Enough bull: The bull about GICs
GICs are important but so are stocks
Recently one of my friends and an exceptional advisor in Sarnia, Jeff Burchill, wrote to me irrate about some things said in an article by David Trahair.
Essentially, Trahair says makes one very bold, controversial and contrarian statement like “Put your hard-earned savings only in ultra-safe GICs — and rest assured that you are earning returns on par with those in the stock market.” Trahair wrote a book called Enough Bull: How to Retire Well without the Stock Market, Mutual Funds, or Even an Investment Advisor because he was tired of hearing from people who have suffered financially because they followed “traditional” retirement planning advice. He believes the problem is compounded because people believed they had to invest in the stock market to make the illusive 8-10% a year return to build their retirement savings quickly. As a result, many have been devastated, especially many seniors that have little time to make up for their losses.
Trahair goes on to present some data to back his claim that people who investing in stock markets would be no better off than people who invested in GICs. I’d like to offer some of my thoughts on the data and the comments.
Firstly, I would agree with Trahair that too many people have been over exposed to the stock markets and it has especially affected people who are approaching retirement or in retirement. I wrote and article a while back about the Retirement Risk Zone and the problems that arise from being over exposed to the stock market as you approach retirement. I think this is the major reason we have seen more and more people in the last 10 years delay retirement or go back to work because of the stock market. Essentially having too much money in the stock market means less predictability and control over your own retirement. It’s all a case of timing so how lucky do you feel?
I would agree that as you near retirement, you need more predictability and should invest more of your money into GICs and other guaranteed investments but going full tilt might be a little extreme. One of the problems with Trahair’s data is something I call end date bias which means that the most recent data is skewing all of the results, even the long term results. His data represents a snapshot in time which happens to be a period when stocks did not do all that well. A different snapshot like the end of 1999 would show a very different picture.
The other concern is a statement he makes that is overgeneralized “As you can see GIC returns seem to be competitive – in the long term not much lower than the TSX Composite Total Return Index.” The data he talks about shows the difference in compound returns over 10, 20, 30 , 40 and 50 year periods. The smallest difference is the 40 year period where the S&P/TSX Composite Total Return Index outpaced GICs by 2%. The biggest difference was the 10 year period where the stock market outperformed the GICs by a whopping 6.1%. How can that not be significant? Burchill is quick to point out that 1.5% to 2.0% difference on a $10,000 investment per year can mean over a $500,000 difference over time.
Anyhow, I think the key to success is finding some balance based on your personal needs and circumstances. I think that the closer you are to needing the money, the more conservative you need to be. I also think that GICs tend to get a bad wrap not just because of the low interest returns but maybe because there is more compensation in other managed products.
I know a lot of advisors who are exceptional and sell GICs because it is the right thing to do even though they do not pay a lot. I also know some advisors who won’t touch GICs mainly due to compensation. I think you should be careful with some of Trahair’s controversial message. While the underlying message has some merit, it may also be a little extreme. If you think GIC’s should be part of your portfolio, the best place to start is with the Registered Deposit Brokers Association of Canada (www.RDBA.ca) or read my book Seven Strategies to Guarantee Your Investments.
Relevant articles on GICs
Advice for GIC investors
Markets hit retirees hardest
Retirement Risk Zone
Retirees need to be more conservative with portfolios
World of Guaranteed Investing
Security of GICs
This is an interesting concept and one that I follow.
My wife and I exclusively use GICs as our investment vehicle after having an unfortunate experience with mutual funds in the past.
We also focus staggering our maturities and using alternative institutions such as online banks and credit unions for GICs outside of major banks because they provide much higher interest rates.
We never deposit more than CDIC or Provincial Insurance limits to protect our savings and we have done very well this way, while sleeping comfortably every night knowing how much we earn is the same monthly and yearly.
I fully understand that stocks are very beneficial for many, however for us the risk and the discomfort havent been worth the reward.
We will continue to max out RRSPs and TFSAs along with non-registered allotments for our retirement and will do our best to live off of the interest-only or almost interest-only amount of the proceeds earned from these amounts.
Regardless of investment vehicles chosen, happy savings!!
I agree, my wife and I are about 4 years away from retirement, we have made a lot of money over the past 10 years with our MutualFund but I that has started to slow down. There are some great rates on GIC with online banks for example Oaken Financial who pays 3.60% for 5 years. We have transferred most of our Mutual Funds to GICs so we can keep what we have made and know we are still making money until retirement.
Great advice lol