My question to you would be with regards to the bond portion of the portfolio. Since bonds are supposed to be the ‘safer’ portion of the portfolio (and in historic times moved opposite to stocks, but perhaps not so much any more) would it be a good idea to replace the bond portion of the portfolio with GICs? I’m thinking along these lines since interest rates have risen lately and it’s a very safe option, although the gains might not beat the inflation rate.
Using GICs instead of bonds is definitely an option. I’ve interviewed several financial planners and other experts on this questions and so far, I have yet to hear from anyone that is strongly against this approach. Each option has its pros and cons, for example if you do GICs instead of bonds then if interest rates drop, you would have have missed out on your bonds going up in value. So, there is potential opportunity cost there. However, the way I look at it is that you don’t invest in bonds/GICs to get the highest expected return anyway. That’s the purpose of equities. Bonds/GICs are there to provide you with that safer amount in case you need it when the equity markets take a 30-40% dive temporarily and you need to take some money out of the portfolio to pay for your living expenses in retirement.
In other words, yes I would personally be okay with doing something like a 3-5 year GIC ladder, and then using a high interest savings account for the cash that I need in the next 1 year. With GICs, you know that money will be there no matter what, whereas with bonds, they can still suffer a 10%+ drop in value (as they did when the Bank of Canada kept increasing the interest rates recently.
FYI that for a high interest savings account and GIC I use these guys as they tend to have really good rates.
I just listened to yesterday’s podcast with
Fred Masters and you discussed this very topic with him.
Just wondering, is there reason you suggested a 3-5 year GIC ladder when the rates for shorter term GICs are actually better at the moment? I do not need any funds in the foreseeable future, so wouldn’t a 5 year GIC ladder be better?
Also, could you direct me towards a podcast or resource regarding the most tax efficient way to invest in TFSA vs. RRSP vs. Non-registered accounts? I currently have about $40, 000 in TFSA contribution room and $22,000 in RRSP contribution room. I am in one of the higher tax brackets. I’m planning on using GICs as the safe portion of my portfolio and ETFs for the rest.
Hi Kim. Sorry for the delayed replied. To answer your question, doing a GIC ladder up to 3 or 5 years is the most common answer that I’ve heard from the financial planners that I’ve interviewed on the show. Markets usually recover within 2 years FYI, and almost always within 5 years so this way if you have a GIC ladder for that length of time, you’re not worried about cashflow after a crash. With that said, there is the opportunity cost of investing in GICs vs equities (since equities have a much higher longer term expected return).
I did take a look at the rates on GICs as of today and I see what you mean. I usually use EQ Bank as their rates tend to be good. Me personally, since in the current interest rate environment the rates on a 1-2 year GIC are higher than a 5 year, if it was my money, I would just stick to the shorter time frames that give you the highest rates. I don’t like the idea of locking in for 5 years and then getting less than if I locked in for 1 year. I feel you should get paid more if you are willing to lock in your money for a longer timeframe.
Of course, the best decision can vary from person to person so it may be different for you, but for me, that is how I like to think of it.
These videos have been so helpful! Thank you for them! I’m a beginner investor and was wondering if you keep all US ETF’s in RRSP and CAD ETF’s in TFSA?
5 Comments
Kim
August 2, 2023My question to you would be with regards to the bond portion of the portfolio. Since bonds are supposed to be the ‘safer’ portion of the portfolio (and in historic times moved opposite to stocks, but perhaps not so much any more) would it be a good idea to replace the bond portion of the portfolio with GICs? I’m thinking along these lines since interest rates have risen lately and it’s a very safe option, although the gains might not beat the inflation rate.
By Kornel Szrejber
August 2, 2023Using GICs instead of bonds is definitely an option. I’ve interviewed several financial planners and other experts on this questions and so far, I have yet to hear from anyone that is strongly against this approach. Each option has its pros and cons, for example if you do GICs instead of bonds then if interest rates drop, you would have have missed out on your bonds going up in value. So, there is potential opportunity cost there. However, the way I look at it is that you don’t invest in bonds/GICs to get the highest expected return anyway. That’s the purpose of equities. Bonds/GICs are there to provide you with that safer amount in case you need it when the equity markets take a 30-40% dive temporarily and you need to take some money out of the portfolio to pay for your living expenses in retirement.
In other words, yes I would personally be okay with doing something like a 3-5 year GIC ladder, and then using a high interest savings account for the cash that I need in the next 1 year. With GICs, you know that money will be there no matter what, whereas with bonds, they can still suffer a 10%+ drop in value (as they did when the Bank of Canada kept increasing the interest rates recently.
FYI that for a high interest savings account and GIC I use these guys as they tend to have really good rates.
I hope that helps!
Kornel
Kim
August 3, 2023Thank you, Kornel!
I just listened to yesterday’s podcast with
Fred Masters and you discussed this very topic with him.
Just wondering, is there reason you suggested a 3-5 year GIC ladder when the rates for shorter term GICs are actually better at the moment? I do not need any funds in the foreseeable future, so wouldn’t a 5 year GIC ladder be better?
Also, could you direct me towards a podcast or resource regarding the most tax efficient way to invest in TFSA vs. RRSP vs. Non-registered accounts? I currently have about $40, 000 in TFSA contribution room and $22,000 in RRSP contribution room. I am in one of the higher tax brackets. I’m planning on using GICs as the safe portion of my portfolio and ETFs for the rest.
Thank you again for your guidance.
By Kornel Szrejber
August 15, 2023Hi Kim. Sorry for the delayed replied. To answer your question, doing a GIC ladder up to 3 or 5 years is the most common answer that I’ve heard from the financial planners that I’ve interviewed on the show. Markets usually recover within 2 years FYI, and almost always within 5 years so this way if you have a GIC ladder for that length of time, you’re not worried about cashflow after a crash. With that said, there is the opportunity cost of investing in GICs vs equities (since equities have a much higher longer term expected return).
I did take a look at the rates on GICs as of today and I see what you mean. I usually use EQ Bank as their rates tend to be good. Me personally, since in the current interest rate environment the rates on a 1-2 year GIC are higher than a 5 year, if it was my money, I would just stick to the shorter time frames that give you the highest rates. I don’t like the idea of locking in for 5 years and then getting less than if I locked in for 1 year. I feel you should get paid more if you are willing to lock in your money for a longer timeframe.
Of course, the best decision can vary from person to person so it may be different for you, but for me, that is how I like to think of it.
To answer your other question, here is a post that I wrote where I explain how I do it:
https://www.buildwealthcanada.ca/what-investments-to-hold-in-an-rrsp-vs-tfsa-vs-taxable-account-asset-location/
Kornel
Kyle
May 13, 2020Hello Kornel,
These videos have been so helpful! Thank you for them! I’m a beginner investor and was wondering if you keep all US ETF’s in RRSP and CAD ETF’s in TFSA?
Thank you for your time.
Kyle