The simple investment that can help shockproof your portfolio

We asked three of our experts for their thoughts on where you should place your hard-earned money during volatile times: Scott Blair, who oversees CWB Wealth Ltd.'s investment solutions in his role as Chief Investment Officer; Scott Bell, a certified financial planner, business banking expert, and Senior AVP and Market Leader; and Jessica McKenna, Manager of CWB’s Prestige and Personal Banking team in Toronto. While they come at the question from different perspectives, they explore why GICs remain among the options that can be a safe harbour for your funds. 

 

Canada is facing the prospect of steep tariffs with our biggest trading partner. There is a change of leadership at the federal level, with an election likely. Despite rate cuts, economic growth is sluggish. In short, there is a lot of uncertainty out there. What is your take on the situation? 

Scott Blair: There is a lot of uncertainty out there, that’s for sure. A news headline today will say one thing, while a headline tomorrow may say the opposite. If we focus on tariffs for a minute, I think over the next four years, we’re going to see the winds continue to shift. For instance, maybe we’ll have some targeted or blanket tariffs, and then two months later tariffs could be removed. And then just as quickly, they could be back on the table again.
Usually big market disruptions are associated with unforeseen events. COVID was a great example. It was like a bolt out of the blue, and the market fell dramatically. 

But this situation is a little different in that we’ve had quite a while to think about whether tariffs are coming in and how the other policies of the Trump administration might impact us.

We’re expecting reasonable returns in the markets this year, but more volatility.

Are there some investments that you’d consider to be safer than others during a period like this? Are fixed-income instruments like bonds a safer bet now?

Scott Blair: Well, fixed income does tend to be a safer bet if economic growth slows. It can be a haven in uncertainty. The only caveat is that if we do end up with higher inflation due to tariffs, we could see rates go back up again to bring inflation back in check.
Bonds are generally safer, relative to stocks, in dire economic situations, but if we see rising interest rates, you could end up with lower-than-hoped-for bond returns. If you want safety and certainty, you should consider investing in cash, money market funds or something with a guaranteed return like a GIC [Guaranteed Investment Certificate].

So, GICs are a safe, go-to investment during a period of extreme uncertainty?

Scott Blair: Yes, cash, money market funds, Treasury bills and GICs. These investments are pretty safe and are particularly ideal for those with upcoming cash needs.

Scott Bell: GICs play a big role in large portfolios, even for sophisticated clients who employ complex investing strategies. They provide security and predictability and guaranteed returns, which many investors find appealing, especially during times of uncertainty. 

Interest in GICs jumped up dramatically when we saw interest rates go up post-COVID. Prior to that, clients weren’t excited about sub-one-percent interest rates. Since then, rates have gone up, though they’ve come back down a little bit, but GICs are still a pretty attractive investment. And when you’re talking about people who have large sums of money to invest, they want to take advantage of the rates. They are shrewd operators who want to maximize their returns. 

In fact, a lot of our business clients use GICs as a core foundational tool.

They take on a lot of risk operating their businesses, and they want to have that security and predictability and that peace of mind that when they have a project coming up, those funds are going to be there and ready for them to use. And if something happens and disrupts their business in the short term, they want to know they have something to fall back on that’s guaranteed. Managing that shorter-term cash component is a core strategy that we employ. 

What is of primary importance is making sure that clients have the right investment mix and strategy. Ultimately, it’s about ensuring that our clients have the right asset allocation, and we’re providing them with that peace of mind that they’re looking for. And as Scott [Blair] mentioned, there are many different products to consider. Bonds, both government and corporate, could be a good foundation for many people, but obviously the returns could be impacted by rising interest rates, which makes GICs an attractive part of an investment portfolio. 

Jessica: I’ve noticed that because of this uncertainty, a lot of people are coming in and asking, ‘What are your GIC rates?’ We are seeing a lot of rate shopping.

 

I speak to a lot of customers who want to keep their cash liquid, or somewhat liquid, for the short term, but also have a safe investment, and that’s where our GICs come into play. 

GIC rates across Canada are not all that high at the moment. About a year ago, many financial institutions were offering rates of about 5% or more depending on the term and the product. What's the reason for this?

Scott Blair: The two biggest factors that affect rates are inflation and GDP growth. When inflation is high and rises above the Bank of Canada target of 2%, the Bank of Canada tends to raise interest rates and bond yields rise. And when GDP growth is strong, you can expect there is a decent chance that inflation will follow. That’s what we saw with COVID. GDP growth was very strong, inflation followed afterwards, and people thought it would be transitory. But it wasn’t, and rates had to rise very rapidly to make up for it.

Now we have a situation where inflation is under control, and if you take tariffs out of the calculation, inflation should remain under control. All of this means the Bank of Canada will want to cut rates. As a result, bond yields could come off a bit more. But rates have already come down quite a bit, so it’s not like a one-to-one relationship where the Bank of Canada cuts rates by 25 basis points and then GIC rates come down by 25 basis points. 

There are a lot of factors such as our national debt, supply and demand for our debt, and several other things. But in general, when the Bank of Canada lowers rates, GIC rates will follow. 

So, is there a strategy that investors can use to take advantage of fluctuating GIC rates? 

Jessica: Laddering is a simple, safe and efficient GIC investing strategy that’s designed to help investors take advantage of interest rate changes. Let’s say a customer comes into the branch with $10,000 to invest. We split the $10,000 into five equal investments of $2,000. We then invest the first $2,000 in a one-year GIC, and then we invest the second $2,000 in a two-year GIC, and so on and so forth. We repeat this process every year as each GIC comes due. The benefit of this strategy is that you not only have access to cash every year as the GICs mature, but you will also be taking advantage of changing interest rates.

As we talked about just now, rates are always changing–they’re going up, they’re going down. In a year or two, interest rates could be going up again. So, you have an opportunity to lock in at a really great interest rate for five years.

Laddering is a relatively safe and efficient way to invest using GICs.

Scott Bell: Blending interest rates together can provide attractive returns and give you access to regular cash flows. When you’re talking about business clients, laddering can be a great alternative to leaving funds idle in an operating account. It’s one of the core strategies we talk to our clients about. 

Are there any tax strategies you’d recommend when it comes to investing GICs?

Jessica: Since interest income is taxed at the highest marginal tax rate, you should consider holding your GICs in a tax-sheltered account such as a TFSA, RRSP or RRIF. 

There are plenty of different GIC products on the market. What products do you recommend to your clients? 

Jessica: The GICs that CWB holds are very competitive. Our GIC rate specials are particularly attractive at 13- and 29-months. Most competing financial institutions will offer a 12-month GIC at a lesser rate, and 13 months is only one extra month beyond a year, so that is not a big deal for most clients.

Another tried and true product that CWB offers is our Flex Notice Account, which provides our clients with a relatively high interest rate over a short time frame. We have two types of Flex Notice Accounts: a 31-day Flex Notice Account, where a customer only has to give us 31 days notice before they withdraw the funds, and then there’s a 93 day Flex Notice Account. Generally, the 93-day account offers a higher interest rate than the 31-day account because it’s a longer notice period before you can access your cash.

The returns on the Flex Notice Account can fluctuate, however. If the prime rate goes down, for example, so too will the amount of interest you’ll earn in your Flex Account. In other words, the returns may not be as large as you anticipated when you first invested. And customers must invest a minimum of $25,000 in the Flex Account. 

But, in my opinion, the Flex Notice Account is probably going to be an appealing option for most investors at the moment because it offers a higher interest rate, even if it is subject to fluctuations in the prime rate. And our GIC special rates are still really great.

 

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