Can You Succeed With An All GIC Portfolio?

Conventional wisdom says that when it comes to investing for retirement your exposure to equities should equal about 100 minus your age.

That means a 30-something should have up to 70 percent of his or her portfolio in equities to help maximize investment returns over time.

Related: Building Your Investment Portfolio

As you get older you’ll dial back the risk so that when you’re close to retirement age you’ve reduced your equity exposure to about 30 percent of your portfolio.

All GIC Portfolio

But personal finance author and chartered accountant David Trahair says you can retire well enough without putting any of your money in the stock market.  Instead, he suggests the best place for your savings is in ultra-safe GICs.

Trahair’s retirement solution is simple.  Pay off your debts quickly, live within your means, and don’t make the type of investing mistakes that can derail your retirement plans.

That means avoiding high MER mutual funds and volatile markets that can lead to irrational behaviour – like selling when markets are falling and buying on market exuberance.

Related: Do Stock Market Cycles Influence Your Investment Behaviour?

It’s hard to believe in this low rate environment, but GICs have held up remarkably well against the stock market over the long haul.

Time frame S&P/TSX Composite Total Return Index GICs
10 years to Aug 31 2009 9.41% 3.35%
20 years to Aug 31 2009 8.86% 5.11%
30 years to Aug 31 2009 10.76% 7.28%
40 years to Aug 31 2009 9.77% 7.71%
50 years to Aug 31 2009 9.80% 7.35%

Not only are GIC returns competitive with the overall stock market returns, they do so without the risk and without the fees that come with investing in equities.

  • You’ll never see negative 30 to 50 percent returns from a GIC like you can with the stock market.
  • When you take out the 2 percent MER from a managed fund you’re down to near GIC territory.
  • To get the total market returns you’d need to be invested 100 percent in equities, which is unlikely.

Avoiding Mistakes

According to Trahair, your emotions can have the biggest impact on your investment returns.

Were you able to hold on when your equities lost almost 50 percent of their value between June 2008 and March 2009?

Related: How Index Funds Compare To Equity Mutual Funds

Can you avoid the story stocks (Nortel, RIM) and IPOs (Facebook) that can quickly sink your portfolio?

So can you succeed with an all-GIC portfolio?

This strategy makes sense if you’re the sort of person who’s still putting money in high MER mutual funds and you’re not comfortable investing on your own, or if you absolutely can’t stand the thought of losing money in the market.

You can make up a lot of ground by eliminating your debt (including your mortgage) as quickly as possible and then ramping up your savings as you get closer to retirement.

You could argue that GIC rates are so low that you’ll need to be in the stock market in order to beat inflation.  But Trahair doesn’t buy that argument.

Related: Beating Inflation With Rising Dividends

I’m sure if you had $100,000 in 2008, you’d rather have $102,000 the next year with a GIC than have $70,000 in some equity mutual fund.

Besides, if inflation gets out of control it’s likely that GIC rates will also rise to keep pace.

Trahair suggests you avoid market-linked GICs, which claim to capitalize on the growth potential of the stock market without putting your principal investment at risk.

Like a traditional GIC, a market-linked GIC offers the peace of mind of 100 percent principal protection so if the markets go down you’ll still have your original investment.

But the upside is limited to about 4 percent a year, which isn’t enough of a premium over the best 5-year GIC rates, which currently sit at about 2.85 percent.

Final thoughts

Trahair defies conventional wisdom by suggesting most investors would do better with an all GIC portfolio rather than investing in equities.

At first I dismissed this approach as being too conservative and simple to work.  But there’s a strong case to be made that the majority of us should protect ourselves from our own mistakes and from falling prey to investment scams and unscrupulous advisors.

Related: Fee Only Financial Planner Vs Commission Based Advisor

Consider that from 1991 to 2010 the S&P 500 Index averaged 9.14 percent a year, but the average equity fund investor earned just 3.83 percent a year.

Our irrational behavior often leads to poor returns because we tend to buy after the market goes up, and bail when it goes down.

We chase the latest trends and pay too much attention to what’s happening in the economy today without keeping an eye on the long term.

A strict diet of GICs is about as stodgy as it gets, but you might sleep better at night with this risk-free approach.

What do you think of Trahair’s argument?


20 Responses to Can You Succeed With An All GIC Portfolio?

  1. I do not like to pay fees of any kind and, as long as these GICs were held in a self-directed RRSP or TFSA, that could be a good plan.

    I keep dividend paying stocks in my TFSA but perhaps I should consider directing my RRSP money to GICs.

    Interest rates are low so, I am guessing, short term commitments so you can be ready if rates rise?

  2. I’ve often wondered if I were crazy as a young investor focusing on debt reduction and GIC Investments only, thank you for allowing me to breathe a bit easier knowing that I wasn’t completely ‘out there’

    • @Kyle – there’s nothing wrong with paying off debt and focusing on capital preservation. They key is to review your plan frequently and make sure you’ll have enough saved up to retire comfortably.

  3. As part of the Credit Union system, GICs make up a large portion of a member’s portfolio and it has done them well. Many are coming off of 5 year GICs that we earning just over 5% (most equity funds aren’t showing that good of a return).
    One solution I use with these investors is a principal plus strategy. Say they have $100000 to invest for 5 years one way to potentially increase returns is target a maturity value of $100000 for the secured portion of their funds so they need to invest approximately $88000 in todays rate environment and put the other $12000 into say a balanced portfolio. They know they will have at least $100K at the end plus what ever the return is on the $12K without risking their whole portfolio.

    • @Cory – That’s a very reasonable approach because you’d only need the balanced fund to achieve 3% a year (net of fees) to beat the all-GIC portfolio after 5 years.

  4. Whether or not your money is in a tax sheltered account would make a difference.
    Interest from GICs gets taxed at a higher rate than either dividends or capital gains.

    • @Hazy – you’re right about the interest from GICs being taxed at a higher rate outside of tax sheltered account. I believe Trahair is referring specifically to RRSPs when he talks about the all GIC portfolio.

  5. Great article! Being a Financial Planner, I tend to err on the side of caution and wish that my near or in retirement clients could get the 30 year average rate,however, going forward, the expected annualized GIC rate will most likely be an average of the 10 and 20 year rates above…or 4.23%. With people living longer, if individuals choose this strategy, they need to understand if they need to generare more than 5% on their pool of capital, there may be some erosion of this. As always it comes down to planning, education and expectation. In the current environment, a combination strategy with Dividend paying stocks, higher interest earning corporate bonds and GIC’s offers a way to bridge the gap until GIC rates get back to 6%…if that ever happens.

    • @Heather – I think it’s pretty difficult to get 5% income from your portfolio without eating into capital these days.

      The point about inflation is that it doesn’t matter that GIC rates are low right now because inflation is also low. When rates rise, it’ll likely be because inflation has risen.

      You need to look at the nominal returns and if you get 6% from a GIC then inflation is probably 5% and you’ll still be treading water, just like we are today.

      Higher rates just make us feel better but it doesn’t mean we have more purchasing power.

  6. I think David Trahir deserves props for spreading unpopular ideas — they run counter to what most investment professionals say (except, perhaps, banks like ING where they love you sticking money in a low-return GIC and lending it out for more).

    I am concerned that the dearth in %s revealed is a lot worse than it looks in pure nominal terms — compounded over a lifetime, the difference could be staggering. In an RRSP or TFSA, sure, tax efficiency is moot. But what about in a taxable account? Dividends, besides outperforming a GIC, would be taxed at a vastly lower rate. I think there’s truth somewhere between the extremes — e.g. Garth Turner’s PUT EVERYTHING IN EQUITIES NAOW, and Trahir’s “IF IT’S NOT IN A GIC LADDER YOU ARE ROYALLY SCREWED”.

    • @Joe – You’re right in that the same argument of percentages is used to show how much of an impact MER has on your returns over time. 2% is significant, for sure.

      As I mentioned above, Trahair is definitely talking about RRSPs with this approach.

      I agree that the truth is somewhere in the middle but I doubt that will sell too many books :)

  7. Interesting post. I’m not familiar with Mr. Trahair but I will make the assumption that he is a knowledgeable and credible author. I’m also quite unfamiliar with the investment landscape in Canada so my comments are strictly based on the U.S. That said I couldn’t disagree more at least in terms of my experiences. I can say without exception that 2008-09 was nothing more than a hiccup for my clients, albeit a large one. All clients were back to even by mid 2010 and are currently well ahead of where they were pre-crash. I do agree that bad investor behavior can be an investor’s worst enemy. That said (and I’m not trying to be self-serving here) these folks need to suck it up, pay the fee, and hire a professional fee-only advisor and turn off CNBC. Markets are volatile but somebody who knows what they are doing can manage that volatility. Nothing wrong with interest bearing instruments such as GICs in moderation, but inflation is a far worse enemy to retirement savers than investment loss. I love your blog and really enjoy your posts, but I’m not buying the idea of an all GIC portfolio for all but the oldest of clients. Besides the GICs I’m familiar with here in the U.S. are issued by insurance companies, which is a whole other can of worms.

    • @Roger – Are you saying none of your clients demanded to sell during the ’08-’09 crash? I’m sure you fielded a few calls from panicky investors.

      I think Trahair’s point is to play good defense and don’t turn the ball over. Suck it up and save more, but don’t lose a dime of your principal investment.

  8. I think David Trahair wrote my book! We invested primarily in GICs for the first 15 years after we started working. We were ultra-conservative. And the small amount we put in index mutual funds seemed to lose a lot two years after we invested it. (It actually bounced back and averaged about 7-8% a year because we never sold it.)

    In both 2008/2009 and when the dot com bubble burst, we went in to work cheerful and well-rested to be confronted with co-workers and bosses who were grey-faced and scared. You could easily spot who had tried for high returns.

    Of course buying GICs was easier when the rates were 7-12%! In 1991 we had most in at 10.5% without bickering for a one year term. (We didn’t own a home then.)

    In more recent years, we decided to upgrade from ultra-conservative to mid-conservative: we keep a core holding in GICs and have been building a portfolio of ultra-low-risk stocks in the market. Ironically, some stocks like CNR and ENB have earned capital gains of 30% in less than a year even though we bought them for dividends and security, not growth!

    FWIW, we have no debt at all.

    Part of deciding how to invest is deciding what returns you are looking for. We were looking for very modest returns and great safety. Others are looking to turn $1000 into a million. It’s not surprising a GIC-approach wouldn’t suit them!

    PS I disagree with a ladder at the current rates. Better to stick to 1-2 year terms and wait it out than to lock in for 3-5 years at these rates. The ladder was based on the idea that rates would rollercoaster up and down. A ladder doesn’t make sense at the end of the ride when everything is flat and there’s no where to go but up. (If rates drop from the current 1.7% ish for 1-year then you might as well not invest at all!)

    • @Bet Crooks – great comment, thanks for sharing your experience! Your point about the GIC ladder makes a lot of sense. Rates did bounce around a lot more than they do now.

  9. I’ll be the one to say it: Trahair’s a kook. “When you take out the 2 percent MER from a managed fund you’re down to near GIC territory.” Aye, there’s the rub, isn’t it. His whole dataset boils down not to “invest only in GICs” but to “don’t pay 2% MERs.”

    It’s been a few years since I went over his argument, but IIRC, he hand-waves away the GIC taxation issue with registered accounts. But here’s the thing: if you’re only investing in GICs that approximately pace inflation, you must save every last dollar you wish to later spend in retirement. You get no real benefit from compounding. So you end up having to save 20-30% of your after-tax income if you start when young, and up to 50% if you wait until your late 40s to read his book (depending on how much you want to rely on CPP/OAS, etc. etc.). So you will be maxing out your shelters and spilling over into non-registered under the Trahair plans… or planning to live a very frugal retirement.

    To put numbers to it, if you save $10k/year (real) from age 45 to 65, then withdraw $20k/year (real), your money will last until you’re 90 if you can earn 3.5% above inflation on it (i.e., with stocks/low-MER). If you’re only making 0.5% above inflation, you’re broke by 77. You’d have to save twice as much in your working years to make it to 90, or spend half as much in retirement.

    • @Potato – Haha, I don’t think he’s a kook. His argument isn’t just about avoiding the 2% MER, it’s about avoiding investing mistakes (buy/sell) and protecting your principal.

      He also says to pay off your mortgage before investing a dime in your RRSP. Then you’ll ramp up your retirement savings using at least the amount you were paying on the mortgage each month (so likely much more than $10k a year between 45-65).

      RRSP contribution room shouldn’t be an issue, and if it is then your TFSA could handle the spill-over.

      Actually, I’m not sure why you mention GIC taxation issues at all because there should be no need to use a non-registered account in this case.

      I haven’t read all his books but I know one of his arguments is that you don’t need as much money in retirement as the financial industry says you do (i.e. 70% of pre-retirement income).

      I know some of us plan to retire early or to retire filthy rich and so we accept much more risk in our investments in order to achieve those goals.

      But some people just want a comfortable retirement and I doubt Trahair’s approach will leave them in poverty.

  10. John, I read your comments today and yesterday about provincial strip bonds and did a little research. Not good enough however, because I couldn’t find provincial strip bonds paying in the 3% range. Must not be looking in the right place. Any suggestions (not recommendations, I have read your disclaimers!)

  11. I have 5 year laddered GIC’s in RRSP, TFSA and keep a savings account specifically for jumping on those higher rated deals on short term GIC’s. I target nothing less than 2.5%. I am comfortable with the rate of growth. Each year when GIC’s mature, I review rates and roll some into a 5 year but if there is a three year, for example, paying more than 2.5, the bulk of the money goes there. I am careful to ensure GIC’s mature each year in case we need to purchase those big items, ie car. I like the flexibility as well as the security of the laddered GIC strategy. Thinking about stretching into provincial strip bonds and dividend stocks next.

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