Are GIC rates rising in Canada?
In early 2022, GIC rates were just beginning to rise, but were still below 3%. The reason they’re a lot higher now’s price considering. The Consumer Price Index (CPI) rose 3.9% in 2023, after already rising 6.8% in 2022. The Bank of Canada (BoC) raised rates of interest in 2022 to curb spending and price increases. While a 4% GIC rate could seem tempting, it represents a 0% real return when inflation is at 4%. The BoC predicts that inflation should return to its 2% goal in 2025. GIC investors may also expect GIC rates to fall.
GICs vs. stocks as inflation protection
Stocks are often a great hedge against inflation, but that is not all the time the case. The S&P/TSX Capped Composite Index lost 6.1% when inflation peaked in 2022, and the S&P 500 lost 12.5% ​​(total return for each, S&P 500 in Canadian dollars). Stocks have rebounded well in 2023 and to this point in 2024 as central banks appear to have won their battle against inflation. Stocks normally like falling rates of interest, but now the foremost concern is whether or not or not a recession is looming.
Stocks are volatile within the short term and sometimes within the medium term, but can offer high returns over the long run for patient investors. The longer your investment horizon, the less volatility matters. But in fact, a retiree like your husband, Rodeen, has a shorter investment horizon than someone who’s a few years away from retirement. And for some investors, the stress of short-term volatility is probably not definitely worth the probability of upper returns.
Therefore, the asset allocation – i.e. how much ought to be invested in stocks, how much in bonds or in other asset classes – could be very individual.
If your husband gets out of stocks completely and invests in GICs, he could make temporary losses within the stock market everlasting and never get well capital. So while there may be a risk of further losses within the stock market in the event you stay invested, since stocks rise greater than they fall, and particularly after a pointy drop in value, there may be also a risk of selling every part directly.
Although the shares have fallen sharply in value, their long-term returns have been compelling, with total returns for the TSX coming in at 7.5% for the ten years ending December 31, 2023, and for the S&P 500 an astonishing 14.5% in Canadian dollars.
If your husband invests every part in GICs, Rodeen, that reduces his long-term return expectations for his portfolio. This can reduce your retirement profit or a possible inheritance on your beneficiaries. For example, a 1% increase within the return in your investments over 25 years can increase your retirement profit by about 11% before taxes. Additionally, the longer term value of an inheritance could increase by 27%, not counting taxes.
Not only the costs are necessary
It’s necessary to contemplate how much is deducted out of your husband’s portfolio every year on your expenses, Rodeen.
