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The 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 decisions.

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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25 Lakeshore Road, Oakville, On L6K 1C6.
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