5 Investment Benefits of Buying a GIC
One of the richest people in the world, Warren Buffet, has only two rules when it comes to investing. Rule number one says you should never lose money, while rule number two says you should never forget rule number one.
When investing, a good portfolio should include both fixed investments and equity. Guaranteed investment certificates (GICs) are a perfect choice for your fixed income portfolio. This article shows you a number of reasons why buying GICs will help you stay true to Warren Buffet’s rule number one on investments: never lose money.
1. Your Principal Is Secured
Most investments do not guarantee the safety of your principal. No entity can guarantee that your investment in stocks or real estate will protect your principal. However, GICs are different. They may not provide as many returns as other high-risk investments, but you won’t have to worry about losing what you already have. A GIC gives you a rock-solid guarantee that such an eventuality won’t happen. You may not become extremely rich by investing in GICs, but you won’t lose your money either.
2. Interest Is Almost Always Guaranteed
While GICs won’t make you rich, having the best GIC rates can guarantee you a modest return on your investment. This, however, depends on how long you keep your GICs since withdrawing them too early may affect your returns. The returns are also not guaranteed should you invest in a market-linked GIC where the market is volatile. The trick, therefore, is to hold on to your GICs for as long as possible, which means you should invest funds you don’t need in the short-term. You should also consider investing in non-redeemable GICs, which have higher interest rates than cashable GICs.
3. GICs Protect Your Money From You
GICs are invested over a particular period, which means you cannot withdraw them before the expiry of that duration. This deprives you of the flexibility to access them at short notice. It’s not as easily accessible to you as the money in your savings account. However, should you have a financial emergency, a number of institutions may allow you to withdraw your GICs early, but you may have to surrender all interests earned thus far. The reasoning behind the structuring of GICs is to protect you from impulse withdrawals and help you to be strategic with your savings.
4. You Can Purchase GICs for Registered Accounts
Different savings vehicles such as RESP, TFSA and RRSP are eligible for GICs investments. You won’t pay tax on interest earned by your GICs if you are using RESP and RRSP GICs. TFSA GICs also don’t attract taxes in earned interest or on withdrawals. This makes investments in GICs a win-win situation from whichever angle you look at it.
5. GICs Are Suitable for a Fixed Income Portfolio
The best investment portfolio features a balanced mix of both equities and fixed income investments. Equities are ideally suited for long-term investments and are highly recommended for capital growth over a longer period. Fixed income portfolios, on the other hand, protect your principal while at the same time giving you a nominal return on your investment. GICs can be compared to corporate or government bonds and other fixed-income investments. They are however more lucrative than these other options since they not only guarantee the security of the invested principal, but they also generate much higher returns in comparison.
GICs are a must-have in your fixed income investment strategy. The only downside is that, if held over a very long period, inflation volatility may eat into your profits. As Warren Buffet says, your aim should be to never lose money. While inflation can depreciate the value of your money, the nominal interest accrued from GICs should, ideally, cover any devaluation of your principal. The solution is to keep a keen eye on inflation rates and assess how they impact on your GICs.