Money Management Newsletter: GICs
and Fixed Income
What is the best fixed term to invest for with
rates so low?
This is a simple question for which there is no easy
answer. Very few people other than The Great Zambini or your fairy godmother
can accurately predict how long interest rates will remain at a particular
level or the future direction of such rates. Unless you have access to
infallible data, the best course of action in almost all cases is to stagger
the maturities of your investments over several years.
The concept of staggered maturities is simple and recommended by most
investment professionals, however applying it is another matter for a
lot of people. The main stumbling block in applying this concept is peoples
emotions and their willingness to gamble on interest rate changes.
For example, in the fall of 1990, long term rates were in the 11.25% range
while shorter term rates averaged around 11.75%. Many of our clients with
deposits maturing at that time, renewed them for one year or less, anticipating
that rates would continue to increase. Similarly when interest rates began
falling rapidly in early 1991 many clients again renewed for short terms
hoping that rates would soon return to previous levels. We all know that
rates have continued to fall so the people noted above had those particular
investments renew at even lower rates.
Now that rates are much lower than they were in 1990 and 1991 many clients
are again renewing for shorter terms feeling that rates have to improve.
This may or may not happen and time will be the only judge of current
You will note however the pattern illustrated above. Individuals were
renewing for short terms during periods of high rates, falling rates and
again when rates are low. Emotions may have been a factor in these decisions
which in retrospect have produced lower returns.
A consistent approach of staggering investment terms will eliminate emotional
decisions that can often create negative results. This disciplined approach
should improve the overall return of your portfolio and produce a more
consistent investment cash flow. A consistent cash flow is especially
important if you rely heavily on your investment income to meet monthly
expenses, as wide fluctuations in your earnings can make budgeting difficult.
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© , Fiscal Agents Money Management Newsletter
25 Lakeshore Road, Oakville, On L6K 1C6.