This week I’m going to tackle the subject of investments that yield very low returns – the bad – but that are guaranteed – the good. The particular product I’m going to discuss is called a Guaranteed Investment Certificate here in Canada, but for my readers from other countries, insert any such product that you have available to you. If you can sign on the dotted line for a guaranteed return and that return is pretty low, then it’s a comparable product.
Here’s the question: Are GICs and their ilk wise investments for women?
Until this week I had not invested in a GIC since I was 18 years old – which was, um, a while ago. Why? To be blunt, they offer dismal returns. A quick perusal of offerings shows that the most you can hope to earn is roughly 2% with a small player, plus you lock up your funds for 2-3 years. For terms of less than one year you can expect to earn less than 1%.
Some lenders offer stepped returns where you average roughly 1.25% over three years if you put the cash in and forget about it during that time. Even cashable GICs have awful returns. Sure, some of them give you the flexibility of pulling your money out without penalty, but the end result is still wee.
So why on earth would anyone choose these products? Before this week I would have said that it’s madness to touch them for a couple of key reasons.
First, any investment that does not yield returns above the rate of inflation, after tax, will hurt you in the long run. In Canada the rate of inflation over the past several years has been around 2% – it has fluctuated but let’s use 2% because it’s a nice, round number (you can get exact, historical numbers here). Now let’s say you have $1,000 to invest and since you don’t want to risk losing the principal you decide to put it into a guaranteed investment for a couple of years at a rate of 1.5%. The problem with this approach is that inflation is shrinking the value of your money faster than your investment is growing it. There’s a great analogy on the inflationdata.com website:
Over the long run since 1913 inflation has averaged more than 3% (3.24% ), so on average it has taken less than 22 years for prices to double.
As you are saving, it is like trying to fill a bucket while 3% is leaking out, which means you have to put it in faster than it leaks out.
There’s the rub: If you’re choosing a guaranteed investment that yields below-inflation returns, you’re toast.
This is a big deal for everyone, but especially for women. Why? Because on average we earn less than men to begin with and on top of that, we’re growing our wealth much more slowly.
In her book Why Women Have Less Wealth and What Can Be Done About It, Mariko Lin Chang shared the following findings:
Earlier this year I had the pleasure of interviewing Alan MacDonald, a wealth management adviser with Richardson GMP, for a blog post on who, exactly, should be giving advice, particularly financial advice. He had many interesting points to share. In his experience, women are typically more conservative than men and they tend to defer to their male partners despite the fact that when they actually get down to the business of evaluating investments, they typically do a great job. The bottom line? We’re leery of investing, so we shy away. When we do get involved, we pick lower-risk options.
As a whole we are a pretty conservative bunch, we’re worried about making money, we’re focused on ensuring financial stability for our children and we tend not to like big risks. This may make us more inclined to go with safer investments such as GICs. For a myriad of reasons, not the least of which is the wealth gap as defined by Chang, I suggest that we aim for higher than bottom-of-the-barrel returns, and we should certainly seek to accomplish more than just replacing the amount eroded by inflation.
On a related note, Alan pointed out that no one saves their way to wealth. You can save yourself out of being poor, but to develop wealth you need to do a lot more than that. Most GICs, therefore, are not the best idea for the bulk of your money.
Having said that, I just parked a chunk of change in a 3-year, cashable GIC. What on earth was I thinking?
It all started with a teller at our business bank who asked if we had plans for some cash that was sitting around. She suggested I talk to one of their business advisers, so I did, figuring I had nothing to lose. I told him straight up that I was not interested in long-term investments because I am actively looking for second mortgages and other real-estate investments that typically yield 10% – 15% annually. Unless he can beat those numbers we would focus on short-term options. That’s when he talked about the cashable GIC.
Here’s the thing: Normally I would have scoffed at anyone suggesting that 1.15% is worth my time but then I realized that we had done nothing with that cash in the last six months. It’s true that 1.15% is a paltry return but it is better than 0%. I’ve been evaluating a variety of investments over the past six months however sometimes it takes a while to find the right option and in the meantime, our money isn’t doing anything. So here’s a good use for a short-term, cashable GIC: it gives us something back rather than nothing while we find what we’re looking for. In the case of this particular investment, the money needs to stay in the account for 90 days and then we are free to pull it out whenever we like with no penalty. If something comes up within 90 days, we have other cash options so we won’t be stuck.
The catch, though, is that my money had better not be earning only 1.15% for more than a year. If, within one year, I can’t find suitable second mortgages or real estate projects to invest in, then we need to re-evaluate our plan for that money and find something that will do a damn sight better.
If you find yourself in a similar boat and you’ve got some funds that are earning zilch in an account, then consider finding a similar, short-term option to get interest flowing your way on the grounds that something is better than nothing. Just don’t let those paltry returns become the norm. There are plenty of investment options that do not involve high levels of risk and that will yield far more than short-term, guaranteed products ever will. If you don’t know where to start, buy index funds and hold on to them forever, unless you’re about to retire – but that’s a whole other conversation.
Make your money work for you all the time and don’t let indecision or fear chain you to low returns for the long haul.