Most Canadians are familiar with the term GIC – Guaranteed Investment Certificate. For those that are not, a GIC is a type of fixed-income investment provided by financial institutions. Typically offered in specific terms (1 – 5 years), a GIC guarantees interest payable and the return of principle at the end of the term.
The Good – In times of market uncertainty and volatility, GIC owners can rest assured that the principle of their investment is protected. There is no concern that their initial investment amount will decrease in amount.
The Bad – Depending on the health of the economy, the interest rate environment may not be very attractive. If interest rates are low, then your investment will not earn a high rate of return.
The Ugly – The Consumer Price Index measures changes in the price level of a market basket of consumer goods and services purchased by households. This index is widely accepted as the measurement of inflation for Canada.
Why is this important? Simply put, due to inflation, the value of $1 today, will be less or will purchase less goods and services, in the future.
The average inflation rate over the last 10 years has been 1.60%. The average 1 year GIC rate over the same period has been 1.37%. By investing your money into a 1 year GIC, you are actually losing value, relative to inflation, over time. Your ability to purchase the same amount of goods and services in the future is lost because your money has not increased at the same rate as prices. The average 5 year GIC rate over the same period has been 2.22%. That said, you are locking your money away for 5 years leaving yourself with limited liquidity and flexibility.
Over the short-term, a guaranteed loss of future purchasing power is not a compelling reason to invest in a GIC.
Speak with your advisor to discuss investment options that provide the opportunity to outperform inflation.