GIC: The Illusion of a Guaranteed Return
Nine years after the financial crisis, many investors remain hesitant to get back in the stock market. While the shock was indeed major, many funds ended up recovering their losses within a year later.
What happened then, as the crisis was unfolding, was that major banks and institutions unwinded their marketing powerhouse to benefit from people’s fear. Knowing that a big recovery was on its way, and with historically-low interest rates, their positioned themselves to cash in on it using their clients’ money. And it worked! Based on a 2017 report from l’Institut de la Statistique du Québec, the total value of bank deposits and GICs increased of 60% between 2006 and 2015, despite plummeting interest rates. On the other hand, stocks markets have been sensational since the crisis, having almost doubled in Canada (S&P/TSX) and tripled in the United-Stated (S&P 500).
Imagine a financial institution offering GICs with 1,5% annual interest rate during this period (which is higher than most on the market), who used the money received to invest in its own Canadian or American mutual funds, many of which have yielded over 200% between 2009 and 2017, or 15% per year. A 15% return on a 1,5% interest payment to the client represents a yearly return on investment of 1000% for the bank… and it did not even invest its own money!
The investor, on the other hand, received a modest 1,5% interest payment, which is 100% taxable. At a 50% marginal tax rate, his net annual return has been 0,75%. Now, between 2009 and 2017, the value of money fell 13,78% for an average yearly inflation rate of 1,63% (based on Bank of Canada’s CPI reports). So while the bank was enjoying 1000% yearly returns, the investor actually lost 0,88% per year.
When all facts are taken into consideration, the main guarantee provided by a GIC is that your portfolio will lose some of its real value every year. Given all the efforts and sacrifices it took for you to build your portfolio, don’t let its value erode through time while banks and institutions make money out of it. There are better way to generate returns while protecting your capital, such as our Guaranteed PortfolioMC. For more information, contact a member of our team.