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This is an important distinction for advisors and investors to consider before exiting the markets in favor of so-called safe haven assets – in this case, GICs and bonds. Here’s why:
Will the real returns for GICs increase wealth?
While the lure of a guaranteed return is particularly strong in volatile markets, it’s important to consider what you can actually get away with and at what price.
According to a Mackenzie Investments report, GICs have made money for investors in just four years (2001, 2006, 2009, 2020) since the year 2000, after accounting for taxes and inflation. In the other years, the real rate of return was negative.
At the time of writing, GIC rates were at their highest in years. Tangerine offered a one-year GIC at 4.7%. Inflation was 7%. The real return is -2.3%. Investors are not increasing their assets with these numbers.
There’s also an opportunity cost to investing in GICs: you can’t always cash out when you want. When purchasing a GIC, hold it until maturity. Flexibility and liquidity can be an issue. And while there are flexible GICs, the yields are much lower, in the 2% range, which I don’t think is high enough.
Why bonds perhaps better than GICs
Like GIC rates, bond yields are better than they have been in years. In the US, two-year Treasuries returned 4.266% in September – a 15-year high. 10-year government bonds hit 3.829% – an 11-year high. Government and corporate bonds are sometimes paying more than double what they were at the beginning of 2022.
In that regard, bonds can be a viable option for money you want to park. However, this is still well below the rate of inflation and will not grow your portfolio over time. But the reason I prefer bonds to GICs is that bonds are flexible and liquid.
When 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 put it back into stocks. You might lose some money, but you’re out, and you can invest in Microsoft, for example, or Apple, or TD Bank, and reap the rewards of a market recovery. However, if you are invested in GICs, you are tied up and have to wait for them to mature.