Are GICs a Good Investment for Canadians?

After understanding the answer to the question “What is a GIC,” many investors wonder if it’s the right choice for them. Especially with the higher interest rates we have seen in the past few years. But how do guaranteed investment certificates actually stack up? And should you own them?

What makes GICs appealing to Canadians

On the surface, GICs look attractive. They offer stability at a time when the financial markets feel unpredictable and borrowing costs remain elevated. But a guaranteed interest rate alone does not mean the investment is automatically right for you. GICs prioritize certainty over growth. It’s a trade-off that impacts whether or not they are a fit for your portfolio.

Many Canadians choose GICs because they remove a significant amount of uncertainty from the savings process. The benefits of holding a GIC include:

• Receiving a guaranteed principal (provided that you hold the GIC until maturity)
• Predictable returns, as you already know the interest rate and payout timeline
• A simple structure with no market tracking or ongoing management
• Comfort for risk-averse investors, especially during periods of market volatility

The downside of GICs

While GICs may offer certainty, they come with a few caveats. Liquidity, for example, sits at the top of the list. Most GICs will lock in your money for the full term, limiting your flexibility should your plans change or you unexpectedly need access to the funds in the future. The restriction also means an opportunity cost. Using a GIC means that your money sits in a fixed-rate product, while equities, or even a balanced portfolio, have the potential to deliver stronger long-term growth. But the higher earning potential of these alternatives comes with additional market risk.

Another consideration with GICs is inflation. Even though GICs guarantee a positive return, rising prices can erode your buying power over time. Scotiabank explains, “as inflation increases… your money buys less.” The key issue here is the real rate of return. If your GIC pays 5%, but inflation is 3%, then your real return, otherwise known as your purchasing power, grows by only 2%. Now, if inflation exceeds the GIC rate, then technically you are falling behind in real terms. The risk may seem small in the short-term, but over longer periods, it can become more pronounced as even modest inflation compounds.

Finally, changes in interest rates also make a difference to your GIC purchase. If rates rise after you lock in the terms of the GIC, then you won’t see the change reflected in your investment. Your money will, instead, stay tied to yesterday’s yield.

It’s important to understand each of these points, though remember, they don’t mean GICs fail as an investment product. Instead, they may simply work better as a tool for capital preservation rather than acting as a store of liquidity or a long-term inflation hedge. This trade-off shows how “safe” doesn’t always mean “best.”

How GICs compare to other investments

When deciding if a GIC fits into your portfolio, it helps to compare them directly to other common investment options like high-interest savings accounts or stocks and ETFs.

Where GICs fit in a diversified portfolio

From a market risk perspective, traditional GICs sit between holding cash and investing in stocks. They often offer greater return than a savings account, but less upside than equities typically have. That also translates to a lower downside potential. This is a key reason why many investors blend different types of investments in their portfolio. It’s a strategy called diversification.

As RBC explains, when you diversify your portfolio, it means “investing across a variety of industries and asset types, such as stocks, bonds and cash.” The purpose is to “help keep your investments on an even keel by reducing risk when the economy is uncertain.”

When GICs are a good investment

After understanding that GICs can fit within a diversified portfolio, the next question is when they actually make sense. In short, GICs often work best when you have a clear timeline and a defined purpose for your money. Here are a few situations where that may apply:

• Saving for a downpayment on a home. As GICs provide certainty, they can protect your earmarked funds from losses close to your closing date.
• Putting money aside for tuition. When you have an upcoming, known education cost, predictability matters more than growth. GICs can ensure you have those funds available on your tuition’s due date.  
• Capital preservation amidst market uncertainty. Since traditional GICs do not carry market-related risk, it is possible to use the investment type to help stabilize your portfolio in response to market-related volatility.
• RRIF or LIF fixed-income allocation. With these types of retirement accounts paying out a mandatory annual amount, GICs with the appropriate maturities can help ensure the money is available when you need it. That said, locking in GICs over the long-term can limit flexibility if cash flow needs change.
• Other short-to-medium term expenses (1-5 years). When you know you’ll need the money within a few years, GICs can help protect your principal from market-related swings.

While owning a GIC can help in some of the above situations, the investment is not for everyone. Be sure to consider your overall portfolio in combination with your financial goals and risk tolerance before you make a decision to purchase a GIC in Canada.

When GICs fall short

GICs aren’t always the right choice. Particularly for investors who focus on long-term wealth building and have a medium to high risk tolerance. If retirement is decades away or you won’t need the funds until many years down the road, locking money into a low, fixed return product can limit its growth potential and reduce the benefits of compounding. Over the long-term, stocks and equity-based ETFs have historically outperformed these cash-like investments. By holding a GIC, you may reduce short-term volatility, but you risk long-term growth instead.

Investors who need flexibility may also find that GICs are not the best fit for them. Most GICs have a lock-in period until maturity, which can restrict your ability to access the funds. It can pose a challenge if your goals change or if you have a sudden, unexpected expense.

Another challenge for GIC owners is in periods when inflation runs higher than GIC yields. In those cases, holding a GIC means that you are losing out on purchasing power, even as your principal has protection. Let’s look at an example. In 2023, inflation in Canada reached well over 4%. If you had purchased a GIC during that time paying only 3%, your investment would have declined by roughly -1% in real terms since rising prices outpaced the interest earned.

Finally, GICs may be inadequate for younger investors. Particularly those that have a time horizon that is long enough to tolerate market swings. When you have decades to invest, short-term volatility often matters less than long-term growth. But, remember that investment choices should depend on both willingness and ability to take on risk. Investors who have a lengthy period for investing should weigh their personal financial situation as well.

The verdict on GICs

GICs aren’t right for every Canadian. If they are a fit for your portfolio, it doesn’t mean you need to put all your money into the investment either. Instead, the amount of your investment should depend on your investment goals and risk tolerance.

When you consider GICs, keep in mind that their strength lies in predictability. Not growth. For investors with defined timelines, near-term expenses or a need to protect capital, GICs can play a useful role within a broader investment plan. Remember, though, that relying too heavily on GICs can limit long-term growth. It’s a particular consideration for those with longer time horizons or a higher risk tolerance. Over time, growth-oriented investments often provide better protection against inflation and a stronger potential to build wealth.

The bottom line: Before you invest in a GIC, consider how it fits with your other holdings, your cash needs, and your risk tolerance. When in doubt, we always recommend speaking with a professional investment advisor for personalized guidance.