GICs: The Sloth of Your Portfolio

When you hear "GIC," what words do you associate with it? Secure, guaranteed, stable return, no risk. The three letters themselves stand for Guaranteed Investment Certificate, and everyday investors like to hear that. So it is no surprise that GICs are one of the most popular investment products individual's in Canada use today.

Today, if you shop around, you may be able to lock into a 5 year GIC for 2.5% to 3.0% with $15,000. Now, that no doubt sounds like a steal considering the majority of all other investments are down anywhere from 10% to 50%. So the ultimate question is: do I invest my money with GICs or do I invest my money elsewhere?

First, let me relate the marketed benefits of a GIC:

• Fixed term interest rate
• No maintenance
• No management
  

GICs provide the ability for an investor to take $15,000, place it into an account for 5 years and receive 2.5% on that money each year. At the end of those 5 years they can choose to take that money and spend it, invest it elsewhere or place it back into a new GIC.

Now some disadvantages of a GIC:

• Interest rate risk
• No Flexibility
• Inflation Risk
• Taxed heavily

I won't be able to explain each of these in this blog, if you would like to know more please feel free to ask. The one point I would like to deal with, though, is inflation risk because this leads into what is called "real return." Let's create a scenario to illustrate:

You have $15,000 and you place it into a GIC that provides you with 2.5% return each year. It is important to understand that this 2.5% is NOT your real return. Real return for an investment is Return - Inflation = Real Return (simplified equation). So in this scenario:

2.5% on $15,000 is $15,375.
Inflation averages around 2.5%
Real Return = 0% (2.5%-2.5%)

Tax Rate of 27% (average tax rate)

Your $15,375 at the end of your first year has a real return after tax of:

$10,849*(If invested in an RSP this tax would be deffered until withdrawn)

To simplify all of this, unless you have a GIC that has an interest rate of 6% a year and inflation stays at 2.5% you will not have any growth on your money in a GIC. Now it's important to realize that if you put $15,000 into an investment such as the Makenzie Universal Canadian Resource Fund, your 1 year return would be -56.4%. Would you believe me if I told you that that is still a better investment option than a GIC?

Remembering that investing to make money has to be a long term journey, let's let the numbers tell us which is better. We will compare the GIC to one of the most aggressive investments and to one that is very conservative.

Over 10 years Feb. 1999 to Feb. 2009 $15,000 Real Return (these numbers are real figures):

GIC at 3.5% = $21,353

Mac Unv at 13% (aggressive) = $52,014

GWL Real Estate at 6.6% (conservative) = $28,553

GICs are popular because they are heavily marketed. This is becuase financial companies make a tremendous amount of money on them and they do not need to be managed. The banks give you 3.0% on your money and they take that money and make 13.0% themselves in other investments.

Always remember that it is important to ask questions about where your money is being invested, be concerned with what your Real Return is and be aware that nothing is ever guaranteed.

The keys to investing and finding growth are: time, diversification and proper portfolio management.

Are you getting that with your investments?

Have a great week!

Matthew George

Riding the Emotional Roller Coaster

Assuming you have picked up a newspaper in the last 7 months or somewhere heard a "solution to the problem" from financial experts around the world, you are enjoying the thrills and spills of our economic amusement park.

It's no mystery that we have been in a Bear Market this last 7 months; we won't deal with the question of why it happened. That has been widely talked about, and I have my own opinions as to where the real foundation of the problem was rooted but we can discuss that at a later date. What I would like to discuss is how should we react to these "corrections" in the market and is there positives to be found in such so-called "difficult times?".

How should we react?

The short answer is to take our emotions out of investing, and I would like to stress here both in "bull markets" and "bear markets". This can be very difficult to do in the "flat world" that we are living in with updates every second as to which stock is hot and which are not and advice provided daily, structured around multi-platformed strategies from Banks, Investment Companies, Investment Magazines and Newspapers. It is very easy for an individual to be caught up in all this madness and stop making decisions logically and start making them emotionally based on what we are being told by numerous teams of "professionals" in every imaginable form of communication.

Let's look at a couple examples. In June 2008, this headline was in the Financial Post: "Parked Cash Could Fuel Bull Market." Also in June, an Investment Executive (who will remain nameless) said "Canadian Equity Funds with Solid Performance." What followed was one of the largest drops in market history.

The absolute basics of investing as most people know are to Buy Low and Sell High. Yet if you were strictly to follow the news, the papers, the magazines you would be hard pressed to find one that says Sell when things are good and Buy when things are bad.

What do we read when things are bad?
January 6 2009 Financial Post "Stock Markets will Remain Dangerous."
January 15 2009 Globe and Mail "It's really gloomy out there."

The Canadian investor follows this investing pattern, Buy High and Sell Low (being sarcastic but speaking truth here). We follow headlines, we listen to news casts and we act IN THE MOMENT.

In 2001 we experienced something similar, the Tech Bubble and 9/11. Over a span of about a year and a half the TSX dropped approx 5,000, points to a bottom of 5,600 in the month of Sept 2002. As you can imagine the headlines dealing with the market were much the same as we are seeing right now. What happened over the next 2 years? Well the TSX reclaimed those 5,000 points. In fact, from Sept 2002 to Sept 2007 the TSX went from 5,600 to 14,600 points. Imagine if you had invested on Sept 2002.... Also imagine if you had sold in Sept 2002, what you missed out on...

I won't deal with numbers and returns because I personally am not an advocate of Market timing. I am though an advocate of Long Term Investing and proper portfolio management. The closer you are to needing your money, the less aggressive your portfolio should be; the longer you have in the market the more aggressive you should be.

If there is one thing you can take away from this let it be this quote from an extremely successful Investment Advisor:


“The success or failure of a long-range savings plan is not predicted on its rate of return, but the consistency of putting money away regularly and leaving it there.”

Bernard Baruch, financial advisor to the Rockefeller's and the Kennedy's in the 1920s and 1930s

I strongly agree that his statement still holds its truth today and should be the basis of every individual's financial plan. The headlines of the Times and Globe and Mail should not determine your personal decisions about your investments.

Do you also agree? I would love to hear what you think.

Have a great week!

Matthew George

Why Make a Blog?

This is an intro post describing the decision to start writing a blog.

As an individual who falls into the demographic of generation Y it is almost a necessity to one; read a blog, or two: write a blog. I have made the decision to do both.

I have personally always thought that writing a blog is a desperate effort to fill an emotion need to feel important and express your opinions to others, and overall feel important. Now, my opinion has not changed entirely, but I have come to a point where I feel that a blog can certainly hold some value.

Why write a blog? My desire to write a blog is not to write about the latest pop cultural event or rant on about issues that I feel "need to be heard by the world!" My desire was really rooted from conversations I have had with a couple of close friends. I come from a marketing background and am now a professional in the Financial Advice/Services business. My marketing mind was constantly nagging me to start some sort of "electronic communication medium" to further communicate with and involve my clients and also just because I love the idea. And what marketer doesn't love his own ideas...

My ideas never leave my head but they usually morph into something else, hence a very simple blog.

Finally, what is "Your Weekly Expansion?". It will be a theme/thought/topic created weekly that I hope will expand the knowledge of the individuals reading it through discussion. In turn I hope they will take any small thing learned and turn it into something larger in their own lives. It will be structured loosely around discussions ranging from finding personal financial success to trying to uncovering that ever-elusive inner happiness.

I hope you find enjoyment and value in our later discussions and of course input is always encouraged.

This blog will be updated Mondays on a weekly basis.

Matthew George