The Risk Of Investing In GICs

by Pam on June 7, 2010

Guaranteed Investment Certificates (GICs), are a common savings vehicle used by Canadians.  There are different types.  Some are locked in for a specific period of time, while others are cashable at anytime.

GICs provide the following advantages:

-Your principal is guaranteed.

-For most GIC types, you are guaranteed a fixed rate of interest for a specific period of time.

-They help people to save who would otherwise spend their money.  If their money is locked away, they have no way of accessing it, making it impossible to spend it on a whim.

Why is it risky to invest in GICs?

When it comes to saving for long-term goals such as retirement, it is extremely risky to have all your money tied up in GICs because GIC rates seldom pay enough to keep pace with inflation.  That means that when you factor inflation into the equation, you actually end up LOSING money.  Sure, your principal may be guaranteed, but if you are not earning enough interest to factor in the increased cost of living each year, it is likely that you will not achieve your retirement savings goals.

That said, once you are much older and retirement is only a few years away, it may be wise to consider GICs as part of your retirement portfolio in order to preserve capital.

There are varying opinions out there regarding GICs.  Some people think they have so little money that they cannot afford to take any risks, and thus they save only in GICs.  I would ilke to suggest, however, that if you have so little money, you cannot afford NOT to take any risks, as GICs guarantee to cause you to lose money due to loss of purchasing power.  In my opinion, only the very rich can afford to save exclusively in GICs for their long-term goals.

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