GICs, Stock Markets, and Credit Card Fees: Q&A With a Canadian CFP®
Money is an important conversation to have and I’m so glad people are tuning into The Canadian Money Roadmap podcast and reaching out with questions. I devoted episode 58 to answering some of the most common questions that end up in my inbox.
So, let’s talk about GICs, stock market returns, and the dreaded credit card fees.
What’s the deal with GICs? Is now a good time to buy GICs in Canada?
Like so many things, the answer is “it depends.” So before I get there, let’s look at a more basic question: what are GICs?
GICs, or Guaranteed Investment Certificates, are something you buy from a bank or credit union that provides a set amount of interest. This is not investment growth, but a specific cash payment in exchange for putting your money in a GIC.
Other features to note:
GICs are for a set length of time—could be six months, a year, or five years. Each one has a specific time frame in which your money is locked in; interest is paid at the end of the term. Note that you cannot access your money during this time, which is a risk to purchasing GICs.
Interest is set and will not change after your money is locked into a GIC. That’s why it’s called a guaranteed investment—you’re guaranteed a specific rate of interest.
The reason this question is coming up now is because GIC interest rates are the highest they’ve been in recent history, with many sitting around 4-4.5% interest.
For a guaranteed rate of return, that’s not bad.
But this doesn’t mean it’s always the best investment choice. Risk and expected returns are always linked—the lower the risk, the lower the expected return, and vice versa.
So, a GIC being a (almost) risk-free investment, the return is always going to be low. Therefore, this is not the way to optimize your investment portfolio. So, buying them depends on your goals:
If your goal is security instead of investment maximization, GICs can be a good option right now. This may be a valid strategy for conservative investors with employment income to invest (i.e., you are not selling higher-value securities for low-return GICs).
If your goal is investment maximization, GICs are not going to do this over the long term.
Like any investment opportunity, it’s important to know your goals before purchasing securities. Same with GICs—understand how they work and consider if they meet your long-term financial goals.
2. My portfolio is down—did I buy the wrong investments?
Same answer here—it depends. Specifically, it depends on what investing strategy you took between these two options:
You invested in individual companies, purchasing stocks based on what was interesting, trending, or popular over the last few years. Examples include Zoom, Peloton, or Tesla.
You invested in a diversified portfolio, typically ETFs or mutual funds, that carry a variety of securities to minimize overall risk of holding just one company’s stocks.
If you fall into the first category, you might have bought the wrong investments. There’s no way for me to know your personal situation, but purchasing individual stocks of a specific company can be very high-risk.
It’s nearly impossible to assign expected returns from individual stocks because of the risks present in a business. Anything from a PR scandal to changing consumer interests can impact the value of individual stocks.
The only real way to mitigate risks of investing in one company is to diversify your portfolio, which places you in the second category listed above.
If you have a diversified portfolio and it’s still down this year… Well, welcome to the club! 2022 is one of the worst years, with both stocks and bonds down. It doesn’t happen that often, and it’s tough, mentally, to keep your cool watching your portfolio dip.
But despite the low performance, I believe that this is not the wrong investment choice. It’s simply a bad year for investors.
3. But I’m still worried about my portfolio. Should I sell now and wait for the dust to settle before getting back into the market?
This one’s easier to answer: No. Selling when you’re down turns a hypothetical loss into a permanent one.
When you invest in securities (stocks, ETFs, mutual funds), you are buying a stake in a business, or multiple businesses. Even though the price of ownership changes, you still own the same number of units.
Selling those units when they’re down only to buy them back when the prices are higher results in two things:
Higher purchase price: If you wait for the market to recover, buying your stocks back will now cost more than they did originally.
Lost returns: This is the more important piece—if you sell your investments when they’re down and buy them back later, you’re missing out on the returns you originally invested for in the first place! That gap means you are not getting the returns you could have on the investment.
The market moves up and down, it fluctuates. There is no way around it—it’s part of the inherent risk of investing in the stock market.
Just remember: you cannot reliably avoid risk and only get high returns. Periods of decline are part of the risk that comes with high returns. So, don’t panic and wait it out.
4. I heard that businesses can start charging more to use my credit card. What’s happening with that?
If you’ve been keeping up with the news, you know that there’s been a change in Canada regarding credit card fees.
Credit card companies charge fees for their service which is, of course, to facilitate the exchange of money. In the past, merchants (store, business, or service provider) were not allowed to explicitly pass on that fee to the consumer. Thanks to a recent class action lawsuit, things have changed.
Now, businesses are allowed to transfer credit card processing fees explicitly to the consumer. This would appear like an extra charge on your receipt, after the total charges, along with taxes.
The big question Canadians are asking is if merchants will start charging.
My best guess is that most will not. Why? Well, these fees are nothing new and businesses have been accommodating them in their pricing structure for years—they’ve already absorbed the cost into their prices.
Additionally, adding a new charge to consumers will create more competition between merchants and not charging will be seen as a competitive advantage. After all, fewer consumers will go to the stores that start charging this extra fee.
Companies that might charge the fee are those with little competition or industries with little consumer choice. This might be cell phone or internet providers who have a captive audience of consumers who can’t really go anywhere.
These are just my speculations, though—time will tell!
If merchants start charging the fee, it may be time to switch over to using debit instead. Purchasing via your debit card, through the Interac system, carries no fees to consumers.
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There we are—your questions answered! If you have a question you’d like me to answer, simply email me at hello@evanneufeld.com and I’ll try to get into it.
And if you want to check out the full episode where I dig a bit deeper into these questions, download episode 58 of The Canadian Money Roadmap podcast and have a listen.
Evan Neufeld is a CERTIFIED FINANCIAL PLANNER® professional in Saskatoon, Saskatchewan and offers both investing and fee-only financial planning services.
*Disclaimer: Any numbers or rates of returns are used for illustration purposes only and should not be taken as fact. Note that the information in this article is current to the time of writing but is not guaranteed as up-to-date past then.
This article and accompanying podcast do not constitute personal financial advice. Evan Neufeld is a CERTIFIED FINANCIAL PLANNER professional in Saskatoon, Saskatchewan, and provides this Canadian personal finance content for educational purposes to the public. You are welcome to contact Evan to receive personalized fee-only financial planning or investment portfolio management.