| Laddering – The Value of Using
Long Term Interest Periods
What direction are rates going?
What is the best way to invest my GICs : short term
or longer term?
Studies by independent economists and major banks
have confirmed that GIC investors enhanced their
overall return when they select long-term GICs instead
of short term rates – hoping that rates will
rise. One study showed that over a 30 year period
investing in long-term five year GICs yielded average
premiums nearly a full percentage point higher than
investing in short term GICs. Similar studies conducted
by other banks and independent economics have found
that the odds are stacked against the short term
investor doing better than those investors selecting
a laddered five year GIC strategy.
By laddering your investments you can ensure liquidity
while taking advantage of higher five-year GIC rates.
GIC laddered Investment Strategy
Laddering offers a way to take advantage of five-year
rates of return on GICs. It is a straight forward
strategy:
- Divide your initial investment into five equal
parts
- Purchase five separate GICs; each maturing
one year later than the next
- When each GIC matures, reinvest in a five-year
GIC.
Because only one-firth of the portfolio comes due
every year, overall performance is less likely to
be affected by short-term interest rate fluctuations.
If interest rates are falling, only 20 per cent
of your portfolio is affected. If interest rates
are rising, you can take advantage of new opportunities
and invest at higher rates. Using this strategy
all of your GIC investments will be earning five-year
rates of return which are typically the highest.
Plus, you will have the security of knowing that
you have not tied up all of your capital for a full
five years; you will have access to 20 per cent
of your total investment in any given year.
How to implement Laddered GIC Strategy.
This is an effective strategy for investors who
want the best of both worlds – high fixed
interest returns with a high degree of liquidity.
We can help you explore if this strategy is best
suited to your financial needs and work with you
to implement the laddered GIC approach for fixed
income management.
Enhanced GIC 5 Year Rate of Return
Why accept less than the best? We survey banks and
trust companies across Canada to provide clients
with the highest possible interest rates at any
given time on Guaranteed Investment Certificates.
Getting the top rate on a GIC investment can result
in thousands of dollars of additional capital over
a persons accumulation years – 1.24% per year
increase. Don’t make the mistake of thinking
that a quarter or half percent would not make much
of a difference because it will.
Type of Fixed Income Investments
through Deposit Brokerage:
Guaranteed Investment Certificates
Commonly referred to as GICs are fixed-term investments
issued for terms of up to five years. To be covered
under CDIC the term cannot be over 5 years. A client
can select a specific term to meet their requirements
,e.g.: 2 years – 18 months. GICs are placed
primarily with banks and trust companies.
Short Term Deposits:
Short Term Deposits are fixed deposits that cannot
be redeemed under any circumstances until maturity.
The rate from 30 to 364 days. Clients can select
a term based on a specific period of time, e.g.
62 days, or a specific date, e.g. October 6th
Cash Term Deposits:
Cashable term deposits range from 30 days to two
years and are available through our deposit broker
firm. As rates move, it is very easy to reinvest
a cashable term deposit at the current rate as long
as the minimum holding requirements are met. With
the client’s permission, it is possible to
reinvest the cashable term deposit via fax to the
financial institution. Interest accrues daily and
is paid at maturity or on a prorated basis.
The Deposit Broker Network:
A deposit broker is an independent retailer who
helps people select and buy investments products
especially guaranteed investments products such
as GICs, Term Deposits, etc from different Canadian
financial institutions.
Under Kenneth Brown Investments, our deposit broker
area, we strive to provide clients with the fundamental
keys to financial success – a wide selection
of products, the bet possible interest rates and
personal service.
Because we are independent from any single institutions,
we can offer objective product recommendations.
The financial institutions are able to provide as
special rate for clients who investment through
the Deposit Broker Network.
We belong to the Federation of Canadian Independent
Deposit Brokers (FCIDB) which is an industry trade
organization for deposit brokers. It sets standards
for its members and provides a contest within which
member deposit brokers operation.
We encourage all associates who provide service
to our clients to complete the Canadian Deposits
Self Study Course through the FCIDB. This course
was specially develop to enhance the knowledge of
associate working within the deposit brokerage area.
What is CDIC and how much cover is available:
Canada Deposit Insurance Corporation is a federal
crown corporation created in 1967 to protect eligible
deposits in member financial institutions against
failure. The maximum basic coverage for each depositor
is $60,000 per member institution. The amount covers
the combined total of all eligible principle and
interest for the entire institution.
CDIC Membership can be verified by consulting
CDIC’s membership brochure or the CDIC Web
site: www.cdic.ca
CDIC Insures eligible deposits with member financial
institutions, including:
- Savings and chequing
- Term deposits including GIC’s maturing
in less then 5 years
- Debentures issued by loan companies
- Money orders and drafts
- Certified drafts and cheques
Basic Protection: by law the maximum
basic protection of eligible deposits is $60,000
per depositor (principal and interest combined)
in each member institution. Deposits are not insured
separately in each branch off of a member institution.
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