Going All in On GICs - Not as Crazy as it Sounds
Investment wisdom states that as we age our portfolio exposure to high risk products should drop and more of our money should be sheltered to protect us from market windfalls. In turn, the younger we are, the riskier our portfolio should be with a greater exposure to stocks and mutual funds and a smaller reliance on products such as GICs.
However, in today’s highly volatile markets – with all the uneasiness going on, its hard to be enthused with low-rate yields – but then again the added benefit of 100% principal protection is very appealing.
I find that the main reason we are all turned away by GICs is that we perceive that the low rates will not be enough to beat the current inflation rate and therefore we must opt to other avenues. However, if you structure your portfolio in a conservative – risky fashion you can still get a great rate beating inflation and growing your money.
If we look at the return of the Major Stock Indexes and Mutual Funds in North America and the return in the last 5 years;
Please Note that MER fees need to be accounted for mutual funds. Investing through a broker in the stock market will require paying commissions on a per trade basis. To calculate real returns – a inflation adjustment may be required.
For the GIC a conventional GIC was used.
If we look at the following tables, a GIC only based portfolio would have come out on top on 2 of the 5 scenarios and lost the other 3. Now on paper, this looks great but illustrates that when compared to the broader market, the GICs do match up in some scenarios. Based on the above facts – a rate of return of 40 – 50% on an investment seems great but what had to be done to achieve these rates. Not only are GICs hassle-free and a worry free method of investing – they do offer competitive rates and you’ll never lose a dime because your principal is protected.
In addition, achieving portfolio returns such as those noted above require 100% commitment to stocks and market exposure. In my personal experience what happens is that it becomes hard to own and hold onto stocks in poor market conditions. In can be weeks sometimes before the market picks up. Are you able to tolerate market windfalls, or news that temporarily makes stocks spiral up or down? All these questions should be addressed.
Now, I am not saying to avoid the market entirely. Even though the GIC rates are competitive to some degree, it is highly unlikely to achieve massive returns using them. Those big success stories you see are market related and seeing large returns will make any investor happy and proud.
It is easy to dismiss GICs especially at a young age but at the end of the day, GICs are something to consider. The idea of not having to worry about market windfalls and a hassle free life can appeal to almost anybody and getting competitive returns is just gravy on top.
Disclaimer: All of the above information is my own personal opinion. Rate of return quoted above have been taken from google finance. The 2 mutual funds listed were chosen due based on large holdings. Rates listed are an approximation, they may or may have not been adjusted for inflation, compounding or fees. Just because you focus only on GICs does not mean your rate of return will be higher. Please do your own research before buying any of the mentioned investment products.