Guaranteed Investments Certificates (GICs) are a type of financial tool where you deposit your money for a defined period of time, in exchange for a guaranteed rate of return. GICs are very safe and are not subject to the volatility of the stock market. Which begs the question, are GICs safe in a recession?
GICs provide guaranteed returns and will not lose value, so they can be a good way to protect your money during a recession. However, investing in a GIC during a market downturn will prevent you from benefiting from the stock rebound. So, it could result in less long-term wealth.
Whether a GIC makes sense for you or not will depend on your individual circumstances. Read on to find out if GICs are right for you.
Should You Invest in GICs During a Recession?
Investing in GICs during a recession depends on your individual situation.
When Purchasing GICs in a Recession Makes Sense
If you have spare cash and are not willing to risk losing money in the short-term (1-2 years), GICs can be a great option (see here for more info). As well, during a recession, central banks interest rates tend to be higher. This often results in higher rates for GIC as well. So, you can get GIC rates in the ballpark of 4-5% for 1-year terms. Now you do need to consider if that rate is outpacing inflation or not.
But ultimately if you have a need for the money in the short term, or can’t stomach the volatility of a recessionary market, GICs can be a good option.
When You Should Not Purchase GICs During a Recession
There are two circumstances where purchasing a GIC during a recession does not make sense: Selling stock market investments to purchase GICs, or when you have a long-term time frame.
If you are considering selling stock market investments to purchase GICs, this is not recommended. It is certainly tough to see the value of your investments drop, but it’s weathering this volatility that will allow you take advantage of the rebound.
In fact, it’s in the bad markets that the market performs the best. In the last 30 years (since 1993), of the 50 best market days, 52% have been during a bear (down) market, and an additional 26% have been in the first two months of the subsequent bull (up) market:
And as shown in the graphic, missing just the ten best days cuts your returns by over 50%. By pulling your money out when the markets go down, you’re potentially costing yourself huge money over the long run.
I know it hurts now, but in the long run you’ll be thankful that you left your money invested.
The other time it does not make sense to invest in GICs during a recession is if you’re investing for the long-term (>3 years).
Over the long run, the stock market will greatly outperform GICs (more below), even at high GIC rates (e.g. 5%). And by purchasing stocks or index funds during a recession, you’re basically getting everything on sale, which can improve your long-term gains.
The big consideration with stock market however, is that you need to be willing to weather the volatility. But if you can stomach it, you can build huge long-term wealth.
How Do GICs Compare to Investing in the Stock Market?
Based on historical performance, over the long-term, GICs have always underperformed the stock market.
At the best of times, 5-year GIC rates historically have been around 5%. 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. Since it’s inception, the S&P has averaged around 10% return per year. Assuming the average returns of 10%, that same $10,000 would turn into $16,105.
Now the big consideration with stock markets is the volatility. The average return is 10% per year, but the actual annual returns can vary from negative 40% to positive 40%. If you’re invested for a long time frame, these swing historically have evened out to that 10% average, but on a year-to-year basis, your value can vary significantly.
So in the short-term, a GIC may outperform the stock market, especially in a down year, but if you are looking to build long-term wealth, the stock market is the better option.
When do GICs Make Sense?
For example, if you are planning a wedding a year from now. Or you have a tuition payment due for yourself or a family member. This are known expenses that can often be foreseen well ahead of time.
In circumstances like this, a GIC makes a lot of sense. You have that money allocated for that expense, and you can give up access for 6 months to 2 years, allow it to grow in the interim. And you’re guaranteed to make the return as advertised (more below).
If you’re looking a longer time frame, investing makes more sense. Over a longer time frame, you have to weather the volatility to get better returns.
And if you may need access to the funds in the interim, consider treating it like an emergency fund. GICs required losing access to the funds, so if you may need the money in the next few months, it’s not smart to lock it up in a GIC.
What Makes GICs so Safe?
GICs are safe for two reasons: They’re guaranteed, and they’re insured by the CDIC.
As suggested by the name, GICs are guaranteed to provide the return they advertise. Essentially, you’re entering into a contract with a bank or financial institution. You lend them money for a given time frame, with agreed upon terms and a defined interest rate. At the end of the time frame, they’ll return your money, with interest (as advertised).
The other things that makes GICs so safe is that they’re insured by the Canadian Deposit Insurance Corporation (CDIC). Similar to the money in your savings account, GICs are insured up to $100,000. This means that even if the institution you’re working with goes under, your money is safe. In fact, the CDIC insures both the capital you deposited, and any interest earned (up to the $100,000 limit).
In terms of safe investment vehicles, there are few that exceed the safety of GICs.
Have you ever used GICs for a specific expense? Comment below and let me know where you’ve used GICs and how you fared.