Guaranteed Investment Certificates (GICs) are a type of savings product that offers a fixed interest rate for a defined term. Depending on the bank you purchase your GIC from and the duration of the contract, the interest rates and terms can differ. So this begs the question, can you have multiple GICs?
As an investor, you are able to have multiple GICs with one or more instititutions at once. Owning multiple GICs allows you to combine various time-frames, rates of returns, and features at once. This can provide diversification, but may provide lower returns than other forms of investing.
There are lots of considerations for GICs, and they may not always make sense for your financial situation. Read on to learn more.
What are GICs and How Do They Work?
Guaranteed Investment Certificates (GICs) are a contract in which you agree to lend your money for a set amount of time, for a set interest rate. GICs are offered by banks and other financial institutions, and they can range from lasting 6 months to 5 years.
In general with a GIC, your money is locked up for the entire time period, and at the end of the time period, your money will have grown by the agreed upon amount. For example, you may purchase a 1-year GIC at 3%. This means that for every dollar you put into the GIC, at the end of the year the bank will return $1.03.
As suggested by the name, this return is guaranteed, and deposits in GICs are insured by the CDIC up to $100,000. So these are very safe investment vehicles.
Now in exchange for this safety, they offer lower returns, and you’ll lose access to your money. Depending on the terms of the GIC, you may not be able to remove your money before the term is over, and if you do there may be penalties.
When Should GICs be Used?
GICs are great for when you have a known expense coming in the next 6 months to 2 years. Using a GIC allows you to get growth on the money without any risk, and guarantee it’s going to be there when you need it.
For example, when I finished school, I knew my student loans would come due the day I graduated. So I got a GIC that would end a couple months before I finished school. This allowed me to get a bit of growth on the money, but also ensure it was safe and available when I needed it. I also had that money earmarked for that expense, so I was comfortable giving up access for the duration of the GIC.
This can be applied to other expenses like a downpayment on a home, a wedding, a vacation, or a tuition payment. A GIC may make sense when you know of this expense coming in the next 6 months to 2 years.
GICs are not suited however for two circ*mstances: Long-term investing, and for saving for unexpected expenses.
When looking at long-term timeframes (greater than 3 years), GICs will underperform investments like index funds significantly. And as the time frame gets longer, the opportunity cost just increases.
GICs are also not well suited for emergency expenses, and should not be used for an emergency fund. With GICs, you lose access to the money, and can be penalized if you do need to withdraw. And with emergency expenses, you never know when you’ll need it. You would hate to have an emergency and not be able to access your money. Emergency funds should be held in high-interest savings accounts.
Benefits and Drawbacks of Investing in GICs
GICs may sounds like a great idea, offering a guaranteed return, but they also have their drawbacks. Here are the benefits and drawbacks of GICs:
Benefits of GICs
- Safety – GICs are guaranteed to deliver the agreed-upon return. They also are insured up to $100,000 by the CDIC. So unless the bank and the CDIC failed, your money is safe.
- Flexibility of Duration – GIC durations can range from 6 months to 5 years, so you can match your duration to your individual needs.
- Competitive Rates – Because GICs are offered by a variety of institutions, the competition can result in higher rates.
- Low Maintenance – Once the GIC is purchased, you can leave it until the term is over. There is no active management required.
Drawbacks of GICs
- Lose Access to Money – Once deposited, depending on the terms, until the GIC duration is reached, you either can’t withdraw the money, or will incur a penalty if you do.
- Low Returns – GIC returns are considerably lower compared to investing in the stock market. This can result in huge differences over the long term. Even when GIC rates are high, they can still underperform other investments.
- May Not Outpace Inflation – GIC rates typically are correlated to central bank rates, but the returns may not outperform inflation. So the real value of your funds may be decreasing.
- Fully Taxable – Growth from GICs is taxed like employment income. Thus it’s taxed at a higher rate compared to dividend income, or capital gains.
- Minimum Deposit – Most GICs require a minimum deposit, typically $500 to $1,000. This can be prohibitive for some investors.
How to Ladder Your GICs to Optimize Returns and Liquidity
GIC laddering is a strategy that uses multiple, long-term GICs at the same time to increase returns and liquidity for GICs.
The idea is that longer term GICs (5 year) will provide higher rates then shorter terms, and by offsetting your long-term GICs annually, you can ensure you have at least one GIC maturing every year. This allows you get the highest return possible on your GICs, while having the ability each year to withdraw money if necessary. If you don’t need the money, you roll it into a new 5 year GIC.
To set this up, you purchase five GICs: a 1-year, a 2-year, a 3-year, a 4-year, and a 5-year. After one year, the first GIC will mature, and you roll that into a 5-year GIC. After two years, your 2-year GIC will mature, and you also roll that one into a 5-year GIC.
You continue this until you have five, 5-year GICs, with one maturing each year.
This allows you to maximize rates of return for GICs, while also having more liquidity than if you only owned one 5-year GIC.
Benefits and Drawbacks of Laddering Multiple GICs
Laddering GICs is a great way to maximize returns and liquidities from GICs, but the returns from GICs will be still be significantly lower than index funds in the long run.
So if you’re keen on using GICs, it’s a great strategy. But if you’re investing for the time frames proposed by the laddering strategy (>5 years), you have the time to weather the ups and downs of the stock market.
Relative to purchasing a single 5-year GIC, laddering provides more liquidity. It allows you access to your money once per year, while taking advantage of the (typically higher) 5-year GIC rates.
But relative to investing in the stock market, laddering GICs will result in much lower growth. At the best of times, 5-year GIC rates historically have been around 5%. Compare that to the . If you invested $10,000 into a 5%, 5-year GIC, at the end of the term you’d have $12,762. Now compare that to 5 years invested in the S&P 500, assuming the average returns of 10%, that same $10,000 would turn into $16,105.
Now of course, has much more volatility, meaning it won’t be a smooth ride, but over the long-term your gains will be significantly more. I would argue that if you’re considering using laddering to invest long-term in GICs, you should explore if index funds are a better fit.
There are also other alternatives to GICs that may be of interest. Ultimately what matters is that you’ve considered all your options, and determined the one that works best for you.
