Avoid big bank GICs!

I received an e-mail this week from a reader who said he and his family are very cautious and expressed an intention to invest his RRSP money in GICs with the Bank of Nova Scotia this year as a result.

My advice can be summed up in one word: Don’t!

Recently, five-year non-redeemable GICs at BNS were paying only 2.75 per cent. The other major banks were about the same. Locking yourself in for five years for that kind of return simply makes no sense at all. It is virtually certain that rates will start to rise within a year or so. You will likely be kicking yourself at that point for tying up your money.

If you want the ultimate in safety, Canada Premium Bonds are a much better choice. The current issue pays only 2.25 per cent in year one but that rises in steps to 4 per cent in year five. The yield over five years works out to just over 3 per cent.

That’s better than a big bank GIC but what is more important is the liquidity the CPBs offer. You can cash in once a year, within 30 days of the anniversary date. So if rates rise and the federal government doesn’t adjust the CPB rate accordingly, you can redeem the bond and go elsewhere. Think of it as an esce clause and a very valuable one at this time.

So if you’re still suffering from the psychological scars of the bear market and want safety above all else, look at CPBs. You can find more details at www.cis-pec.gc.ca/eng

Alternatively, look at GICs from a smaller financial institution.

This article originally appeared in the Internet Wealth Builder