Mistakes investors make with GICs
Guaranteed Investment Certificates (GICs) are a secure way to invest funds for the short or long term. When investing in a GIC, you can choose from a variety of term lengths which typically carry different interest rates. With most GICs, the longer the investment term – or the longer you loan the bank or institution your money – the higher the return. Terms can vary greatly, from 30 days up to several years. You can choose between a fixed-rate GIC, an escalating-rate GIC over the term of your investment or a cashable or redeemable GIC that can be accessed at any point.
The amount you invest in a GIC is also flexible and you can start with a small minimum investment. Investors can also choose to hold GICs in a registered account, such as an RRSP, TFSA or RRIF, or a non-registered account.
With their stable and secure nature, GICs usually represent the dependable portion of a balanced investment portfolio. But with the number of options when investing in GICs, there also exists the possibility of not choosing the best one for your financial goal. What are some of the most common errors investors make with GICS?
What errors do investors make when it comes to GICs?
One of the most common errors investors make when choosing GICs is not having a plan for their investment. Although the term and interest rate are set at the outset for most GICs, investors sometimes don’t factor in the long term. Is this the right investment term for you right now? What do you plan to do with your GIC when it matures? How does it form part of your overall financial strategy or long-term savings plan?
Thinking through your investment plan, even if it’s for a relatively short period, will allow you to see what type of GIC and what term works best for you. You should also be thinking about how you will manage your investment when the term is up. Does it make sense to reinvest it or will it depend on other factors? Are you saving for a long-term goal that matches your GIC term? It’s important to think about and answer some of these questions when thinking about investing in GICs.
Another common error with GIC investments is choosing the wrong term and having to cash out early. Depending on what term you decide on, you could be faced with paying penalties for early withdrawal of your funds. Sometimes the penalties in these cases will erase any gains you’ve made on your investment. This problem can be avoided by ensuring that you have other emergency savings to account for anything unexpected before you choose to lock your money away in a GIC for any length of time.
One possible solution
If you’re thinking about investing in a GIC by are pondering some of the questions we raised earlier, you can choose to ladder your GICs. Laddering your GICs into one-year terms allows you to consistently have access to your money while also keeping the bulk of it invested. If you purchase a GIC each year for five years, you can either choose to withdraw your funds or reinvest them each year. This may give many investors the peace of mind they need in the face of investment choices.
