“At least I’m not losing any money.” That’s a common refrain I hear from people who have chosen to invest in Guaranteed Investment Certificates (GIC).
But is that actually the case in this historically low interest rate environment? In a word, No. People often forget to account for inflation and taxes when thinking about their investments and it’s a costly mistake.
Sometimes The Safe Option Comes With The Most Risk
Many people invest in GICs or Government Savings Bonds thinking they are making the safe choice. And, on the surface, they are. Both guarantee a fixed interest rate until the investment matures at a set date in the future and both promise to protect the principal. However, currently the interest paid on a one-year GIC is about 1.7%. That’s simply not enough to protect and grow your wealth.
Consider The Numbers
Interest income is taxed fully at an investor’s marginal tax rate. If you’re in the highest tax bracket, you’re paying 46% in income tax. That means, if your investment earns 4%, after tax it drops to 2.16% (this is why many investors hold GICs or bonds in their RRSP account to defer paying the tax). That doesn’t even cover the cost of inflation, which is sitting at about 2.2%. Just look at the math:
If you’re making 1.7% on a GIC or bond and then losing 2.2% spending power due to inflation, your real rate of return is -0.5%!
Diversify To Achieve Your Desired Returns
Balancing fixed income investments with stocks can help you make positive returns while still managing risk. Diversification means purchasing good quality investments in areas of the market that will outperform during the good times and protect you when times are tough. A financial advisor can play a key role in building a successful diversified portfolio tailored to your objectives and tolerance for risk.
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read all articles in Allan Small's Worry Free Retirement Series ----------
Worry Free Retirement - An Overview
Canadians Are Living Longer. What Does This Mean For Your Portfolio?
Are Your Investments Keeping Up With Inflation And Taxes?
Did You Know That People Who Work With Financial Advisors Make More Money?
Protect Your Investment Assets
Avoid These Top Mistakes Retirees Make When Investment Planning
What Do You Want Your Money To Do For You In Retirement?
The Art Of Creating A Portfolio For Retirees
Estate Planning: Passing Wealth From One Generation To The Next
Can Buy And Hold Still Work For Retired Investors?
Active Investing Key To Worry Free Retirement