Stop juggling those GICs
Long term investments may be more profitable
GICs can cause investors a lot of grief. Do you “go short”, or lock in for a lower rate of interest and a longer term?. A report from the Royal Bank’s economics department shows that since 1977, investors would have been ahead by taking a longer term instead of rolling over their GICs each year in hopes of out-guessing the market.
For most of the years since 1977, a savvy investor would have selected a five-year term GIC over successive one-year terms, said Harry Hassanwalia, Royal Bank deputy chief economist.
“Studies examining interest costs for mortgage borrowers accurately conclude that homeowners would have been better off financially choosing shorter terms,” he said. “The reverse is true for GICs: investors could have increased their income by selecting longer rates.”
But what about the future? Again, Hassanwalia says history is a great teacher, and suggests a `go long’ strategy for investors who prefer income-generating vehicles.
“In early September the posted five year rate was 4.75% and the posted one year rate at that time was 3%,” he said. “In order for a strategy of rolling over one ar rates for the next five years to give a yield of 4.75%, which is the 5 year rate guarantee, the future one year rates must average 5.2%. That reflects an increase of over two full percentage points in the current one year rate by 1998. How likely is that?”
If he proves right, seniors could save a lot of time spent lining up in banks and still come out ahead financially.