Our recent high interest rate environment has had many of us looking for methods to make the most of our cash, and if you’re like us, GICs (Guaranteed Investment Certificates) have been the answer. For many Canadians, GICs have been key part of their recent investment portfolios. The higher interest rates have made for very attractive returns on various 1-3 year GICs from different institutions, providing an easy option to minimize short-term risk while observing changing market conditions.
Well, if you watched our recent 2024 Outlook Webinar with Bryan Yu, Chief Economist at Central 1, you may be wondering the best way to manage your GIC investments given that the future of interest rates in Canada is a little more up in the air.
Look no further because we're here to tell you about GIC laddering, a simple investment strategy that not only protects you against long-term interest rate fluctuations, but also helps you maintain liquidity. In this article, we discuss what GIC laddering is, how it works, and when it might be something you want to consider.
Here are a few key points from the article!
Diversification of Maturities: GIC laddering involves dividing your investment into multiple GICs with staggered maturity dates, spreading risk and ensuring regular access to funds.
Mitigation of Interest Rate Risk: By investing in GICs with varying terms, you can hedge against fluctuations in interest rates, as you'll have funds maturing at different times to reinvest at the best rates during each term.
Balanced Returns and Liquidity: GIC laddering offers a balance between earning a higher rate of returns on longer-term investments and maintaining liquidity through regular access to a portion of your funds.
Simplicity and Flexibility: While it requires careful planning and management, GIC laddering provides investors with a simple yet flexible strategy for growing their savings over time.
Suitability for Risk-Averse Investors: GIC laddering is particularly well-suited for risk-averse investors seeking steady income, capital preservation, and a conservative approach to investing in a unpredictable interest rate environment.
GIC laddering is a simple yet powerful investment strategy to mitigate risk and maximize GIC returns. It involves spreading your investment across multiple GICs with different maturity dates. Instead of investing a lump sum into a single GIC with a fixed term, you divide your investment into equal portions and invest each part into GICs with different term lengths.
As each GIC matures, you reinvest the proceeds into a new GIC with the longest term in your ladder. This creates a continuous cycle of investment and reinvestment, allowing you to take advantage of higher interest rates on longer-term GICs while still maintaining access to a portion of your funds on a regular basis. Let’s look at how it’s done!
(A visual example of a ladder schedule )
Building a GIC ladder is a straightforward process that can be easily customized based on your financial goals and risk tolerance. After financial planning to determined how much you want for your initial investment. From there select number GICs of different year terms, typically purchasing one per year from 1 year GICs to 5 year GICs.
Here you can see an example of all the steps involved to create your own GIC ladder:
Allocating Your Investment: Let's say that you decide on $50,000 dollars as the total amount you want to invest in your GIC ladder. Start by dividing this amount into equal portions, over the length of time you want to invest. In this case, we’ll go with five years, meaning that you’ll have 5 buckets of $10,000s to allocate.
Select GIC Terms and Rates: Research GIC terms and rates offered by various financial institutions. You can usually find rates on bank websites, through your online banking, or using Yield Exchange!
Compare interest rates and terms to find the best combination that aligns with your investment objectives. Keep in mind that just because a bank has the best 2 year GIC or 3 year GIC rates, they may not have the best 4 year GIC. It’s also important consider factors such as the current interest rate environment and your outlook on future interest rate trends. This might leader you to shifting your investment weight towards the shorter term or toward long term GICs.
Purchase GICs: Open accounts with the financial institutions offering the GICs you've selected. Then, purchase the GICs with staggered maturity dates according to your allocation plan. Ensure that the terms and rates meet your criteria and that you understand any terms and conditions associated with each GIC. An important thing to note is that if you’re investing with a tax free savings account or TFSA, is that while you can open multiple TFSAs at different banks, your contribution limit is shared among them.
Monitor and Reinvest: Regularly monitor the maturity dates of your GICs as they approach expiration. When a GIC matures, reinvest the principal and interest into a new GIC with a new five year term, that way it will mature a year after the last stage of your current ladder. This process allows you to continuously reinvest your returns at potentially higher rates the available while maintaining liquidity through regular access to funds and mitigating the risk of interest rate changes.
Review and Adjust: Periodically review your GIC ladder to assess its performance and make any necessary adjustments based on changes in your financial situation or market conditions. Consider rebalancing your ladder by reallocating funds to different GIC terms, considering redeemable GIC options or adjusting your investment strategy to better align with your goals. By following these steps, you can effectively build and manage a GIC ladder that helps you achieve your financial objectives while minimizing risk and maximizing returns.
Here’s a table to show case what your returns would look like after five years!
| GIC | Start Date | 1 Year | 2 Years | 3 Years | 4 Years | 5 Years |
|---|---|---|---|---|---|---|
| 1 | Invest $10000 in a 1 year GIC at 5% |
Maturity Value: $10,500 |
Total Interest: |
Total Interest: |
Total Interest: |
Total Interest: |
| 2 | Invest $10000 in a 2 year GIC at 4.75% |
Total Interest: |
Maturity Value: $10,973 |
Interest Earned: |
Interest Earned: |
Interest Earned: |
| 3 | Invest $10000 in a 3 year GIC at 4.65% |
Total Interest: |
Total Interest: |
Maturity Value: $11,461 |
Total Interest: |
Total Interest:
|
| 4 | Invest $10000 in a 4 year GIC at 4.5% |
Total Interest: |
Total Interest: |
Total Interest: |
Maturity Value: $11,925 |
Total Interest: |
| 5 | Invest $10000 in a 5 year GIC at 4.3% |
Total Interest: |
Total Interest: |
Total Interest: |
Total Interest: |
Maturity Value: $12,343 |
Based on this example, our average rate of return over 5 years across each of our GICs is 4.44% giving us a total of $12,131 of interest earned.
Compared this to if we had just invested in a single 5 year GIC at 4.3% where we would have earned only $11,715!
Mitigates Interest Rate Risk: By staggering your investments across multiple terms, you reduce your exposure to fluctuations in interest rates. This helps to ensure a more consistent stream of income over time.
Provides Liquidity: Since a portion of your funds matures at regular intervals, you have access to cash when you need it without having to break the entire investment.
Provides Flexibility on Returns: By investing in longer-term GICs, you can potentially earn higher returns compared to shorter-term options. However, in market conditions like the one we are in currently where interest rates are high, you may find that 5 year terms are giving lower rates, giving you more flexibility over how you want to allocate your personal finances.
Increased Variability on Overall Yields: While GIC laddering offers the benefit of liquidity and security against interest rate changes, overall yields will by more variable compared to investing in a single long-term GIC. With a single five year GIC, you always know what your guaranteed return is, but when laddering the rates you get when reinvesting are subject to change.
Complexity and Management: Managing multiple GICs with different maturity dates can be more complicated than investing in a single GIC. It requires careful planning and monitoring to ensure that each GIC is reinvested at the appropriate time.
GIC laddering is a suitable strategy for investors who prioritize capital preservation, steady income, and flexibility. If long term investing is your aim, right now is a great time to tack advantage of high short-term rates to maximize returns upon reinvestment. As interest rates begin to fall, it's important to continue to evaluate your ladder to see if there are better opportunities for your cash elsewhere.
Consider GIC laddering if:
You're looking for a safe and predictable way to grow your savings.
You want to minimize interest rate risk while still earning competitive returns.
You need regular access to a portion of your funds for short-term expenses.
GIC laddering is a versatile investment strategy that offers a balance between security, liquidity, and returns. By spreading your investments across multiple GICs with varying terms, you can mitigate risk, maximize returns, and maintain flexibility in managing your finances. Whether you're saving for short-term goals or building a long-term investment portfolio, GIC laddering is worth considering as part of your overall financial plan.
Regardless of what your financial goals are though, one thing that stay constant is the need to find great rates! That's exactly what we at Yield Exchange are here to do, so if you're looking for the place to find the best rates for your GICs, sign-up for a free account on our platform today!