Guaranteed Investment Certificates are like the nice guys of the investment family. They are safe, steady and you can count on them when your other investments go south.
But when it comes to offering big returns, like nice guys, GICs often finish last.
In today’s historically low interest rate environment, more Canadians are shunning GICs as an investment. Canada’s GIC market has fallen from peak volumes in 2008, and after rising about five per cent annually since 2004, according to a report from Toronto-based consultancy Idea Associates.
The report says GICs were as valued at just under $900 billion in the first quarter of this year, down four per cent from 2008.
John Bennett, an independent financial services industry consultant, said the GIC market surged last fall when tanking markets sent investors scrambling for safety.
But as interest rates started dropping off to spur consumer spending, investors turned their backs on GICs.
“I think the sense of fear has subsided,” Bennett said. “But that doesn’t mean they’ve gone back into equities.”
In fact, Scotiabank released a report recently showing Canadian households are sitting on up to $1 trillion of cash and near-cash holdings, earning almost no interest.
GICs offer a guaranteed rate of return over a fixed period of time. However, because they are low risk, the return is often lower than other investments such as stocks, mutual funds or income trusts.
While GIC rates are all over the map, depending on the type of investment you buy, a standard, non-redeemable, five-year GIC today offers a return of around two per cent. That is less than half of the return an investor could have received a year ago.
Accountant and author David Trahair said while GICs rate are now at their lowest levels, ever, the good news is that they can only rise from here.
What’s more, Trahair said investing in GICs at a low rate is safer than risking losing money in stocks.
“A lot of people are interested in getting to safety after losing 30 per cent or more of what they had (in the recent stock market crash),” said Trahair, who recently released the book Enough Bull – How to Retire Well Without the Stock Market, Mutual Funds, or Even an Investment Adviser.
He also likes GICs because they are simple and easy to understand, unlike some other investments that have caught investors off guard in recent years.
For instance, income trusts were thought to be a solid investment with steady distributions and low tax rates. However, holders were stung in 2006 when Ottawa said it would start taxing trusts like corporations beginning in 2011.
There is also the asset-backed commercial paper investment, which many people bought not understanding what they were getting.