How GICs can ease stock market stress

* This article is sponsored by EQ Bank

As world events cause stock prices to dramatically rise and fall, you might be wondering how to protect your portfolio from these rapid swings.

In the face of stock market volatility, one of the safest options for Canadians is the guaranteed investment certificate (GIC). This straightforward investment is unbothered by what’s happening in the market, and it delivers predictable returns with virtually no risk.

Let’s take a look at why your portfolio could be vulnerable to stock market volatility and how GICs can ease your stock market stress.

 

What causes stock market volatility?

When people aren’t sure of what’s going to happen in the economy, they can start making unpredictable decisions with their money. When this happens on a wider scale, it can lead to sudden changes in how investments like stocks and precious metals are valued.

Right now, there are several things happening around the world that are contributing to stock market volatility:

 

Inflation and rising interest rates

The inflation problem isn’t unique to Canada; it’s happening around the world. As the situation unfolds, people are trying to get ahead by buying investments they think will benefit from rising costs and interest rates, and they’re selling investments they think will suffer. When their opinion of which investments are best suited to beat inflation shifts, the reverberations are felt throughout the market.

Geopolitical events

Russia has been antagonizing the European Union (EU) through its invasion of Ukraine – and Russia also happens to supply a large share of Europe’s natural gas. That tension is driving gas prices up, which has ramifications for manufacturing and the broader economy. Stock prices rise and fall rapidly as news comes out about how Europe is handling threats to its fossil fuel supply.

Industry changes

There has been plenty of bleak news recently about how staffing shortages are playing havoc in healthcare and other service-based industries. This, and other industry challenges like the ongoing microchip shortage, are contributing to the uncertainty that has some investors scrambling.

Fiscal policy

Canada’s recent policy moves have been mostly aimed at taking money out of the economy, via interest rate hikes, to curb inflation. Combined with relief measures like the federal government’s recently announced $4.5-billion assistance package, these government policies are redistributing money in novel ways. Share prices do funny things as investors try to take advantage of these policy shifts.

How can GICs provide relief from market volatility?

Market volatility is usually short-lived, and long-term investors have historically come out ahead by investing in broad sections of the market and ignoring the short-term ups and downs. However, investors with shorter time horizons and those with less tolerance for risk can find relief from sharp swings in the stock markets by shifting money to more stable investments like GICs.

When the market is turbulent, GICs hold steady. Unaffected by the rise and fall of stock prices, GICs offer a predictable return and lots of flexibility to grow your wealth in a way that works for you. Some of the foremost benefits of GICs include:

 

Guaranteed returns

GICs are a type of fixed-rate investment. When you buy a GIC, you’re agreeing to a term and interest rate that are guaranteed not to change regardless of what happens in the market. That means you know exactly how much money you’ll earn, and when.

Many GICs (such as those offered by EQ Bank are keeping pace with climbing interest rates, making them a particularly interesting investment right now.

These high GIC rates mean high guaranteed returns. For example, if you were to buy a $5,000 1-year GIC at EQ Bank’s best rate of 4.50% (at the time this article was written), you would be guaranteed to earn a $225 total return after one year. A $5,000 investment in a 5-year GIC at EQ Bank’s best rate of 4.70% (at the time this article was written) would earn $1,291 at maturity, guaranteed.

Flexible term lengths

Buying a GIC usually means locking your money in for the certificate’s entire term, but that commitment could be as short as 30 days. That means you can benefit from the security of a GIC without losing access to your money for an extended length of time. If you’re willing to invest for longer, GIC terms typically go up to 10 years—and generally, the longer the term, the higher the interest rate.

Many investors use a GIC “laddering” strategy to maximize their return from GICs without locking in their money for years and years. For example, if you had $5,000 to invest, you could split it evenly among four GICs with terms of 90 days, 180 days, 270 days and one year. As each GIC matures, you have the option to cash out or reinvest in a new 1-year GIC. Over time, you’ll always have the option to cash out a portion of your investment every 90 days, and you’ll never need more than a year to cash out your entire investment.

Government backing

EQ Bank GICs have the backing of the Canadian federal government, making them some of the safest investments you can buy.

GICs offered by Canada Deposit Insurance Corporation (CDIC) member institutions are eligible for CDIC protection up to $100,000 per insured category, per depositor.

 

The bottom line

In the face of market volatility, GICs offer a virtually risk-free way to grow your money. With guaranteed returns, flexible term lengths and eligibility for CDIC protection (for GIC providers that are CDIC member institutions), GICs have a place in every investment portfolio.

GICs are keeping pace with climbing interest rates, making them a particularly interesting investment at this point in time. You can learn more about EQ Bank GICs here.

 

Also read:

How to make the most of rising GIC rates

How to combat inflation in Canada

Are GICs worth it? 6 times when GICs make sense for investors