GIC's are becoming popular once again: Banking manager
As the stock market gyrates and a possible recession looms, many young investors may be looking to rethink their investment portfolios.
Financial planners are seeing more generation Z and millennials add guaranteed investment certificates (GIC) to their portfolios for a sense of security and, perhaps more importantly, because guaranteed returns have reached around the five per cent range, the highest they've been in years.
After seeing double-digit declines in some stock indexes this year, “higher interest rates from GICs have appealed to some young investors who haven’t experienced market downturns before, said Graham Priest, investment adviser at BlueShore Financial.
"At this point (they) would prefer a guaranteed return versus the potential for greater growth.”
Many young people have only seen stocks go up exponentially and perhaps anticipated that would continue and didn’t take profit, he said.
“Some of them might want to avoid declines a second time around where they feel the overall economic environment may not be as favourable."
Traditionally, the advice for young people has been to invest aggressively for the long-term, meaning a high exposure to stocks, said Jason Heath, managing director of Objective Financial Partners Inc.
However, that may not always be the appropriate strategy given young people often have a few short-term and medium-term expenses to cover with their savings.
“If you are saving for a short-term goal like post-secondary costs, a car, a wedding, or a home down payment, risky investments may not be appropriate if your time horizon is only a couple years or less,” Heath said.
While GICs had unattractive rates over the past decade or so, Heath said it's now a more reasonable rate environment for conservative investment options like GICs. Even if GICs at rates of five per cent or higher may not be keeping pace with inflation, inflation is unlikely to stay persistently high – although GIC rates may not remain high long-term either.
While young people with medium to long-term horizons can take advantage of buying stocks on sale right now – without getting caught up in trying to time the bottom – GICs can be an option for those looking to take on low risk.
Another lower risk options is a slow and steady biweekly or monthly investment strategy called dollar-cost averaging, Heath said. Aside from reducing risk, it helps investors develop the discipline of saving first and spending second.
“Stocks may be volatile from year to year, but they can be a great inflation hedge and way to build wealth over the long term,” Heath said.
If you’re a young person looking to put money toward a down payment in a few year’s time, Priest said GICs may be better suited because of the shorter time horizon — even if the investor had a higher appetite for risk.
“It’s so there are no surprises as to what those funds are worth when they need to turn around and place them toward a house purchase,” Priest said.
Both Heath and Priest emphasized that with GICs, investors do need to keep an eye toward liquidity.
“If you tie up your money for a one, two, three, four, or five-year term, you may not be able to access that money if you need it. So, make sure you balance risky long-term investments with term-specific deposits like GICs as well as savings accounts for cash you might need access to quickly,” Heath said.