In my last column, I talked about investors getting distracted by bright, shiny objects and falling off their investment plan. I was referring to products or trends that are making people money and perfectly fit the economic and political narrative of the day. Things such as commodity super cycles, crypto, cannabis, meme stocks, FAANG stocks and focused strategies such as dividends only, Canada only and U.S. only. Things so compelling that investors go all in, leaving behind the notion of a diversified portfolio.
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Right now, the bright shiny object is not nearly as sexy as the ones I’ve listed. It’s the safe, reliable, readily available GIC, Canada’s favourite financial product.
GICs faded from view when short-term interest rates dropped near zero. An astute GIC shopper could at best find yields equalling the rate of inflation. Investors were more inclined to hold bonds and stocks, which were providing a much higher return.
That’s changed of course. GICs and money market funds have attractive yields again and are allowing Canadians to earn a return on money they’ll need in the next few years for a trip, kitchen renovation, college education or emergency fund.
So, what does the return of GICs have to do with investors deviating from their investment plan?
Well, many are also shifting money that’s earmarked for their retirement or legacy into GICs. This is a mismatch. Savings yields shouldn’t be confused with long-term investment returns.
Historically, returns from rolling GICs have lagged bond and stock portfolios, and there’s no reason to believe this will change. Stocks, which carry a risk premium to compensate for added volatility, will beat bonds over time, and bonds, which earn extra yield from taking term and credit risk, will beat secure, short-term vehicles such as GICs.
Indeed, returns expectations for bond and stock portfolios over the next 10 years look attractive.
Bond yields, which are a reliable indicator of future returns, point to a range of 4 to 6 per cent. Likewise, there’s no reason to believe stocks won’t be in their traditional range of 7 to 9 per cent. The price-to-earnings multiple on a diversified stock portfolio is now back into the mid-teens, which is well within the historical range.
People will point to the uncertain economic and sociopolitical outlook, but there are two things to remember in this regard. First, there are always uncertainties. As the expression goes, markets regularly climb a wall of worry. And second, there are positive factors in the mix, too, particularly when it comes to the benefits of innovations and the deployment of existing technologies.
Of course, there’s no way of knowing when the market surges and dips will occur, but the chart of a fully invested portfolio will move up and to the right over the next 10 to 20 years and will be taxed at a lower rate.
Investors opting for the comfort and certainty of GICs are likely to achieve a lower return and expose themselves to a different set of risks. Risks that will assuredly make the next decision a tough one. What if yields are lower when it’s time to roll the GICs? What if inflation heats up and purchasing power is eroding? And the killer, how do you get back into stocks if you need to?
I say killer because reinvesting after getting out of the market is the most difficult decision in investing. It’s loaded with emotion and dissonance. It’s hard if the market is down and the news is bad, and even harder if stock prices are higher than when you sold.
Clearly, higher rates require different strategies for parts of your financial plan. For the money being set aside for future spending or an emergency, higher money market and GIC yields are a godsend and should be taken advantage of. There’s now no excuse for leaving excess money in a chequing account earning next to nothing.
But for money that has a longer-term purpose and needs to achieve a return well in excess of inflation, no change is required. It still needs to be allocated to higher-returning, long-term assets.
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