A year from now, the 3- to 4-per-cent return you earned on a one-year guaranteed investment certificate bought now may look kind of weak.
Stocks turned in two great years in 2023 and 2024 - if the momentum holds enough to produce even average returns, you’d soundly beat a GIC. GICs were great when interest rates were high, but only timid investors like them now, right?
With Donald Trump’s second presidency starting on Monday, maybe not. For investors seeking a low-drama place to park money for 12 months, GICs are something to consider.
It’s pure market timing to lock money up for a year to avoid market volatility, and that means a risk of non-optimal outcomes. You could miss out on big gains if stocks jump. Or, stocks could plunge and you’re not able to take advantage of beaten down prices. But if your priority as an investor tilts more to capital preservation than growth, GIC returns may suffice on a risk-adjusted basis.
If you’re buying GICs directly from an alternative bank, there are many issuers with rates of 3.55 to 3.95 per cent. Online brokers typically have third-party GICs in their inventories, but rates are a little lower. One big brokerage’s best one-year rate recently was 3.37 per cent. Oddly, the big banks have been competing hard in one-year GICs lately - a couple of them had special one-year rates lately of 3.3 per cent.
Inflation recently clocked in at 1.9 per cent, so these rates give you a somewhat decent real rate of return. The outlook is better when you factor in the risk factor. Protected by deposit insurance, GICs present no risk of losing money.
Cashable GICs offer more liquidity than traditional GICs, but you give up some return. Royal Bank of Canada had a special 2.5-per-cent rate recently on a one-year GIC. Another option for investors who want liquidity are cash equivalents like high interest savings accounts packaged like mutual funds and exchange-traded funds holding assets in savings accounts, T-bills or short-term corporate borrowings.
Rates on these products range from 2.75 to 3.5 per cent right now, but they’ll fall in line with any rate cuts the Bank of Canada makes in 2025. There are four opportunities for the bank to cut rates in the first half of the year.
If GICs are on your radar, don’t feel pressured to buy immediately to avoid the risk of lower rates ahead. While GIC returns are well down from 12 months ago, they have stabilized recently. Thank the economic policies of the incoming U.S. president for that. Financial markets see more risk of inflation ahead, and that means less room for lower rates.