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As interest rates rise, Frank is looking to GICs because his bond funds aren't making gains.
READ MORE: GIC or bonds?A second benefit makes GICs more attractive if you expect interest rates to rise. Bonds lose value when yields go up, making it possible to suffer losses in a bond fund, even over periods of a year or two. That won’t happen with a GIC: their face value remains unchanged whether interest rates rise or fall, and many investors find that stability comforting. We all understand that stocks can plummet in value, but no one likes to see even modestly negative returns in fixed income. But before you switch all of your bond funds to GICs, Frank, you should be aware of their limitations. The most important is illiquidity: you cannot sell a GIC before it matures. (Cashable GICs are available from some issuers, but they always pay lower yields.) So if you need to sell some of your fixed income for an unexpected expense, or if you want to rebalance your portfolio after a downturn in stocks, you won’t be able to do that if you hold only GICs. The second knock against GICs is just the flipside of one of their advantages: while they don’t lose value when rates rise, neither do they get a boost when yields fall. That means during a bear market for stocks—which often leads to falling interest rates—your GICs won’t offer the diversification you should expect from bonds. So, Frank, you might consider a balanced approach and using both in your portfolio. For example, you could build a five-year GIC ladder with about half to two-thirds of your fixed income allocation and use a low-cost bond ETF for the rest. That should help you achieve higher yields and added stability while also giving you some liquidity and an extra layer of diversification. Dan Bortolotti, CFP, CIM, is an associate portfolio manager and financial planner with PWL Capital in Toronto.
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