Wednesday, May 8th, 2019
When I was in my early thirties, interest rates were at an all-time high. I was earning a professional salary, had paid off my student debts and was ready to start investing.
At my dad's suggestion, I put $5000 into a GIC in a non-registered account. Though it wasn't the most tax-efficient move—this was the pre-TFSA era and the GIC was not in an RSP—I made a decent return when it matured five years later.
Shortly after I locked in, interest rates took a nosedive and GICs lost their appeal to many investors—including me. Sure, they kept your money safe and guaranteed at a slightly higher rate of return than the average savings account, but when interest rates were at record lows, there wasn't much incentive for me to lock in my savings.
I'll be parking some of my RSP money in GICs for the next year—something I'd probably even advise my thirty-something self to do if she were investing today.
First, I'll be earning some money, rather than having it sit in cash and doing nothing until I find the right stock or ETF to invest in. Second, it will keep my principal safe no matter what the markets do. Third, I'll have a guaranteed rate of return.
But this time, unlike my thirty-something self, I won't be locking in all of my GIC savings for five years. Instead, I'll buy five GICs of one thousand dollars each and with differing terms. This is a portfolio management technique often referred to as laddering, where you buy several GICs with staggered maturity dates and rates of return.
While the ideal scenario is to purchase GICs when interest rates are at their highest, trying to figure when they'll hit their peak is like trying to time the equity markets. It's basically impossible to do.
By staggering my purchases, I'm bound to lock in at least one GIC at a higher interest rate. With some of my GIC savings maturing in the shorter term, I'll have more frequent opportunities to capture higher rates if rates end up rising. If rates don't rise, I've managed to keep a portion of my money safe and earning something at a guaranteed rate.
And by saving in RSP GICs, I've kept a portion of my RSP portfolio safe with some tax-deferred interest.