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The Money Management Newsletter: GICs and Fixed Income
Maximizing returns on GIC investments, compounding and escalating interest rates

Start early and invest often - The longer your investments have to grow, the more opportunity you have to reap the benefits of compound interest - is a standard investment mantra.


If you're not relying on your GICs as a source of regular income, then opt for compound interest (View rate chart) to maximize your return. Compound interest is the interest that you earn on your interest. For example, if you invested $10,000 and earned a rate of four per cent over one year, your interest would be $400. If you earned four percent again the following year on the combined amount of $10,400 you would receive $416 in interest. The extra $16 that was earned on the $400 would be your compounded interest. Compounding interest is a compelling reason to invest for the long-term.

Click here: To learn more on compounding

Ladder the maturity dates of your GICs - This is one way to diversify the GIC component of your portfolio to help you meet your goals and reduce your risk. Laddering helps maximize your overall return by structuring your GIC investment maturities so that you renew them for the term with traditionally the highest rate of interest – the five-year GIC – while giving you flexibility and access to your funds. Here's how it works:

  • First, you divide your total GIC investment into five equal portions, and invest them in five different GICs - ranging from one-year to five-year maturities. This way, one of your GICs will mature each year.

  • Each year as a GIC matures you renew it for five-years if the funds are not required. This way you continue the ladder of one GIC maturing annually to provide ready funds if needed but also earning a higher average rate of return by using five-year renewal terms.

Click here: To learn more on laddering

In addition to giving you access to some of your money each year, laddering helps smooth out interest rate fluctuations and increases your return potential by reducing the impact of interest rate dips.

Phyllis Arth , Fiscal Agents' GIC investment specialist says "Some institutions such as Advisors Advantage Trust or TD-Canada Trust offer automatic GIC laddering" - a convenient solution for investors interested in this strategy. She also advises, "don't be fooled by the high interest rates offered in the final years of escalator or rate riser GICs. It's the overall effective rate of return as indicated by the blended rate or average rate over the life of the GIC that's important. This is the absolute return for the time period - and the only rate that matters. (See chart)

Note:
Investors who normally invest amounts close to the $100,000 CDIC insurance limit should be mindful that the total principal and accumulating interest remain insured.
(See CDIC news release) ). GICs are not considered marketable securities such as Canadian bonds and normally cannot be sold before maturity. (Exceptions are available) Compounding certificates only offer tax relief if sheltered in a registered investment such as an RRSP or RRIF. The interest earned each year on a non-registered, compound-interest GIC must be reported as income on your tax return, for the year earned, even though you will not actually receive the money until the GIC matures.

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