Investors looking for safe havens often turn to Guaranteed Investment Certificates (GICs), but in many cases they do so without realizing that these investment products can inject flexibility and liquidity as well as security into their portfolio.
Beyond offering a guarantee of principal and a fixed
rate of return, frequently ignored benefits of wisely managed GICs can
include penalty-free access to a source of income just when it's needed,
and the elimination of guesswork in relation to fluctuating interest rates.
These advantages and more can be secured through a portfolio-management technique know as laddering, or staggered investing. It's a relatively simple concept... basically, the investor purposefully purchases GICs with differing dates of maturity and thus rates of return... and it can be extremely useful in meeting various portfolio needs.
Consider income taxes. Many investors faced with quarterly income-tax payments struggle to come up with cash at the right time to fulfill their obligations to the tax man. But if they know the size of their payments each quarter, then they can buy a GIC that pays interest quarterly, thus ensuring that they have sufficient income to meet their needs. And it's the same with any other periodic obligations such as property taxes.
If you are considering implementing laddering for your fixed term GIC portfolio.Here's how to start. Using a calendar, document your periodic expenses. At the same time, review the streams of cash you can take advantage of. There may be regular pension payments, cheques from government sources and income from investments including GICs. Carefully assess the maturity dates of your GIC investments and the corresponding reinvestment dates.
Many investors need their GIC income to help meet their regular expenses. If you find that your investments income doesn't mesh with your cashflow needs, then you are a candidate for restructuring of the GIC component of your portfolio. Take a look at the reinvestment dates of the GICs you own. If the timing is off, you may wish to temporarily park the funds in a short-term note or investment savings account, waiting to then reinvest so the interest payment arrives prior to the when you have to pay the obligation.
If you look around, or have your financial advisor do
so, you'll be surprised at the variety of terms being offered to help
investors meet specific needs. Some institutions now offer GICs with such
terms as 18, 19 or 20 months these can be incorporated into a laddered
GIC portfolio as an alternative or complement to shorter terms. The bulk
of the interest earned on say a 19 month-GICs would be on the 12th month
anniversary date. It goes without saying that, since longer terms are
associated with higher rates of return, you will want to purchase as many
of the longer-term GICs with targeted maturity dates as fit into your
schedule of needs.
Another consideration for investors who hold several
GICs that all renew at the same time, or one large GIC, is the loss of
flexibility since they are limited to accepting whatever rate is offered
when their investments mature. There is nothing like that sinking feeling
some investors have when most of the conservative component of their portfolio
is due for renewal and they realize they are faced with low returns for
the foreseeable future. At this time, they may begin actively seeking
alternative investment solutions, another source of stress.
Developing a laddered GIC portfolio plan is an easy way to help you maximize GIC return
Some strategic benefits are: -
The easy way is to divide the investment into 5 equal
amounts, invest the first in a 5 year GIC the second for one year and
them at maturity re-invest for 5 years, the third portion for 2 years
and at its maturity re-invest for 5 years. Following on with the same
type of staggering, invest the balance in the same manner.
Now let's look at some of the characteristics and advantages of different types of specialty GICs you may wish to consider in this context.
Rasteriser or Escalator-type GICs offer hassle-free long-term investments, but for a true comparison to regular GICs you need to remember to look at the average rate of return over the term. This type of investment will only accumulate the interest and pay it out at maturity - much the same way normal compounding certificates operate. With any compounding interest-bearing investment, the interest earned annually has to be included in any tax filings as interest income.
The caveat here is that you are paying taxes on interest
income each year well before it's in your hands, possibly causing a cash-flow
problem. However, some Rateriser or Escalator-type GICs can be converted
into a regular GIC on the second, third or fourth anniversary date (note,
it has to be with that same institution and no shorter in term than the
original GIC commitment). If rates rise, this flexibility can be rewarding.
in stock market growth and a guarantee of principle - stock-linked GICs
may provide the answer.
One more thing you should know about the term "GIC"
is that an investment issued by an insurance company that's being marketed
and called a GIC is actually a Guaranteed Interest Contract. For the most
part certificates and contracts have the same basic characteristics when
building advantages into a laddered portfolio. Guaranteed Interest Contracts
issued by a life insurance companies have estate benefits (beneficiary
designation) plus potential creditor protection built-in.
To find out if your GICs need revamping call your Fiscal Agents advisor or 905-844-7700.
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