Laddering
One of the most common GIC strategies is called “laddering”. This is when you separate a GIC investment into five equal pieces, and invest each individual piece into a GIC with a different term. For instance, you would take $10,000 and invest $2000 each into a 1-, 2-, 3-, 4- and 5-year term. This strategy allows you to participate in higher interest rates, while reducing risk (i.e. the risk of locking-in a low rate). As each GIC matures, it is reinvested into a 5-year GIC, which provides a higher interest rate on your investment. This strategy also provides liquidity to your portfolio, as 20% of the portfolio always comes due within a year.
Interest Rate Anticipation
Another GIC investment strategy is anticipating the direction of interest rates. You do this by buying long-term GICs if rates are expected to fall and short-term GICs if rates are expected to rise. By doing so, you lock-in higher rates if interest rates fall, or you “ride the wave” of interest rate increases as they rise. This strategy is works best with the help of an advisor.
Short-term Savings Accounts: Personal and Corporate
Cashable GICs pay higher interest rates than a traditional savings account at the bank. Cashable GICs are technically 1-year or 1.5-year GICs that become fully liquid after 30 or 90 days. If you can afford to lock-in your money for the initial 30 or 90 days, your GIC becomes a high-interest savings account after this initial time period as it is fully available for withdrawal. This strategy is great for both individuals and corporations that have high cash positions, and would like to enjoy better interest rates than their savings accounts are paying. Also, as credit union GICs are guaranteed by the BC Government to an unlimited amount, corporations can rest assured that their large savings amounts are fully guaranteed.