If you’re thinking of reinvesting matured guaranteed investment certificates into new GICs in the months ahead, expect the rates available to start with a three.
Several alternative lenders still offer one-year rates around 4 per cent, but the wider trend for all terms is firmly in the 3-per-cent zone. One year ago, rates of 5 per cent and more were easily available. A broad trend of falling interest rates has been great for borrowers, but hard on conservative investors and savers. They now have to decide whether to roll over their GICs or find alternatives.
GICs have always had a constituency of investors willing to sacrifice returns to insulate themselves from the risk of losing money. Of course, eliminating risk with GICs requires you stay within deposit insurance guidelines.
If you’re in the club of investors who have no interest in stock and bond market volatility, keep calm and carry on with GICs. There’s really nothing quite like them for a stress-free investing experience, providing you don’t need to access your money. Cashable GICs are available, but always at a cost of lower rates.
With inflation at 2 per cent as of the latest reading, a 3.5-per-cent GIC gives you a real return of 1.5 per cent. That’s acceptable, if not impressive.
A lot of money was poured into GICs in the past couple of years by investors who avoided these products generally, but were enticed by the idea of returns of 5 per cent or better with no risk. This type of investor won’t be satisfied with current GIC rates and will want to move on.
Before looking at options, let’s first look at a preliminary step to take before your GICs mature. Find out what will happen with this maturing money – will it automatically go into a bank account, or will it automatically be rolled over? Automatic rollovers are to be avoided in an environment of falling rates.
Some alternatives for investors who want to go in a different direction with maturing GICs:
- Bond and bond funds: There’s price volatility, but also potential to generate total returns based on interest payments and rising bond prices. The bond market is now worried that the policies of U.S. president-elect Donald Trump will be inflationary, an outcome that would be bad for bonds.
- Dividend stocks: Much more volatility, but there are many blue-chip dividend stocks with yields in the 4-per-cent to 6-per-cent range. BCE Inc. (BCE-T) is a reminder that extra-high yields reflect investor concerns.
- Cash equivalents: Exchange-traded funds and mutual funds holding their assets in big bank savings accounts, government T-bills and short-term corporate borrowings referred to as money market instruments offer yields in the mid- to high 3-per-cent range currently; expect these rates to drop more or less in line with each cut the Bank of Canada makes in its overnight rate in the months ahead.
Full disclosure: I invested some money in GICs with rates above 5 per cent and I can assure you I am not reupping.