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GIC Term: Go Short or Long?
November 14, 2023
9:06 am
Wrayzor
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Looking to see what the consensus is on short vs long term non-registered GICs right now.

I'm cherry-picking some offers that are available now and ignoring other considerations like CDIC/CU coverage limits, laddering requirements, economic catastrophe, etc. The goal is to maximize risk-free income. The dollars invested aren't required for 5 years. All interest compounds.

For longer term, 4 years @ 5.5% and 5 years @ 5.25%.
For shorter term, 2 years @ 6.0%.

Taking the 2 year offer, the rate in 2 years would have to be 5% to match the 4 year offer or 4.75% to match the 5 year offer.

What are the odds that 2 years from now the 2 year rate will be 5% or the 3 rate being 4.75%?

My inclination is to say unlikely and the longer terms better meet the goal.

November 14, 2023
9:32 am
Dean
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.
From what you describe above (" ... The dollars invested aren't required for 5 years ... "), now is probably the time for you to go 'Long'.

My requirements and parameters are different, so I'll be doing both.

FWIW,

    Dean

sf-cool " Live Long, Healthy ... And Prosper! " sf-cool

November 14, 2023
10:08 am
Lodown
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Right now is the time to go long 5+ yrs. But keep some in shorter term like 2-3 yrs as a hedge.

November 14, 2023
10:51 am
NorthernRaven
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Wrayzor said
Looking to see what the consensus is on short vs long term non-registered GICs right now.

I'm cherry-picking some offers that are available now and ignoring other considerations like CDIC/CU coverage limits, laddering requirements, economic catastrophe, etc. The goal is to maximize risk-free income. The dollars invested aren't required for 5 years. All interest compounds.

For longer term, 4 years @ 5.5% and 5 years @ 5.25%.
For shorter term, 2 years @ 6.0%.

Taking the 2 year offer, the rate in 2 years would have to be 5% to match the 4 year offer or 4.75% to match the 5 year offer.

What are the odds that 2 years from now the 2 year rate will be 5% or the 3 rate being 4.75%?

My inclination is to say unlikely and the longer terms better meet the goal.  

I've been having similar debates with myself, although I've got a potential situation that has me keeping a bigger chunk short than I might otherwise (I took a bunch of the Tangerine 6% 18 month earlier this year, and will take a slice of Oaken 6% as well). I normally buy my GICs myself, but if you can make 20K minimums you can currently get nonreg 6.10/6.11/5.87/5.81/5.85 from Haventree Bank through a GIC broker like GICdirect - they don't seem to be offering that through other channels. I finally broke down and set up with them to get some of that 5-year rate. I was about to take a chunk of the 3-year as well, but I'm asking your question and wondering if I shouldn't just double down on the 5-year, and the hell with laddering... 🙂

November 14, 2023
11:59 am
Loonie
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As OP says, it's about guessing the odds about future rates. The clear answer to that is that NOBODY knows. As proof, remind yourself of your imaginings two years ago. Nobody I know was predicting rates would be up to 6+ by now.

And there is nothing that is "risk-free". It's only a question of which risks you want to take.

November 14, 2023
12:52 pm
Wrayzor
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Loonie said
As OP says, it's about guessing the odds about future rates. The clear answer to that is that NOBODY knows. As proof, remind yourself of your imaginings two years ago. Nobody I know was predicting rates would be up to 6+ by now.

And there is nothing that is "risk-free". It's only a quesiton of which risks you want to take.  

You're right Loonie, there's no certainty in this game. I'm merely interested in others' guesses/opinions/thoughts on the question.

I was trying to fence off risk as a variable with a focus on GICs. I understand that GICs are low risk, not zero risk. And taking everything into consideration, with blue chip dividend yields north of 7%, they are an attractive alternative (if appetite for risk is higher). But I'm looking to narrow the question down to short vs. long term in the GIC universe.

November 14, 2023
3:00 pm
phrank
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When it seems very, very tilted in one direction, then on those rare occasions I do destabilize my 5 year ladder on my GICs to try and increase returns. So IMO it was obvious for a while that rates were going to be going up. So I held off on any long term GICs for around 2 years and maintained maturing funds in HISA or short term GICs like Huberts then desirable quarterly GIC.

I'm actually surprised rates only made it to 6% now, but now I'm also not sure where things are going next and when I'm uncertain, that's when I try to redistribute my GICs to return to something close to a 20% per year 5 year ladder.

Personally, I think for people interested in 5 year GICs the main purpose of a GIC ladder is to ensure you are always getting an equal balance of worst and best rates over that 5 year window. So I don't do much speculation with my GICs except in exceptional circumstances.

At this moment I personally am not doing anything other than returning to something close to 20% distribution in my GICs because I personally think GICs are not the tool you use to get rich. It's the tool you use to protect against large losses in a way which requires minimal speculation.

November 14, 2023
3:02 pm
althisa
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Wrayzor said
The dollars invested aren't required for 5 years. All interest compounds.

For longer term, 4 years @ 5.5% and 5 years @ 5.25%.
For shorter term, 2 years @ 6.0%.

What are the odds that 2 years from now the 2 year rate will be 5% or the 3 rate being 4.75%?

My inclination is to say unlikely and the longer terms better meet the goal.  

If you dont need the money for 5 years and your inclination says rates will keep going down go long, follow your inclination.

The question is how many times has your 'instinct' been right, and how often has it been wrong. And how many times is it just plain old luck when you were right.

BTW 2 yrs @6% + 2 yrs @5% is NOT equal to 4 yrs @5.5%
Simply averaging rates does not work if you are compounding as you indicated
A revised and correct calculation may or not change your decision

Laddering makes sense for people like me who are uncertain of the future.
Not clear why you would exclude 'Laddering requirements" when essentially what you are doing is comparing ladders with your guess at future interest rates in 2 and 3 yrs

November 14, 2023
3:15 pm
Dean
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.
But then ... at the same time, I'll be consulting my Ball . . .


.
I should have the final results by tomorrow morning.

Stay tuned ...

    Dean sf-wink

sf-cool " Live Long, Healthy ... And Prosper! " sf-cool

November 14, 2023
7:21 pm
Loonie
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For what it's worth, I'd bet on the shorter terms now. But that advice is not worth much - in my opinion!

November 14, 2023
8:10 pm
mordko
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Ladder.

November 14, 2023
8:32 pm
Loonie
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OP said clearly in initial post that laddering has been ruled out, so there is no point in talking about it.

November 14, 2023
9:28 pm
althisa
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Loonie said
OP said clearly in initial post that laddering has been ruled out, so there is no point in talking about it.  

Except what OP is talking about is comparing ladders

2yrs @6% + 2 yrs @X% is a two rung ladder
2yrs @6% + 3 yrs @Y% is another two rung ladder
comparing them is comparing ladders

It took me time and research to understand GIC and bond ladders, their benefits, how they work etc. Sometimes when you are comparing long and short options, the short options are essentially ladders if you are reinvesting the $ at the end of the term.

November 15, 2023
4:49 am
mordko
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Loonie said
OP said clearly in initial post that laddering has been ruled out, so there is no point in talking about it.  

What OP clearly states is that he wants the impossible, aka “ The goal is to maximize risk-free income. ”. That’s contradiction in terms. By definition. Whether he goes long or short, there will be interest rate risk, liquidity risk, inflation risk and other risks.

I think he should be gently pushed towards reality. While “risk-free” isn’t feasible, his risks can be reduced a bit by laddering.

November 15, 2023
4:58 am
savemoresaveoften
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mordko said

What OP clearly states is that he wants the impossible, aka “ The goal is to maximize risk-free income. ”. That’s contradiction in terms. By definition. Whether he goes long or short, there will be interest rate risk, liquidity risk, inflation risk and other risks.

I think he should be gently pushed towards reality. While “risk-free” isn’t feasible, his risks can be reduced a bit by laddering.  

That nails it. When one wants "risk free" return, there is compromise and never optimized which OP wants is max return.
My 2 cents worth is if one is worried about ultra low interest rate again, that is a very low probability. CB have done it for the last 20 years since 2009, and they now witnessed how ugly that can make inflation out of control. So they will not attempt to do it again, unless there is another global meltdown of some sort.
I can see CB rate goes back down to maybe 3% at the next recession, but not 0%

November 15, 2023
7:46 am
Wrayzor
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phrank said
I personally think GICs are not the tool you use to get rich. It's the tool you use to protect against large losses in a way which requires minimal speculation.  

Agreed, phrank. I'm treating GICs as a cushion against losses. And, like you, I have been holding off on long term purchases. But now wondering if this is the time.

althisa said
BTW 2 yrs @6% + 2 yrs @5% is NOT equal to 4 yrs @5.5%
Simply averaging rates does not work if you are compounding as you indicated
A revised and correct calculation may or not change your decision

Laddering makes sense for people like me who are uncertain of the future.
Not clear why you would exclude 'Laddering requirements" when essentially what you are doing is comparing ladders with your guess at future interest rates in 2 and 3 yrs  

Regarding the calculation, I was presenting the proper compounded numbers, just rounded for simplicity. (The real numbers I came up with are 5.0024% and 4.7530%, but stand to be corrected.)

Laddering excluded, because I didn't want the answer to be "fill in your ladder". I'm more inclined to take advantage of opportunities to maximize GIC return than to build a traditional ladder. To me, the most common laddering is to set up equal size GICs with terms of 1-5+ years and keep rolling over into the longest term. Not what I'm looking to do with the long vs short question, so I wanted to avoid that discussion. My options may be seen as a series of ladders (isn't everything?), but my exclusion was the equal-weight laddering strategy.

mordko, savemoresaveoften: I concede that nothing is risk-free and I do understand risk and the trade-off with return. I took a risk(!) using the term "risk-free", and have rightly been called out for mis-using it. Still, I'm looking to maximize income within my GIC bucket. Laddering may reduce risk a bit, as pointed out, but it's not a maximization strategy.

I guess I'll just have to wait for Dean's ball's definitive answer.

November 15, 2023
8:54 am
mordko
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If you want to maximize returns with a GIC strategy by taking a bet on inflation, interest rates, future mortgage requirements and other contributing factors then why not throw a coin? As good an answer as anyone can provide.

If you want something a little more scientific, build and event tree and place your estimates of probabilities of the key factors on every branch. And then do a a simple probabilistic analysis. Personally I won’t bother because I can’t accurately estimate what the inflation will be in 4 years’ time, and that’s the simplest question I would have to answer.

But seriously… What value could possibly be added to your analysis via a random opinion polling of people in a chat room?

November 15, 2023
9:50 am
AltaRed
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Wrayzor said
I concede that nothing is risk-free and I do understand risk and the trade-off with return. I took a risk(!) using the term "risk-free", and have rightly been called out for mis-using it. Still, I'm looking to maximize income within my GIC bucket. Laddering may reduce risk a bit, as pointed out, but it's not a maximization strategy.

I guess I'll just have to wait for Dean's ball's definitive answer.  

My view is you are not maximizing GIC income, except for maybe one moment in time, e.g. over the next 12 months until the next GIC matures. You have nothing more than a personal guess as to what interest rates will be when each of your GICs mature.

My view is we will not see 2020/2021 style low interest rates again but I equally believe current rates will not last beyond mid-2024. The only thing I might bet on is GIC renewal rates in 2025 being somewhere more equi-distance between those two extremes.

I know you did not ask, but my bet right now if I was into GIC ladders would be this being the very best time to create an equal 5 year ladder. Rates are essentially the same across all terms, and that 5 % five year GIC maturing in 2028 could look stunning as early as 2025. That 6% two year GIC you buy today could (in the risked case) be a sorry renewal at 3.5% in 2025.

November 15, 2023
10:24 am
Wrayzor
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mordko said
What value could possibly be added to your analysis via a random opinion polling of people in a chat room?  

What value? There are many people contributing here with far more experience than I have playing in the GIC world. I do value and appreciate everyone's input. I realize nothing is for sure and it's opinion that I'm seeing, peppered with suggestions which add to my knowledge base.

I recognize my question is practically the same as the general "where are rates going?", but with a specific example I wanted to see where people sat. I've learned a lot from this site over the years and continue to do so, even if a coin flip would provide a similarly accurate answer to this particular question. It's not so much the answers but people's thought process of getting to them that gives value to me.

November 15, 2023
10:34 am
mordko
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Wrayzor said

What value? There are many people contributing here with far more experience than I have playing in the GIC world. I do value and appreciate everyone's input. I realize nothing is for sure and it's opinion that I'm seeing, peppered with suggestions which add to my knowledge base.

I recognize my question is practically the same as the general "where are rates going?", but with a specific example I wanted to see where people sat. I've learned a lot from this site over the years and continue to do so, even if a coin flip would provide a similarly accurate answer to this particular question. It's not so much the answers but people's thought process of getting to them that gives value to me.  

In a similar scenario someone analyzed buy and sell recommendations in a few financial chatrooms. The results showed no correlation between predictions and performance. They did find some correlation with short-term trading volumes but thats it.

Thought process… Sure.

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