocks because of their history of healthy dividends.

Michelle Zadikian is a senior reporter for Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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