Pros and Cons of the Guaranteed Investment Certificate
Guaranteed Investment Certificates
Most Canadians are familiar with the term GIC. A type of fixed-income investment normally offered in specific terms of 1 – 5 years and in which the interest payable is guaranteed and locked-in for the duration of the term. Although extremely conservative, like with most investments, there is an element of risk associated with GICs.
The Good – Capital Preservation
In times of market uncertainty and volatility, GIC owners can be rest assured that the principle of their investment is protected. There is no concern that their initial investment amount will decrease.
The Bad – Low, Guaranteed Interest
Depending on the health of the economy, the interest rates may not be very attractive. If interest rates are low, then your investment will not earn a high rate of return.
The Ugly – Loss of Purchasing Power
Your interest rate rarely outpaces inflation (cost of living increases) and can take a further bite from income taxes. Why is this important? Simply put, due to inflation the value of $1 today will purchase less goods and services in the future. As time goes on your wealth is slowly being eroded.
Since COVID-19 and the resulting pandemic, supply chain issues and increased demand for goods and services have contributed to a spike in inflation in Canada. As of December 2021, the annual inflation rate rose to 4.8%. You will be hard-pressed to find a GIC paying close to that. 3.05% at the time of this article.
Over the short-term, a guaranteed loss of future purchasing power is not a compelling reason to invest solely in GICs.
Speak with your advisor to discuss alternative ways to outperform inflation and guarantee your capital.