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How GICs Can be Part of a Diversified Investment Portfolio

The key to investing is to create a portfolio that’s diversified with a mixture of various types of assets: Stocks, fixed income (bonds), and cash. While GICs aren’t a very exciting investment, they’re a key part of the asset mix.

GICs are considered a fixed-income product like bonds because they offer a fixed rate of interest for a specified term, such as one or two years. And a diversified portfolio will include a portion devoted to fixed-income investments.

Asset allocation models

Determining your asset allocation mix depends on the amount of risk you’re willing to tolerate as well as your age. If you’re nearing retirement, you probably don’t want to have 90% in stocks because there’s a chance you could lose a good chunk of your nest egg.

There are different types of asset mixes but there are generally three types of portfolio allocation models.

Aggressive portfolio—This model is for someone with a long-term investment horizon (often between the ages of 18 and 35) and with a very high risk tolerance. Your asset allocation will be 80% in stocks and 20% in fixed income.

Balanced portfolio—This model is for an investor with a mid-term investment horizon (usually between the ages of 35 and 55) and who can tolerate some risk. Your asset allocation will be 60% in stocks and 40% in fixed income.

Conservative portfolio—This model is for someone with a short-term investment horizon (often over the age of 55) and who can’t tolerate much risk. Your asset allocation will be 30% in stocks and 70% in fixed income.

It’s important to note that these are generic guidelines because not everyone will have the same level of risk tolerance. The amount you allocate to different types of assets will be determined by your age and the amount of risk you can tolerate. If you want to reduce your risk even further, you can stash some cash in a high-interest savings account.

GIC investment options

There are many different types of GICs. The most popular kind is the fixed-rate GIC, which pays a set amount of interest (you can find the best GIC rates on our site). There are also GICs that come with special features, including:

Escalating-rate GICs—The interest rate on the GIC rises over the term. For example, the interest rate will be 1% in the first year and gradually rise to 3% in the fifth year.

Laddered GICs—With these types of GIC, your investment is divided evenly into different term lengths (for example, one, two, three, four, and five years) and you can redeem or reinvest each portion as it matures. You can also do this yourself by building your own GIC ladder.

Market-linked GICs—These types of GICs provide you with exposure to the stock market. If the stock index it’s linked to doesn’t rise, you don’t make money but you don’t lose money either. These shouldn’t be considered as a substitution for stocks.

The bottom line

Although GICs are a good fixed-income investment option, it doesn’t mean you should depend on them for all of your fixed-income exposure. You should diversify your portfolio further by purchasing other types of fixed-income investments, such as a fixed-income exchange-traded fund (ETF) or index fund.

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Flickr: Acorns