Are GICs Still Worth It in 2024? A Guide to GIC Purchases

Guaranteed Investment Certificates (GICs) have long been a staple in Canadian investors’ portfolios, offering a secured way to grow savings with fixed interest rates.

What is a GIC? Typically issued by banks and trust companies, GICs guarantee the return of the original investment amount and pay the holder a pre-determined rate of interest, distinguishing them as one of the safest investments in Canada.

However, many Canadians are wondering whether or not GICs make sense for their own individual portfolio. For some, GICs will be a sound investment, while for others, they’ll be giving up returns in the long run.

Let’s dive into some situations where you may find GICs beneficial and where they’re best left alone.

When a GIC may make sense

Whether or not a GIC is worth it to you is going to come down to multiple factors.

When your time horizon is short

GICs offer safe, reliable, albeit lower returns than you’d see with an investment in the stock market. For this reason, they’re held mainly by those with specific plans with the money they’re investing in over the short term. For example, let’s say you want to buy a vehicle or fund a wedding with the money in a year or two.

In this case, you may seek out the best GIC rates for a 1-year or 2-year term. Your principle is guaranteed, and you can earn some interest along the way. If you invest that money in the stock market, it could be 50% higher by the time you have to withdraw or 50% lower; you never really know.

For this reason, most people will avoid investing money in the stock market that they need over the short term.

In contrast to this, however, if you have no plans to touch the money and your time horizon is long, investing in GICs may not be the best route for you unless you are a very risk-averse investor.

The stock market has historically proven to provide higher returns than fixed-income investments like GICs, and you may be costing yourself returns buying them with money you have no plans to touch for 5+ years.

Your risk tolerance

Although the stock market has historically provided higher returns over the long term, if it isn’t aligned with your current tolerance for risk, you’re bound to end up making mistakes that cost you money.

For this reason, lower-risk fixed-income investments like GICs can make sense.

You want to diversify your portfolio

Yes, investing in equities has been proven to provide higher returns than fixed-income investments like GICs, but that doesn’t mean that every investor is going to be comfortable investing in a pure stock portfolio.

For this reason, adding a GIC to your portfolio can make perfect sense. For many people, utilizing a GIC laddering strategy can help them improve the liquidity of the fixed-income portion of their portfolio, along with boosting returns over normal rates offered.

You are in the decumulation phase

For the majority of your life, you will be in what is known as the accumulation stage. You’ll be building up your assets by saving and investing money in order to have enough to retire and live off those assets one day.

Once you hit retirement, you are thought of as in the decumulation stage, where you will begin to spend and live off of those assets. For this reason, you aren’t necessarily trying to earn a return from your investments; you are more looking to have peace of mind and the safety of your capital.

In this situation, GICs can make perfect sense. They provide you with a guaranteed return and guarantee that the principal amount will be there on maturity.

When GICs may not make sense

GICs certainly aren’t for everyone. Although their high, guaranteed rates of return in this environment certainly look attractive, they can end up being a mistake for many if they don’t understand what they’re buying.

If your time horizon is long

GICs are perfect for short-term capital that you may need in a year or two. However, if you’re a young investor with a long time left to retirement, purchasing GICs over investing in riskier assets like stocks or ETFs will likely end up costing you money.

Historically, one can expect an 8% return, on average, from the stock market. Even in one of the most attractive rate environments we’ve witnessed in a while (2022/2023), GICs often had a maximum yield of 6%.

To give you an idea of how much money this could cost you, if you invest $50,000 and earn 6% annually for 20 years, you are left with $160,356. With an 8% return, you have $235,000.

This also makes the assumption that you will be able to get a 6% rate on every GIC you buy over the next 20 years, which is highly unlikely. So, the gap in returns is likely to widen.

If you need the money soon

There is one thing that GICs lack, and that is liquidity. Sure, you can buy cashable GICs that can allow you to take out the money “just in case,” but ultimately, the bank will take a large chunk of your potential returns for this privilege.

Instead, you should just plan to invest money that you know you will not need at any point in the near future. That way, you can guarantee the highest return from a GIC.

This means investing in your emergency fund is not optimal. Instead, for something like that, you could look to a HISA ETF, which provides similar returns with full liquidity.

Understanding GICs

What Is a GIC?

Guaranteed Investment Certificates (GICs) are investment options provided by banks and financial institutions. They offer a guaranteed return over a fixed period, known as the term.

The primary appeal of GICs is the safety they provide; as the name suggests, the return is guaranteed (except in the case of market-linked GICs, which we’ll talk about later), making them a favoured choice for risk-averse investors.

The term can be picked by the investor, making them great in terms of both long and short-term investments.

What is a good rate for a GIC?

Interest rates on GICs vary and are often influenced by overarching economic conditions. So, it is hard to say what a “good” rate is for a GIC. When interest rates are high, as they have been recently, GIC rates can become particularly attractive.

During times of high-interest rates, 5-6% may be considered a good rate, and during times of low-interest rates, you may struggle to find a rate above 2-3%.

Is a GIC a high-risk or low-risk investment?

GICs are considered a low-risk investment. They provide a safe avenue for investors to earn a fixed rate of interest without the volatility associated with stocks or mutual funds.

They are not without risk, however. Inflation and interest rate risk can result in your “real returns,” those being the returns after inflation has been factored in, being negative. In addition to this, rising interest rates can make the GIC you purchased less attractive than the ones offered, resulting in lower returns.

In addition to this, deposits over and above $100,000 could be lost in the event of a bank default, as CDIC coverage is only up to $100,000. Let’s go into that now.

Are GICs covered by CDIC?

A crucial aspect of GICs is their safety and insurance coverage. The Canadian Deposit Insurance Corporation (CDIC) typically insures GIC deposits up to CAD $100,000 per financial institution, provided the terms are five years or less.

This insurance ensures that investors’ capital is secure, even if the financial institution encounters difficulties.

It is important that you research the financial institution you’re buying a GIC with and make sure they are a member of the CDIC.

Can a GIC go down?

The value of a GIC does not go down. Many investors confuse GICs with something like a bond, which, although it gives you your principal back on maturity, can fluctuate wildly in value throughout the life of the bond.

GICs, once invested, are locked in, and the interest rate is fixed, so the original investment does not decrease in value. However, early withdrawal from certain types of GICs may result in losing the interest earned or facing penalties.

How do I choose a GIC?

There isn’t just a single standard Guaranteed Investment Certificate. In fact, banks have gotten creative and built a wide variety of options for investors to choose from. Let’s take a look; hopefully, you’ll understand which one suits your needs.

Redeemable vs. Non-Redeemable GICs

Redeemable GICs (also known as cashable GICs) can be cashed in before their maturity date without penalty. This flexibility is suitable for investors who might need access to their funds on short notice.

On the other hand, non-redeemable GICs typically offer higher interest rates in exchange for locking in the investment for the full term.

The one thing I always say is that the only one who benefits from a redeemable GIC is the bank. They are not optimal products for investors, as the bank will offer you a significantly lower interest rate when you have the option to redeem.

Try to buy GICs with capital you won’t need, and try to organize maturity dates that align with your financial goals so you can take advantage of the maximum rate of interest offered.

Registered vs. Non-Registered GICs

Registered GICs are held within registered accounts like Tax-Free Savings Accounts (TFSA), Registered Retirement Savings Plans (RRSP), or Registered Education Savings Plans (RESP). They offer tax advantages such as tax-deferred or tax-free growth.

Non-registered GICs, while not offering these tax benefits, can be held and invested in without contribution limits and may be suitable for short-term investment goals.

Tax-sheltered accounts are often best suited for long-term investments as the returns can compound without being impacted by investment taxes. However, depending on your specific goals, they could make sense to you.

Sometimes, banks will offer more attractive rates for either registered or non-registered GICs.

Market-Linked vs. Fixed Rate GICs

Market-linked GICs (also known as equity-linked GICs) have returns tied to the stock market’s performance or specific indices but protect the principal invested.

This option may appeal to those looking for potential higher returns without the risk of losing their initial investment. Conversely, fixed-rate GICs offer a guaranteed rate of return throughout the term, providing certainty and ease of planning for future finances.

As market volatility and economic uncertainty can influence an investor’s appetite for risk, GICs often become a subject of interest for those seeking stability in their investment returns.

Often, there is a cap on the returns you can make with a market-linked GIC, and these products often benefit the bank more than the investor.

An example would be a market-linked GIC that only participates in 50% of the market’s total returns or possibly one with a 10% total return cap. In this case, if the market goes up 20% over the duration, you’d only make 10% in both cases, with the bank pocketing the rest.

The main draw here is that you are still guaranteed the principle if the market falls 20%.

Benefits and Drawbacks of GICs

Pros of Investing in GICs

GICs offer a variety of benefits for investors looking to diversify their portfolios with minimal risk.

Principal is guaranteed
Returns are predictable
Interest can be paid our regularly or compounded
Early redemption is possible with a cashable or redeemable GIC
Great for money you need in the short to mid-term, as you can pick a term that works for you
You can get exposure to the markets via a market-linked GIC

Cons of investing in GICs

Investing in GICs does have some limitations.

Lack of liquidity, unless you deploy a laddering strategy or sacrifice interest for a redeemable product
Opportunity cost. Your returns will be less than investment vehicles like the stock market over the long term
Inflation risk. If the rate of inflation is higher than the rate of your GIC, your returns will actually be negative
Customizable products like market-linked or redeemable GICs typically benefit the bank the most

Maximizing Your GIC Investment

Practically every financial institution offers GICs. However, there are so many that picking one can be a bit overwhelming. Let’s go over a few strategies that can get you earning the most.

GIC Laddering strategy

Laddering involves purchasing multiple GICs with varying term lengths. As each GIC matures annually, it can be reinvested at a longer-term rate.

This strategy combats interest rate fluctuations and provides regular, accessible funds.

Choosing the right financial institution

When selecting a financial institution for a GIC investment, one should consider the offered rates and their status as a CDIC member.

I find that most online banks are able to offer more attractive rates of interest than traditional major banks. This is likely due to the fact that online banks have less overhead due to them being digital, which can allow them to operate at lower spreads.

However, many major institutions still offer attractive rates, which also leads me to my next point.

GIC rates are negotiable

Many institutions will allow you to negotiate an appropriate rate with them on a GIC. If you see a rate offered by another bank, take it to your current bank and ask them to match it. If they don’t, simply tell them, you’ll be purchasing the higher rate GIC with the other institution.

You’ll be amazed at how many banks have to negotiate on fixed-rate products like this. Don’t settle for weaker rates at your current bank simply for convenience.

Common questions with GICs

Is there anything better than a GIC?

GICs provide a no-risk alternative, ensuring the original investment is protected. I’m going to assume this is the main element you’re after. In this situation, there isn’t really anything else that offers the safety of a GIC outside of a treasury bill, which is a government-backed bond.

Is it better to buy bonds or GICs?

Choosing between bonds and GICs depends on one’s financial goals. Bonds may offer the potential for higher returns and liquidity, but GICs have the advantage of a fixed interest rate, not subject to market fluctuations, which can be preferable for those seeking certainty in their returns.

You can avoid market fluctuations on a bond by simply holding it to maturity. But that doesn’t change the fact that it can fluctuate in price, sometimes wildly, if interest rates change while you hold it.

Why would you choose to put your money in a GIC versus a savings account?

A GIC typically offers higher rates compared to a regular savings account, particularly for longer terms.

They can be an excellent choice for Canadians who do not need immediate access to their funds and wish to earn more interest on their savings.

However, if you need liquidity, you may want to look at something like a HISA ETF or simply store your money in a high-interest savings account.

Are short-term GICs worth it?

Short-term GICs can be worthwhile for those with an imminent savings goal or a short investment horizon. They provide a guaranteed return without the risks associated with volatile market investments.

Often, depending on the direction in which banks believe the Bank of Canada will go with rates, you could end up locking in a higher rate of interest over the short term than you would the long term.

Is GIC Safe in a Recession?

During a recession, GICs remain a safe investment as they provide a guaranteed return. They are often insured up to a certain limit, making them a sensible choice for the risk-averse, particularly when economic conditions are uncertain.