Opportunity costs remain biggest GIC danger in down economy

When it comes to investing in bonds versus GICs, your client’s time horizon will provide the best guidance, says Paul Ghoche, a private wealth counsellor with Canada Life.

Ghoche said clients with no immediate cash flow needs may be able to take advantage of attractive GIC rates. Otherwise, GICs may not be the best option.

“Periods of market volatility can provide portfolio managers with opportunities to add to positions at more attractive valuations,” he said. “If you happen to have your money locked up in a GIC during these times, you may be incurring a significant opportunity cost.”

He said GICs, which are not always cashable before their maturity date, carry an inherent liquidity risk during economic downturns.

“We feel that this should also be factored into the overall equation in determining whether allocating a client’s money in a guaranteed investment certificate makes sense at any given point of time,” he said.

If the client anticipates making several cash withdrawals in the near future, a laddered GIC strategy could be the solution — with progressive maturity dates, each of which release a portion of the client’s funds.

As for whether bonds or GICs tend to do better over the long term, Ghoche said that generally, bonds have the edge.

“But again, as with everything, [it depends on] the timing of the bond purchase, the type of bonds being purchased, the economic landscape at the time, and of course the tax considerations. They will all have an impact on whether a bond outperforms the GIC,” he said. “But all things being equal, generally the longer the holding period on the bond, the greater likelihood it will produce better after-tax returns.”

Current conditions, he said, may soon favour bonds.

“There seems to be a prevalent opinion that yields are close to coming back down, if we look at the indication numbers of the last two or three months,” he said. “And this could definitely make a compelling case in terms of choosing a bond over a GIC.”

Ghoche said while investors may like the security of GICs, financial advisors must consider the bigger picture and offer advice based on reality, not fears.

“A lot of people choose GICs because they have geopolitical concerns and are concerned about what is taking place in the market. They may be gravitating toward GICs for psychological reasons,” he said. “So, we have to make sure we are managing clients’ emotions as well as their money.”

Nonetheless, Ghoche said GICs can still be a valuable part of a balanced portfolio. “It is obviously a risk-free option and perhaps a logical solution for those who will be requiring a guaranteed fixed amount at a specific date,” he said. “It certainly has its place in an overall investment strategy.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.