The Good, The Bad, The Ugly

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.

Like most investments, there is an element of risk associated with GIC investing with a commensurate rate of return.

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.

Since March 2022, the Bank of Canada has been increasing the interest rate to combat rising inflation.

Wouldn’t that be good for GIC investors?  Not necessarily.  The current GIC rates may seem high (relatively speaking), but it’s during a time of high and uncertain inflation.

5.5% 1-year GIC rate

(-) 2.2% (40% marginal tax rate)

(-) 3.4% inflation (May 2022 to May 2023)

=   – 0.1% rate of return

Taking into consideration the after-tax, after-inflation (real) rate of return, you are left with a guaranteed rate of near 0% or negative — hardly a compelling reason to invest.  For context, the MSCI World Market Index (CAD) has an annual rate of return of 9.9% (1970 – 2022).  In my experience, most financial plans require an after-tax, real rate of return in excess of 1%.

Speak with your advisor to discuss investment options that provide the opportunity to outperform inflation.


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