Parking Your Cash - Guaranteed Investment Certificates

Preface

I have reduced my exposure to the stock market in recent months for reasons noted in earlier posts.  My actions have been guided by two of Herr Buffet's cardinal rules of investing:

Be fearful when others are greedy, and be greedy when others are fearful

I have the sense that a market correction is in the offing - that the possibility is greater than in years previous.  By several measures, the stock market is entering dangerous territory.  For example,  investors (both retail and institutional) are taking on greater risk in the search for higher yields and the contagion from unexpected events could spread through the financial system in unanticipated ways.  There will be a correction at some point and a climate where equities may be out of favour.  Better to have some resources ready to hand in order to exploit investment opportunities which may arise.

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1

Accumulated gains in recent years have been appreciable and I don't want to place them at risk.  We have enough to meet our needs for the foreseeable future.

At present, I do not have any compelling investment ideas.  Other things in life have occupied my time.  As noted in previous posts, I have started to investigate anew, targets for future investment.  This will be a slow process.

As a result, I have looked for places to park my cash safely.  One of these safe havens is described below.


Guaranteed Investment Certificates (GIC)

A GIC is a fixed income vehicle offered by Canadian banks and trust companies.  It has a guaranteed fixed rate of return and it returns the amount of capital invested.  The terms vary from 30 days to 5 years.  Rates of return generally increase with increases in the terms.  GIC's must be held until the expiry of the term unless one is prepared to pay a penalty.  (There are redeemable GICs but they pay much lower rates.)

This is the best site with comprehensive information about GICs that I found during my research:
Compare My Rates - GIC Info Corner

A few observations:

Safety

Deposits up to $100,000 are guaranteed by Canadian Deposit Insurance Corporation, a federal Crown corporation that contributes to the stability of the Canadian financial system by providing deposit insurance against the loss of eligible deposits at member institutions in the event of failure.  

Click on the following link to see what the CDIC covers.
How Deposit Insurance Works

Read this article by Rob Carrick:
GICs

Rates

Rates generally increase with increases in the terms of GICs e.g. a 30 day GIC will have a lower rate than a 5 year GIC.  The selection of the term will depend on several considerations:

1. Need for cash:  It is possible to "ladder" the terms so that cash can be available in the future e.g. allow for short-term needs via shorter terms of 30 days and longer term needs via longer terms (up to 5 years).  
2. Expectations about future rates: It there is a strong possibility for future increases in interest rates, it may be advisable to select GICs with shorter terms and visa versa.  

This is one of the best sources of information about rates offered by Canadian banks and trust companies:

Cannex - Comparative Rates

Cannex also provides some very interesting White Papers and comparative rates for a wide variety of financial products ... well worth visiting.  

Purchasing GICs

GICs with the highest rates are made available on line.  Institutions such as the Tangerine Bank are well regarded and geared to providing a variety of on line services.  This is only one of many companies.  It is best to compare rates and to split your investments among several institutions if you plan to invest more than $100,000 of your cash in GICs - this in consideration of the $100k limit for the CIDC deposit insurance.  

Concluding Thoughts

Given the current trend for rising rates of inflation, you will be lucky indeed if your money keeps pace with inflation after tax, especially if you elect to buy GICs with shorter terms. Example


The main advantages of GICs are:

• safety
• flexibility as to term

I would consider GICs as useful tools for parking your stash of cash for short periods of time, particularly during times of uncertainty.  As in sport, winning investment strategies often entail going to the defensive mode.