Are GICs a Relic or a Worthy Investment?

Guaranteed investment certificates (GIC) have been a popular investment vehicle among Canadians since the early 1980s. At the time, GICs were an easy way to park your cash and earn a nice rate of interest. However, investors at the time were also wrestling with double-digit borrowing rates.

Since then, interest rates have been on a steady downward slope. This kicked into overdrive after the 2007-2008 financial crisis, which saw central banks employ radical solutions to combat the crisis. In 2021, GIC rates usually fall in the 1-2% range. This is simply inadequate no matter what your risk tolerance is.

Statistics Canada recently released its Consumer Price Index (CPI) report for the month of August. Inflation rose by 4.1% last month, the highest rate since 2003. This has followed a worrying trend in the summer, a pattern that has also been present in the United States. The economy is still in a fragile state as the COVID-19 pandemic lingers. This will limit the financial tools central banks are able to employ to combat inflation.

In this environment, GICs will not get the job done for investors. Even before inflation started this troubling run, the majority of GICs were not keeping up with the inflation rate. Now, investors will park their money for years only to lose out on a month-to-month basis. Investors on the hunt for income will be forced to assume more risk in this environment, either through investing in bonds, income-yielding funds, or through dividend stocks.