Balanced investing vs. GICs – What you need to know

January 4, 2016

What you need to know before choosing one over the other.

Most people like to play it safe. That’s why so many Canadians invest in guaranteed investment certificates (GICs). Your principal and interest payments are guaranteed by the GIC issuer (with “guaranteed” actually embedded in their name), so you know you’re going to receive your original investment back at maturity, and you also know exactly what you’re going to receive in the form of interest.

Sounds good? It is … to a point.

That’s because when working to meet your longer-term financial needs, GICs may not actually be the ideal solution for a number of reasons.

Maybe the most important reason is that interest rates are at (or near) their historic lows. This means the income return you receive from your GIC is likely not going to help your investments grow at a rate that will meet your financial needs over the longer term.

What other options do I have?

Although the safety of GICs may appear attractive, their after-tax, inflation-adjusted returns have proven to be relatively unattractive, especially when compared to many other investments, including balanced mutual funds.

Although the returns of balanced mutual funds aren’t guaranteed, the returns of balanced funds have been shown to be considerably stronger than those of GICs over longer periods of time.

* Five-Year Average GIC Rate Index
**Balanced Portfolio based on 50% S&P/TSX Composite TR Index/ 50% FTSE TMX Universe Bond TR Index
For illustrative purposes only, you cannot invest directly in an index.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated.

As you can see from the chart above, over a 20-year time span, the balanced portfolio significantly outperformed the 5-year GIC.

And, the diversified nature of balanced mutual funds – which can invest in a portfolio of securities made up of equities, fixed income and cash – helps to reduce their volatility and increase their long-term growth potential. The different sources of income and growth generated by balanced mutual funds – which may generate capital gains, dividend income and interest income – can also help reduce the tax you pay for holding these types of investment products.

To learn more about balanced investing and GICs, speak with your financial advisor or visit today.

The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.

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