Guaranteed Investment Certificates (GICs) are a savings vehicle in which you deposit your money with a bank or other financial institution for a defined duration, in exchange for a specified rate of return. The terms of the GIC will define if you have access to the funds and other characteristics, and should factor into how long you hold a GIC.
Typically, GICs are best suited for time frames of 6 months to 2 years. GICs can allow some growth, while protecting your downside. GICs can also be held for longer time frames (5+ years) using a laddering strategy, but the returns will typically be less than other investments.
How long you should hold a GIC depends a lot on your individual financial situation. Read on to find out what you need to consider.
Key Considerations for How Long to Hold GICs
GICs can provide safe returns, but typically require you to give up access to the money. They also will have lower returns than the stock market. But GICs don’t have the same risk that investing in the stock market can bring. Here are some of the key considerations when determining how long to hold a GIC:
Objectives
Consider your objectives for your money. What are you trying to achieve with a GIC? Are you saving for retirement? Protecting your downside risk? Saving for a specific expense?
If you’re saving for retirement, you can typically think longer term and consider a strategy like laddering (see below). It’s important to note however that the long term returns of a GIC will be significantly less than the stock market. However if you’re using GICs alongside investments to protect your downside, using GICs long-term can work well.
If you’re saving for a specific expense, your time frame will be determined by when you need the money. However, if you’re saving for an unexpected expense (e.g. emergency expense), then GICs are not well suited. With a GIC you often have to give up access to your money (at least for the holding period – see below), so a high-interest savings account is better suited for this purpose.
Risk Tolerance
Because GICs are guaranteed, they’re inherently less risky than other alternatives. However, because of the lack of liquidity of GICs, they come with a different type of risk.
If you’re someone who can’t stomach the volatility of the stock market, GICs may be a good option as they can only go up. That said, you need to recognize that the long-term returns of GICs will be lower.
On the other hand, because GICs may not be liquid (your money is locked in for the duration of the contract), you run the risk of needing the money before the term is complete. As such, it’s wise to establish an emergency fund to weather any unexpected expense. That way, you can leave your GICs untouched until they mature.
Expected Returns
As mentioned, GICs have historically had lower returns than the stock market. As well, GICs may not keep up with inflation in some macroeconomic environments.
With a long-term GIC, rates typically top out at around 5%. Compare this to the S&P 500, which historically has returned around 10% per year. This difference can compound over time, meaning that by staying in GICs will have huge opportunity cost over the long term.
That said, GICs can be a good way to diversify and bring some fixed income investments into your portfolio alongside your more volatile stock market investments.
What is a GIC Holding Period?
GICs can be either redeemable or non-redeemable. This essentially defines if you can access the funds before the end of the term or not.
With non-redeemable GICs you completely lose access to the funds for the duration of the term. So, if you choose a 1-year non-redeemable GIC, you cannot access your principal (the amount you originally deposited) for a full year. In exchange for this, the rates (your return) will typically be higher.
Redeemable GICs allow you to withdraw your money early, but typically have a holding period and a penalty if you don’t complete your term. The holding period is a defined period for which you cannot redeem your GIC. For example, with a National Bank GIC, regardless of your term, the GIC has a 30 day holding period in which the money cannot be withdrawn. After the 30 days, you can withdraw your money, but your interest late will be reduced.
If you’re considering a GIC, it’s important to review the terms, and make sure you’re comfortable giving up access to those funds for the entire term duration.
When Does a GIC Make Sense?
In my experience, GICs are best suited for when you have a known expense in the next 6 months to 2 years.
This expense could be a downpayment, tuition payment, wedding, etc. GICs allow you get some growth on the money, and prevent any downside risk.
GICs are not well suited for emergency funds (due to the lack of liquidity). They are also not well suited for long-term investment, as the returns will be significantly less than the stock market.
Laddering Strategy for Long-Term GICs
If you do choose to use GICs in the long-term, laddering can be a great strategy to manage returns and risk.
Typically, the longer the term of the GIC, the higher the rate. Laddering is a strategy where you build up to have five, 5-year GICs, with one maturing per year. To build this, you purchase 5 GICs: a 1-year, 2-year, 3-year, 4-year, and 5-year. Then, when each GIC matures, you roll the funds into a new 5-year GIC. After 5 years, you will have five, 5-year GICs, with one maturing each year.
Once you build it up, it will look like this:
This allows you to take advantage of higher returns, while still having at one liquidity event per year. That way, once a year you have the ability to withdraw money if needed, and re-invest what you don’t need.
Again though, the returns from this strategy have historically been lower than investing in index funds.
Have you every used GICs for a specific expense or for a long-term laddering strategy? Let me know in the comments!