Q: I am a conservative investor. Am I better off investing in GICs or with interest rates expected to drop, should I instead invest in segregated bond funds?
A: Often in life there are no clear-cut answers. In regards to the above question, the answer depends! Before an Account Manager can effectively answer the question, they would have to consider a number of factors:
What is your comfort level with risk? Are you willing to potentially lose some of your principal in the short term to potentially have longer term success? What is the purpose of your investment? What is your tax situation? Tell me about your investing experiences. What time horizon do you have in mind? Is your investment going to be with non-registered funds or registered funds? What other assets do you have? What is your net worth? Are you still working? If not, tell me about the sources of your retirement income. Are you knowledgeable about investments? Your Account Manager needs to understand your unique situation to answer and guide you through what makes the best sense for you!
Going back to the question, we can look first at investing in GICs. When investing in GICs, it is very clear. You know your principal. You know the interest rate being offered by your Account Manager – a qualified Deposit Agent. You know how much interest your principal will generate on the basis of the interest rate. You can very reasonably predict the tax consequences of this investment. If your principal exceeds $100,000.00, your Account Manager can work with you to deal with CDIC, CUDIC and Assuris to protect your principal.
On the downside, while GICs will increase the absolute value of your investments, between inflation and taxes, you may find the purchasing power of your investments erode over time. For example, if your GIC rate is 5.0%, but taxes take away 2.0% and inflation erodes another 3.5%, then your principal in terms of purchasing power is actually reduced by 0.5%.
When we look at segregated bond funds, things are not so clear. Performance is not guaranteed. It is possible to lose money! So why take these risks and invest in segregated bond funds? Simply put, in the long-term segregated bond funds have clearly out-performed GIC rates. What’s more is that it appears that there has not been a better time to invest in bond funds in the last 15 years. Why is that?
Bond fund prices respond inversely to interest rate changes. When interest rates go up, bond prices go down. Conversely, when interest rates go down, bond prices go up. So, if interest rates start heading down as widely expected by economists, then bond prices will go up. If you own segregated bond funds and interest rates go down, then the value of your investments will go up. When they go up, you are benefiting from interest income as you would expect. However, you may also find that you will experience capital gains on your portfolio. Not only does this earn you more money, but it is taxed more favorably as well!
Of course, there are many things to consider. One possibility is to consider a mix of both GICs and segregated bond funds depending on your specific needs. Talk to your Account Manager to discuss your situation and benefit from our advice. Let MWFS guide you to your investment success
