by Tom Bradley

“Hey, aren’t GICs supposed to be stress-free investments?”

Rob Carrick started one of his recent newsletters with this headline. He was referring to Home Capital’s troubles and the risk of owning GICs from Home Trust and Oaken. But Home Capital is not the focus of this post. Rather, it’s the headline.

Rob put ‘GIC’ and ‘investment’ in the same sentence. Is that good English (sic)? Is a GIC an investment?

There’s no consensus on this question, so let’s explore both sides.

GICs are investments

  • Buying a GIC is like buying a short-term bond. A bond is an investment. In return for lending money, you get a fixed rate of interest and a set date when you get your money back.
  • When you tie your money up for a fixed period of time, you are garnering an illiquidity premium. Sacrificing liquidity to enhance the return is a useful ‘investment’ strategy.
  • Like investing, you need to be on top of your game when buying GICs. To get a GIC that has a good rate and meets your needs, you have to shop around and make sure you understand the conditions.

GICs aren’t investments, they’re savings vehicles

  • With the government guarantee (up to $100,000 from CDIC), GICs are as close to a risk-free vehicle as Canadians can buy. Investing, however, is about combining risk and time to generate a return above the risk-free rate.
  • A GIC connotes safety, but for an investor, risk is not short-term volatility, but rather the failure to generate a long-term return well in excess of inflation.

I pose this question because I believe too many Canadians think buying a 3 or 5-year GIC for their RRSP or TFSA is investing for the long term. Indeed, following successive market meltdowns in 2001/02 and 2008/09, it’s our team’s observation that a large percentage of Canadians have lost the ability to take risk and therefore, are not investing for retirement.

But you don’t have to take our word for it. A survey conducted by BlackRock in 2015 showed that 62% of Canadians’ financial assets are held in cash and cash-like instruments (i.e. GICs). Almost two-thirds!

GICs are terrific vehicles for cash management and setting money aside for short-term spending needs. They can play a role in a portfolio, but for investors with a time frame over five years, it should be a bit part.