Holding Cash in Your Portfolio

Do you have money sitting in a chequing or savings account making very little (if any) interest?

Although cash should not be a long-term method of growing your wealth, there is a time and place to use cash to your advantage within your financial plan. Cash can support your current and short-term financial needs as well as provide you with protection and liquidity.

With current interest rates at recent memory highs, more clients are asking about GICs and high interest rates. While I generally recommend investing in a diversified mutual fund portfolio for long-term investments, cash & GICs are finding a place within portfolios again for the short-term slice of the pie. Although these attractive rates won’t last forever, it may be an opportunity to secure a great rate for your shorter-term goals.

As always, investment suitability should be based on your individual situation including personal goals, investment objectives, and risk-tolerance. If you already have a diversified mutual fund portfolio that we have tailored to your specific situation, then I likely would not suggest selling your holdings to buy a GIC – no, not even at these rates! Your portfolio should already be constructed based on your goals, so switching gears to buy a GIC might actually hurt your long-term growth potential! These kinds of changes will be reviewed at our regularly scheduled meetings, however if you have some cash sitting idle, or need a refresher on these types of investments, read ahead.

What is a GIC?

A Guaranteed Investment Certificate is a savings product that you purchase for a specific term (i.e. 1-year, 2-year, etc.). The issuer pays a guaranteed interest rate at the end of the term, along with your principle. Current GIC rates are just north of 5%, which is intriguing for low-risk investors, or those with short-term goals who do not wish to risk their investment in the stock market.

The main downside of a GIC is that it is not liquid; meaning you cannot get at your money until the end of the term. Another negative to GICs is that typically, the interest rate offering is less than inflation, so you may in fact lose purchasing power of your money since it’s tied up for at least a year. Taxation is another consideration which can eat away at your GIC return, depending on what type of account you own the GIC.

We often use GICs as a cash income wedge for retirees’ income stream, or other short-term goals such as a big trip or renovation, which has a specific end date to which the cash will be needed.

A bank or issuer’s profit is the difference between lending rates and the rates they pay on GICs. If mortgage rates are at 8% and GICs are at 5%, then that 3% difference is the bank’s profit.

What is a High Interest or High Yield Savings Fund?

High Interest Savings Account (HISA) is a savings product which also pays interest each month. The interest rate can go up or down depending on what the current interest rate environment is. Currently, these rates are around 4.6% at time of writing; however, when interest rates begin to decline again in the coming year or so, the rate you receive will also decline. You cannot lose money with a high interest fund, but you can earn virtually no interest at all if rates go down to where they were a couple of years ago.

The main benefit of HISA is that it is fully liquid, and you can cash it in on any business day without penalty of lost interest.

Again, typically cash/HISA is used as a cash income wedge for retirees’ income stream, or other short-term goals which require readily available liquidity.

You can hold a GIC or HISA within a Registered Retirement Saving Plan, Tax-Free Savings Account, or Non-Registered investment account. The interest that a GIC or HISA pays is fully taxable within the non-registered account, so this needs to be planned for to ensure earning interest will not impact your other tax planning strategies.

These options are not wealth creators, but they can be smart financial moves to earn additional income on your short-term savings or simply excess cash that you may currently have sitting in the bank earning nearly nothing.