Who doesn’t know that guaranteed investment certificates were a terrible investment until the Bank of Canada started raising interest rates last year?
I only ask because of attempts made by advisers and investment companies to trash GICs by comparing their past performance against stocks, bonds and various investment products. Wow, do GICs look weak. Wouldn’t you be better off with some nice bank mutual funds instead, or perhaps a market- linked GIC offering returns tied to stocks?
The point of highlighting the patheticness of past GIC returns is to drive sales of more lucrative products. It’s certainly not to provide objective investing commentary. If that were the case, then an acknowledgement would have to be made that a long decline in interest rates in past decades killed GIC returns while also turbo-charging stock and bond returns.
Looking forward, diversified portfolios of stocks and bonds will likely outperform GICs if you can hold at least five to 10 years or more and not sell at a low point. What GICs give you is a locked-in, guaranteed return of 5 to 6 per cent annually for the next through five years.
Historical GIC returns can be found in a chart on the ATB Investment Management website that shows one-year GICs averaged 4.1 per cent since 1982, five-year GICs averaged 5.6 per cent and a diversified portfolio with a 60 per cent weighting in bonds and 40 per cent in stocks averaged 8.9 per cent. Inflation averaged 2.7 per cent, so all these investment options produced real returns, which means in excess of inflation. Note that these returns are all shown on a pre-tax basis. GICs produce interest income, which in non-registered accounts is taxed with a heavier hand than dividend income or capital gains.
The ATB chart actually flatters GICs by including the 1980s, a period of sky-high rates. A little over three years ago, the best GIC rates available were roughly 1.5 to 2 per cent for terms of one through five years. Incidentally, the chart flatters balanced portfolios of stocks and bonds as well. It’s unlikely they’ll produce returns close to 9 per cent in the years ahead.
Historical GIC returns do have some relevance in that they remind us GICs will never win any long-term performance contests. Down the line, today’s GIC investors will have to consider a move into riskier assets with the potential for better returns.
For now, GICs offer guaranteed, competitive returns for one through five years. In today’s hyper-stressful world, there’s a market for that.
-- Rob Carrick, personal finance columnist
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Question: I have a great-nephew who was born in Central America six months ago. His parents (both Canadian citizens) live and work there. He has a Canadian passport. Can you suggest how to set up a registered education savings plan for someone who does not live in Canada?
Answer: Unfortunately, you and your great-nephew are out of luck. According to the Government of Canada website:
“You can designate an individual as a beneficiary under the RESP only if both of the following conditions are met: the individual’s social insurance number (SIN) is given to the promoter before the designation is made; the individual is a resident of Canada when the designation is made.”
Since your great-nephew is not a resident of Canada, he can’t be designated as an RESP beneficiary.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
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Rob Carrick