Higher GIC rates | Page 2 | GIC discussions | Discussion forum

Sounds interesting if you want to risk 0% payout after 5 years, but it could be 25% (5% per year). It's all about timing the market. Very good possibilities considering today's interest rate climate. Market has been bouncing around like a yoyo lately.
Community Trust has a 5 year GIC now @ 3.00% for $5000.00 and up. Not bad for a CDIC insured product.

Jon said

You have to check how is the return calculated, banks will design the scheme/index that will favor them.

What ins and outs are there over the 5 year period that may benefit the bank but not you at the end? I looked at these a long time ago and was dubious about them...but forget why. The question is what is the track record of pervious maturities?

There is an entire market out there in this kind of product. If this is what you are interested in, you might want to check around with various institutions.

There are 2 issues with them which have made me shy away from them. First, you have to read all the fine print very carefully to find out exactly what you might get, as they are not usually stacked in your favour. Second, most people do not do very well with them because you are stuck with a particular arbitrary date on which you must cash in. If the markets happen to be in a slump at that time, you're stuck, and you stand to lose earlier gains.

However, if interest rates continue to head towards nothing, they might be worth a look. Not much left to lose.

You should be able to figure out how this would have worked out in the past, picking some arbitrary dates. Such figures may even be available. I did look at some once, and they were not at all inspiring, as it was clear that most of the time you would lose. Sorry, I can't remember where I saw this. At least it would give you an idea of how it could work out.

Something else to bear in mind is that if you buy this outside of a registered plan, you will get the entire tax wallop at the end, should there be one. It seems to count as "interest", not as capital gains, as that is the term they use in their disclosure. Thus, you are taking risks which bear some characteristics of stock market but you are not getting the benefit of any capital gains rates from CRA. So, if you do buy this, it should almost certainly go into an RSP/RIF.

As Norman1 has shown, dividends are excluded. Also, if you look at the indexes offered, many of them have a significant weighting in dividend-producing stocks, which I think means that the returns from stock values per se will likely be less impressive. I would think that if you were going to do this, you would probably want to choose the S&P500 or the Global one. Since the issuer is removing the downside risk, you would want to use this as your opportunity to make the riskier investments without downside risk. The question is whether, after you have met the 16% that you could have gotten from GICs, how likely is it that you will make more with this scheme? I'd say you're not too likely to do so with dividends excluded, the particular portfolios on offer, and the relatively short time horizon of 5 years.

I would vote "no". Term is too short. Stock market has just had a good run. US interest rates are expected to go up. If you think the S&P500 is going to do well, then you might as well invest in that - there will be no ceiling, and you can hold it until the results are favourable. If you don't think the results are ever going to be sufficiently favourable, then you shouldn't invest in either.

I would vote a "yes". Stocks usually do well when interest rate starts to go up from lows. Stocks only enter bubbles when extreme greed prevails, such as dot com, sub-prime mortgages. At current time I do not see greedy money. Yes, one can invest in S&P directly. But that bears even higher risk. I do not believe -15.9%...0%...9.1% pattern. It is not like tossing a coin. It is where underlying economy goes.

Norman1 said

Upside is +9.1%. Downside is -15.9%.

Norman is correct. This is not a matter of "belief". This is a factual calculation.
If you'd stuck with GIC, you would unquestionably gain 15.9%.
If you take this offer, the most that you can get in addition is 9.1% over 5 yrs.; and the worst you can get is to lose out on the 15.9% and have nothing to show for it.

Stocks can go down for a number of reasons, not just greed leading to bubbles.

I like Jon's idea but I am not familiar with how much it costs to buy puts.

Here's a plan:
Take half your money and buy GICs. This ensure you will get something for your money, which TD's offer does not.
Take the other half and put it in S&P500 ETF if you want. Buy puts against this. Assuming they do not cost more than, let's say, 2%, you are guaranteed to at least come out ahead, which TD does not guarantee. If puts cost more than that, reduce your market exposure accordingly.

By the way, I have read in several financial advice books that schemes like this are never rigged in the investor's favour and should be avoided. The more complicated they make it, the less likely you are to win from it. These schemes are designed to draw in the customer and make money for the bank. What else is new?
If you are concerned about the higher risk from investing directly in the stock market, as you say you are, then you can be sure that the bank has also thought of that. They have themselves covered because they don't have to sell their shares in 3 or 5 years; they can wait until they make a profit. You, however, are stuck with whatever happens when the hammer falls in precisely 5 years. On that particular day, who knows what will be happening in the world and in the markets? You need to remember that you are not betting on general trends that you may anticipate in the market; you are betting on your luck on one particular day.

Jon, can you tell us how much puts cost?

Another new GIC option for everyone is Ontario based Luminus Financial CU with a 5 year rate of 3.10%, good till Jan.30.