Income fund over GIC at 5% ? | Page 3 | GIC discussions | Discussion forum

lifeonanisland said

It will be interesting to compare GIC performance to equities, for example, in the next two years. Inflation may result in some erosion of GICs, but my suspicion is that equity performance might be more like a landslide. To suggest that "Putting everything into GICs is quite risky, unless you have a short time horizon" is just plain wrong. I'd suggest that, for anyone just retiring, and relying on savings as opposed to a pension, GICs are likely to the be most risk-free strategy.  

There is no “risk free” strategy. We disagree on the rest of your claim too.

highlyinterested said

Well a quick look at the SPY and ZAG charts over the past year during high inflation shows that many investors are down big. You may know exactly what to buy to keep pace with inflation but I don't. A friend of mine has a popular investment firm managing his money and judging from their performance, they don't know either.  

You picked a period (last 12 months) when equities are at its all time high as a comparison ?! Of course we all know how that skews in favor of your argument....

Like I said before, its perfectly fine for someone who does not have any risk tolerance to stay 100% in GIC and principal protected investments, but there is certainly no basis to say equities are evil, 10X over-valued, a govt sponsored game, blah blah. Once again those equities haters do not even realize how they DIRECTLY benefit from advance in medicine, technology all because of the capital invested in the equity market. If you can read this, you already benefit from it !

I can guarantee any young investors that are in their 20s and 30s that invest in 100% GIC type product only: you will regret it by the time you are in your 60s.

There isn't a single right answer. But, there are plenty of wrong ones!

Unless one's strategy is to adjust spending to match whatever dividends are actually received, it is wrong to be doing monthly sells and withdrawals on an equity mutual fund or a stock portfolio for income.

Stock prices are highly unpredictable over short periods like one to five years. Next five to ten years of payouts should be in GIC's that pay interest and mature at the right times. The monthly withdrawals should be from that pool of GIC's.

That pool of GIC's should then be opportunistically replenished from the equity mutual funds or stock portfolio.

The time horizon for one's next five years worth of income is not the 10+ years indicated for investment in stocks.

Do people believe that pension funds wait until the week or month before to sell investments to raise the cash for each batch of payments to the pensioners?

I am always amazed at the determination of some forum members to badmouth interest-bearing investments on a forum dedicated to same.

Loonie said
I am always amazed at the determination of some forum members to badmouth interest-bearing investments on a forum dedicated to same.  

I can assure you those you “forum members” you mentioned all have funds in GICs and fixed income too. They just may not have 100% like urself.

Sorry to say but they know better about investment and diversification than…

Equity investment in dividend paying blue chip stocks is a form of high interest savings to me. I just stomach stock price fluctuations and just buy more every time market tanked (1998, 2009, 2020). Never lose any sleep over it.

highlyinterested said

Exactly. It's safe to assume that someone asking a question on this forum is a conservative investor interested in protecting the principal. Suggesting that they instead diversify into a variety of assets that have the potential to all drop in value at the same time is silly when GICs pay 5%. 2% GICs were a problem. That problem has been solved for the time being. Sure sustained high inflation is bad when your GIC is paying 5%, but a lot can go wrong with other assets classes in that sort of environment too. At least with 5% cashflow coming in, you know where you stand and can attempt to manage spending to that level.  

Yes, I'm with Loonie and Highly Interested. I think the best advice on this thread came from AltaRed: "However, there is a time an place to dial back portfolio volatility when one retires to mitigate SORR (Sequence of Return Risk). There is no single right answer as we all have different risk tolerances and portfolio needs. Investors who have graduated from Investing101 know that. Why not leave it at that?"

If you're 60, retiring after a life of self-employment, have saved well, and are planning on relying on your own savings for retirement, why wouldn't you deploy your full savings at this time to GICs at 5 percent plus? Particularly if the interest from laddered GICs generously covers all your yearly expenses, without even touching principal or needing to tap CPP or OAS until you're forced to? I'll concede that it might be a good idea to be standing by with cash in hand when the impending equity correction, which has been telegraphed so loudly and clearly that even a deaf man can't help but notice, finds a bottom...in that case, Canadian bank stocks, etc., would probably be smart choices. But at this point, "diversifying" into stock markets just seems foolish...unless you're a decade or two or three away from retirement.

highlyinterested said

Exactly. It's safe to assume that someone asking a question on this forum is a conservative investor interested in protecting the principal. Suggesting that they instead diversify into a variety of assets that have the potential to all drop in value at the same time is silly when GICs pay 5%. 2% GICs were a problem. That problem has been solved for the time being. Sure sustained high inflation is bad when your GIC is paying 5%, but a lot can go wrong with other assets classes in that sort of environment too. At least with 5% cashflow coming in, you know where you stand and can attempt to manage spending to that level.  

With 2% GICs and 2% inflation you broke even (lets ignore taxes). With 5% GICs and 8% inflation you are losing purchasing ability every single day. That’s more of a problem than the first scenario. Might change if inflation drops to 2% and then 5% GIC is good deal but we don’t know the future.

“Conservative investor” does not equate to “100% fixed income”. Given that the question was about fixed income vs a mixed asset fund, saying “GIC is the only right answer” is wrong.

Basics:
1. Every asset class carries certain risks. No single investment can protect against everything. Asset diversification is a good thing.

2. Fixed income (Fi) investments (including GICs) minimize volatility but tend to underperform over long periods of time. Performance is terrible during bouts of unexpected inflation.

3. Stocks are more volatile but outperform FI in the long term. Historically stocks coped well with inflation - and beat it over meaningful periods of time. Volatility can be a problem during early stages of retirement due to sequence of return risk. This is mitigated by having a decent portion of FI within the portfolio. Regardless, stocks usually “protect against inflation”, just not over short periods of time and its not a guarantee.

4. Market linked GICs are a marketing gimmick and should be avoided.

5. RRBs have there own weaknesses and strengths. They have long maturities (30 years) and really suffer in a rising rate environment.

Norman1 has the key point, equities classically have been for 10+-year horizon, it's why you won't see a single pension fund "play it safe" by being 100% in GICs, it just wouldn't work. In the long-run GICs alone are a sure loser, compared to alternatives, that's why virtually no-one does it, saying that truth is in fact not badmouthing anything. Especially when the opening post asked for a comparison that appeared to include equities. Those who are touchy about that truth (I fully get why lifelong 100% GIC users might be, it's been an epic and irreparable bad financial strategy, based on the last 4 decades or so) can easily avoid any thread where these comparisons are the topic and stick to threads about where the latest 5% 5-year GIC can be snagged, etc.

It's all situational, and based on individual temperament. For example, if you're a cop or a teacher you're set for life with gold-plated pension so, depending on your proclivities, you could go 100% GICs or go 100% equities with your savings, either extreme can be justified as you're already set. Or anything in between. If you're retired, clearly if your pile is big enough to last you by being 100% in GICs and you don't want to play the short-term fear vs greed game any more, then 100% GICs can work, i.e. it doesn't matter if you're slipping behind, you're going to hit the finish line just fine. And advising a 62 year-old whether or not to put $800k into GICs is ridiculous, imo, unles you know their other income sources, their yearly expenditures, their total investments and savings, their desire or not to leave money behind, health status/likely longevity, etc.

While equities - particularly a balanced basket of them - can provide some protection against inflation, it is not certain. And certainly not certain in our current situation, with a large portion of out workforce retiring and many businesses (and governments!) saddled with high pandemic debt.

One clarity note: I am fairly sure that those like Loonie crapping on market-linked GICs (which do suck, as they don't give you full return on success and give you lower return on failure than fixed GICs), are not including index funds in their condemnation. Index funds closely track markets and, while they charge fees (different ones for EFTs and standard mutuals) they don't slag you of your upside.
RetirEd