Ride market volatility with GICs

Last updated: March 16, 2018

When it comes to investing, do you take the bull by the horns or play it safe? Maybe you do a bit of both, seeking that balance of risk and return in your portfolio. There’s something to not putting all your eggs in one basket. Having a diversified portfolio – one where your money is spread across different vehicles to offset risk from poorly-performing investments – is key to staying ahead in the investing game.

Many factors go into influencing investment decisions such as financial needs, how much time you have and risk tolerance to name a few. Whatever your investing level is, your money is probably affected by market trends in some way.

The highs and the lows

When stock market rates are high, you might tend to want to jump in with your money. Makes sense. Or, does it? Because when the market is up, that’s usually when the prices of stocks are expensive.

Here’s how it works: the market is largely affected by the attitudes of investors. How investors feel about its performance usually determines the trends that follow. And, that sometimes creates market volatility.

Think of it this way. One day, stock market prices go up. The next day they go down and stay that way for five days. Then, they go up and right back down again, creating a real sense of fear. That’s when price fluctuations become common, particularly for those investments with fewer securities, and higher risk for probability of loss when it comes to returns.

If volatility leaves you feeling like you want to run for safety, going for products minimally affected by trends, like a Guaranteed Investment Certificate (GIC), just might be worth thinking about.

Rest assured with a GIC

According to Tim Wilson, Vice President and Chief Financial Officer at Equitable Bank, “Particularly during times of unrest in the markets, GICs can bring some much-needed security and growth to any investment portfolio.”

Before we get into the benefits of adding this tried-and-true option, let’s try to make sense of the ups and downs of the market since they can weigh heavily on your portfolio.

Blame it on the Bull and the Bear

Understanding market conditions comes down to two words: bull and bear.

In general, a bull market is one that’s on the rise. In contrast, a bear market is, you guessed it, one that’s in decline. We’ve heard stock markets were given these names based on the ways the animals attack their victims – bulls with their horns in the air and bears with their paws down.

In a bull market, normally, a country’s economy is strong as are its employment levels. A continuous increase in share prices makes stockholders happy as growth in the market pervades.

On the flipside, in a bear market, the economy starts to ease off: unemployment increases as companies begin feeling a decline in the economy, share prices take a hit and begin to drop surely and steadily quarter after quarter. Overall, stockholders become fearful as a sense of decline looms in the market.

While the dizzying effects of bull and bear market conditions may leave you feeling like it’s either a golden age or a day of reckoning for your money, there are ways you can make market volatility work to your advantage by considering safer options.

Fixed income investments

Let’s get back to GICs. Often misunderstood and viewed as a retirement savings vehicle because of their low risk and fixed rate of return, the reality is, they’re not just for older folks.

As Tim Wilson explains, they’re a good investment option for any age group. “Whether it be new parents saving for their child’s education through an RESP or a newlywed couple starting their life together by buying GICs to put into a TFSA, GICs can provide benefits at various different life stages.”

Dan Bortolotti, Creator of Canadian Couch Potato, an award-winning blog about index investing said, “It's time we gave the humble GIC a little more respect.”

He explains, “Guaranteed investment certificates are often dismissed as stodgy products for people with no appetite for risk, but that's unfair. Used properly, they have a place in almost any balanced portfolio.”

With most types of GICs, the principal is guaranteed upon maturity, and there are a variety of interest and term options, as well as flexibility and accessibility to funds with cashable products. Sure, GICs may not sound wildly exciting at first. However, in the end, what they can offer is some firm ground in your portfolio. They’re the security blanket you’ll be glad you have even when the bull and bear markets run amok with unpredictability.

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