November, 2023
The most important thing to keep in mind when considering investing your savings is flexibility.
It’s hard to look at any news today without hearing about interest rates. To fight stubborn inflation, the Bank of Canada has raised policy interest rates from 0.5% to 5.00% in just under 18 months. This has a considerable impact on financial instruments such as Guaranteed Investment Certificates (GICs) and other investments investors use to grow their savings. With some GICs now offering over 5% interest income guaranteed, they have become hard to ignore as a viable investment option. But, before you lock yourself into one of these contracts, here are a few insights to consider to see if GICs are the right fit for you.
In essence, GICs are products where investors lend [JN1] their savings to a financial institution for a defined term length in exchange for a guaranteed rate of return in the form of interest income. Other traditional investment options such as bonds are also products where investors lend money to businesses and governments in exchange for a predetermined interest rate. Both GICs and bonds are closely linked to interest rates. Stocks are another traditional investment option where investors can buy part ownership in a company to benefit from future profitability through dividend income and gains in share prices. Both stocks and bonds benefit from liquidity offered from a secondary market where investors can buy and sell these investments to each other on a daily basis. I covered How Interest Rates Impact Your Investments in my last article.
The first thing to consider when assessing investment choices is the concept of saving versus investing. I categorize saving as putting money aside for short-term needs or for emergency funds for life’s unexpected expenses. Investing is putting money to work and grow over the longer term in order to be used to fund future lifestyle expenses like retirement. Savings can be invested and investments can be used for saving. In many ways these two concepts are almost synonymous. But there is a key notion that separates the two which is important for investors to consider.
The most important thing to keep in mind when considering investing your savings is flexibility. For saving efforts, your ability to access your funds in a timely manner or unexpectedly in the case of an emergency, is non-negotiable. For investment efforts with a longer time horizon and less need for liquidity, flexibility is not as essential but it is very important because it gives investors the option to adapt to changing market conditions.
GICs can be matched to a certain short term need or goal using a given term. When interest rates are up, this makes GICs a good option for investors looking for guaranteed income as long as they have no need for liquidity for these funds during this term. But for most investors, most of the time, other traditional investments like stocks and bonds are the better option for long term growth. Not only because these usually tend to have better investment results over time, but because they provide more flexibility.
We never know exactly where we are in the economic cycle or where interest rates are going to go but we can make informed decisions based on our our own savings and investment needs and our goals. The current interest rate environment and their guaranteed returns can make GICs attractive. They may very well match or even exceed the performance of other investments in the the short term, but they may not afford you the required flexibility needed to adapt to changing market conditions. History has shown us that taking on some investment risks with traditional investments usually provides better returns over the long term as well as liquidity. Trading in flexibility for a guarantee is not always the best option.
Author:
Marcel LeBlanc, CFP®, CIM® is a Financial Planner and Associate Portfolio Manager with Louisbourg Investments. You can find more from him on Facebook and LinkedIn. Comments or questions may be submitted to Marcel at marcel.leblanc@louisbourg.net, or he may be reached at (506) 383-5204
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This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.