Staggering or Laddering GICs (a no fuss method of increasing your interest income)
“Laddered”, “laddering” and “staggering”. These are all investment terms that are used to describe a series of GICs or other deposits that mature at varying dates in the future.
Suppose you had staggered or laddered $25,000 5 years ago.
Here is what a GIC ladder could look like:
1. $5,000 invested into a 1 year GIC certificate @ 4.00% due 2005
2. $5,000 invested into a 2 year GIC certificate @ 4.25% due 2006
3. $5,000 invested into a 3 year GIC certificate @ 4.50% due 2007
4. $5,000 invested into a 4 year GIC certificate @ 4.75% due 2008
5. $5,000 invested into a 5 year GIC certificate @ 5.00% due 2009
Equal amounts of money are invested to mature in each of the next five years. Notice that each $5.000 investment is “staggered” for each of the next five years.
Question: Why do this type of strategy at all? Why not just invest the whole amount in just one term?
Although GICs are guaranteed, there is one type of risk that can’t be eliminated. This is called interest rate risk. Interest rate risk is the risk that interest rates can change over a period of time and adversely impact your income.
For example, if you invested all of your money into a 1 year term and rates dropped dramatically one year from now you would be forced to reinvest at a much lower interest rate no matter what term you chose.
If however, you staggered your GICs like the above example, you have protected 80% of your money because you locked in the other four GICs at higher rates.
Question: Why not invest the whole sum at the highest interest rate – the 5 year rate?
We could do that, except not so fast! If you invested everything into one 5 year term right at the beginning, what if you needed the money before the 5 year term is up? You generally can’t redeem your GIC before the GIC’s maturity date.
The "new" Laddering Strategy:
Here is a better way to invest in GICs. Do the staggering as in the above example and when the 1 year GIC matures, buy the 5 year term. When the two year term matures, buy another 5 year term, When the 3 year term matures, buy the 5 year term and so forth until you have five 5 year GIC certificates .
One of the key benefits of this strategy is that one-fifth of your money comes due every year and it will be available, should you need it.
So, assuming that the five year rate hasn’t changed, you will have the following GIC portfolio with each $5,000 certificate maturing in each of the next five years:
1. $5,000 invested into a 5 year GIC certificate @ 5.00% due 2010
2. $5,000 invested into a 5 year GIC certificate @ 5.00% due 2011
3. $5,000 invested into a 5 year GIC certificate @ 5.00% due 2012
4. $5,000 invested into a 5 year GIC certificate @ 5.00% due 2013
5. $5,000 invested into a 5 year GIC certificate @ 5.00% due 2014
And all you have to do from now on is to reinvest each maturity into the highest paying 5 year GIC anytime a certificate matures. The 5 year term almost always pays the highest interest rate.
Question: What is the role of a Deposit Broker?
Now that you decided to use the laddering strategy by using staggered GIC maturities, how do I best implement it?
You can do this by using a deposit broker who will scour 36+ different banks and trust companies in order to find the best rates for you. We do not charge for this service and there are no fees or commissions for the purchase of GICs.
If this way of investing is of interest to you, or you need a GIC quote, do not hesitate to call me at 519.744.3020 or email me at email@example.com.
Note: Interest rates shown are used for illustration purposes only. Call for current rates.
Qualifying GICs are guaranteed if purchased through a CDIC member bank, trust company or savings company. There are CDIC insurable limits. For more information about the CDIC go to http://www.cdic.ca
Most GICs are non-redeemable (can't be cashed out) prior to the maturity date except upon death.