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GICs for you and me

OTTAWA (GlobeinvestorGOLD) — If rising interest rates aren’t enough to rekindle your interest in GICs, then how about some new research about the stability they can bring to a portfolio?

Unless you put risk avoidance at the top of your list of attributes when selecting investments, you’ve probably not bothered to take a look at guaranteed investment certificates in recent years. With interest rates as low as they were, GICs offered returns that were almost laughably low. Today, though, you can get as much as 3.6 per cent for a one-year GIC and 4.45 per cent on a five-year term. Still not interested? Then consider some research that Bank of Montreal commissioned recently.

The study tries to put a mathematical spin on something you already know in your gut – that GICs can add reliability and safety to a portfolio. But a couple of other conclusions are worth looking at, too. One is that short-term GICs can provide higher returns than other cash-like investments. Another is that long-term GICs have a low or negative correlation to stocks and bonds, which is a fancy way of saying that GICs are a good diversifier because they offer returns that don’t rise and fall with other asset classes. Over the last 20 years, returns from five-year GICs had returns were almost completely independent of the S&P/TSX composite index and had only a minimal similarity to the S&P 500 stock index (in Canadian dollars) and the Scotia Capital Universe Bond Index.

Aside from their recent low returns, the main drawback with GICs is that rates vary widely between financial institutions. You may not be able to get the most competitive rates unless you buy through an adviser or broker with access to the products of various banks, trust companies and credit unions. Even if you deal with a big bank and get bonus of an extra half a percentage point, you still could be making less than what small trusts and credit unions are offering. If you deal with an adviser or broker (full-service or discount) and you’re interested in GICs, ask to see the most competitive rates available. Then, use a source like (look under term deposits) to see how competitive those rates are.

Making 3.5 per cent in a one-year GIC doesn’t sound like much in the context of what stocks and bonds have delivered in recent years. But if you’re worried about what rising rates will do to bonds and how the stock market can possibly produce yet another great year of returns, then putting a little money in something guaranteed to make 3.5 per cent might sound good.

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© 2007 The Globe and Mail. All rights reserved.

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