In turbulent economic times investors often look for security, and this year isnt likely to be much different.
A recent study by BMO Bank of Montreal has found Canadians interest in purchasing Guaranteed Income Certificates (GICs) increases as they look for safer investment options and as investment returns increase. Nearly two-thirds of Canadians are expecting a market correction in the next 10 years and 51 per cent indicate they will look for safer investment options this year.
More Canadians are looking for ways to protect their money, says Ryan ffrench, director of term investments with BMO Financial Groups. [GICs] provide a safe investment vehicle that offers investors a flexible range of investment options and competitive returns.
GICs are secure investments that guarantee to preserve principal. The investment earns interest, at either a fixed or a variable rate, or based on a pre-determined formula. GICs often form the foundation of a well-balanced portfolio.
With Canadas prime lending rate hovering at three per cent and near historic lows, generating good returns and income from GICs becomes somewhat problematic. However, BMO and other financial experts are predicting that rates could begin to rise late next year and early in 2016.
Knowing when, how much and how quickly rates will rise is tricky, ffrench says. In a low interest rate environment there are strategies investors can use to protect their principle and still achieve more upside potential.
The first strategy is to create a GIC ladder. This is achieved simply by buying a number of GICs over a period of say five years with staggered maturity dates.
So an investor would buy five different GICs with one, two, three, four and five year maturities. As each one matures it can be reinvested in a new five-year GIC. This way you are always able to reinvest at higher rates if rates do rise and minimize risk while increasing average yield. This is an excellent strategy when rates are moving higher.
Another strategy is to invest in market-linked GICs. These are GICs that are linked to the performance of a market like the S&P/TSX index and give you the potential growth of equity markets without risking your capital.
Many Canadian investors are not adequately prepared for the impact of rising rates.
A recent poll from CIBC Asset Management has found that almost 60 per cent of Canadians with a retirement portfolio are unaware that rising interest rates can erode the value of some of their investments. That figure is even higher (65 per cent) among baby boomers between the ages of 55 and 64.
Rising rates can negatively impact investors who own bonds or fixed income securities because bond prices fall when rates go up. An extended period of falling interest rates and a flight to safety from equity market volatility has resulted in many Canadians investors loading up on bonds in recent years, but most experts agree that this era of record-low interest rates have come to an end, CIBC says.
Nobody knows exactly when and how fast interest rates will rise but Canadians need to understand the risk this poses to their retirement funds and plans, says Steve Geist, president of CIBC Asset Management. Canadians understand the impact that rising rates have on household expenses such as mortgages and loans, but its equally important, especially for those approaching retirement and preparing to draw income from their portfolios, to be aware of the impact rising rates can have on their investments.
CIBC recommends floating rate investments for additional protection from rising rates and shorter bond durations. Duration is a measure of how sensitive the price of a bond is to changes in interest rates. The shorter the length of time for a bond to reach maturity the less interest rate risk is involved. Portfolio managers often will use this strategy to mitigate risk in actively managed mutual funds.
And work with an adviser to find the right fixed income mix. An adviser can help you assess your portfolio and understand its overall sensitivity to interest rate changes.
Talbot Boggs is aToronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
