Laddering GICs from different financial institutions or not? | GIC discussions | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

sp_Feed Topic RSS sp_TopicIcon
Laddering GICs from different financial institutions or not?
September 15, 2023
8:21 pm
althisa
Member
Members
Forum Posts: 105
Member Since:
September 5, 2023
sp_UserOfflineSmall Offline

Considering starting an investment ladder consisting only of GICS. Apparently its still a sound strategy even with an inverted yield curve. A useful article I could find is: https://www.theglobeandmail.com/investing/education/article-the-case-of-the-upside-down-gic-rates/

Do you shop around for the best GIC interest at different FIs for each year/step of the ladder. I could see this becoming a paperwork nightmare.

Alternatively if you have a brokerage account, the GICs from other FIs with different interest rates for different durations are available for purchase under the same account. It may not be the 'best' GIC rate for that duration for the FI, but there is some level of correlation with the best rate.

At least the tracking and accounting under the same account for a GIC ladder is manageable?

September 15, 2023
10:19 pm
Loonie
Member
Members
Forum Posts: 9293
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

I think you are asking which one we would choose?

In my opinion, much depends on how much money you are talking about in total, how keen you are to get best rates or better ones and on whether you want to put your money in banks or CUs..

If you have, say, a million for GICs, and you want only banks, you might be better off with discount brokerage as the insurance limits are so low and you will find yourself too busy keeping track of everything.
If you have something under, say 400K, and you are keen to grow it as much as possible, then a ladder spread over a few FIs is quite manageable, even with banks.

Once you get to about 500K or more, banks become unwieldy as you will need at least2 for each step in order to be insured.

If you like CUs, it's much easier and you can go over a million without creating too much work for yourself because of higher insurance limits. Ontario has 250K for non-registered, unlimited for registered; and MB has unlimited period.

You might also consider a "middle way", namely using a deposit broker. They generally offer some higher rates than discount brokers. They carry both CUs and bank GICs, and they will offer you what they have in descending order of rate. You just choose the one you want.
It can be a bit more inconvenient getting the money to them, but not much.. It may depend on what is available where you live. Works for me but I also buy independently. Increasingly, I am using CUs, for the higher insurance, which f makes it easier for me, and often better deals, but that too depends on where you live.

You will probably find a lot of enthusiasm on this forum from those who advocate discount brokers. Most of them seem to already have discount brokerage accounts. and prefer banks.

I could not pass the G&M paywall but I see the article was written by Heinzl. FWIW, this is not a writer I have a lot of faith in based on many previous articles. He always seemed to me to be trying to prove something he'd already made up his mind about.

What I have read elsewhere is that ladders are advantageous about 85% of the time. The other 15% were less clear but appeared to be when there are inverse rates. I can't prove that but perhaps something to look into. I am only going out 3 yrs max on my ladder now, but that is in large part because I am old, might not be here in five years, might want access to more money sooner.

September 16, 2023
4:36 am
mordko
Member
Members
Forum Posts: 881
Member Since:
April 27, 2017
sp_UserOfflineSmall Offline

I have discount brokerage accounts for stocks and bonds but don’t use them for my GIC ladder. Either buy GICs direct or via specialized GIC broker GIC Wealth.

See no need/advantage in using the same wrapper account (brokerage) as long as you (and your spouse) feel comfortable with spreadsheets.

The G&M article is good; its all basic common sense. Humans are not great at guessing interest rates and timing the market. A simple automation of the process of buying GICs works well regardless of the inverse curve. That’s what a GIC ladder does: it removes human decision-making on timing. Don’t fight Mr Market.

The other advantage of a GIC ladder (referenced in the article) is improved liquidity. You have something maturing every year. Your average duration is always less than 5 years. This removes your risk of being “particularly unlucky” and buying lots before much higher interest products become available.

Still, GICs always have liquidity constraints. Not the question you asked, but Justin Bender provided a really good overview on this issue in the context of building an overall portfolio. I do use discount brokerages for bond ETFs. H

September 16, 2023
5:45 am
agit
Member
Members
Forum Posts: 185
Member Since:
December 12, 2021
sp_UserOfflineSmall Offline

althisa said
Considering starting an investment ladder consisting only of GICS. Apparently its still a sound strategy even with an inverted yield curve. A useful article I could find is: https://www.theglobeandmail.com/investing/education/article-the-case-of-the-upside-down-gic-rates/

Do you shop around for the best GIC interest at different FIs for each year/step of the ladder. I could see this becoming a paperwork nightmare.

Alternatively if you have a brokerage account, the GICs from other FIs with different interest rates for different durations are available for purchase under the same account. It may not be the 'best' GIC rate for that duration for the FI, but there is some level of correlation with the best rate.

At least the tracking and accounting under the same account for a GIC ladder is manageable?  

Protect your asset and stay within the CDIC limit even if you have to open GIC in multiple FI, since Canada is sitting on the largest housing bubble of all time stay with the Big 6 if possible with a bit of rate cut as an extra insurance.

September 16, 2023
6:47 am
althisa
Member
Members
Forum Posts: 105
Member Since:
September 5, 2023
sp_UserOfflineSmall Offline

Loonie said
What I have read elsewhere is that ladders are advantageous about 85% of the time. The other 15% were less clear but appeared to be when there are inverse rates. I can't prove that but perhaps something to look into. I am only going out 3 yrs max on my ladder now, but that is in large part because I am old, mght not be here in five years, might want access to more money soner.  

Thank you for the insights @Loonie @mordko @agit

This is one of the 'risks' I am concerned about, i.e. a risk of suboptimal strategy in an Inverted Yield Curve. The laddering strategy makes intuitive sense 85% of the time in a 'normal' interest rate environment, but in an Inverted Yield Curve environment, it may be the wrong strategy.

Given short term interest rate uncertainty, I am considering a ladder of short term GICs i.e. 3 months, 6 month, 1 year, since the rates for the short term GICs are currently very competitive. But no one has recommended a short term ladder strategy, and there are few articles I could find on it.

This article has some insights US Treasury bills example rather than Canadian GICs
https://www.cnbc.com/2023/02/27/how-to-build-a-treasury-bill-ladder-to-capture-higher-yields.html

September 16, 2023
7:03 am
mordko
Member
Members
Forum Posts: 881
Member Since:
April 27, 2017
sp_UserOfflineSmall Offline

Shortening your maturities makes sense if you think interest rates will rise. What you are talking about is essentially a bet on interest rates.

Seems an unnecessary play in terms of risk/reward ratio simply because products available to you in 1 year are at least as likely to offer worse returns and in the event you gain its likely to be very little.

Either way your relative loss will be limited unless something crazy happens to inflation so its not a big deal.

September 16, 2023
8:18 am
savemoresaveoften
Member
Members
Forum Posts: 2932
Member Since:
March 30, 2017
sp_UserOfflineSmall Offline

althisa said
This is one of the 'risks' I am concerned about, i.e. a risk of suboptimal strategy in an Inverted Yield Curve. The laddering strategy makes intuitive sense 85% of the time in a 'normal' interest rate environment, but in an Inverted Yield Curve environment, it may be the wrong strategy.

The benefits of GIC laddering is to "smooth out" the risk in both a rising and dropping rate environment.
What you described is one side of the risk, but thats not why one choose or not choose to do GIC laddering.

September 16, 2023
10:10 am
bigzim
Member
Members
Forum Posts: 34
Member Since:
February 8, 2022
sp_UserOfflineSmall Offline

I ladder conventional 5 year, hold monies in multiple accounts, for myself, my wife and joint accounts. In that way I can roll rather easily on renewals and select the best rates at time of maturity. Easy to manage over 1M that way. I don’t time the rates and am willing to stick with the ladder as it meets with our critieria for fixed income allocation

September 16, 2023
11:04 am
Norman1
Member
Members
Forum Posts: 6870
Member Since:
April 6, 2013
sp_UserOfflineSmall Offline

althisa said

This is one of the 'risks' I am concerned about, i.e. a risk of suboptimal strategy in an Inverted Yield Curve. The laddering strategy makes intuitive sense 85% of the time in a 'normal' interest rate environment, but in an Inverted Yield Curve environment, it may be the wrong strategy.

There's actually no such risk as laddering is suboptimal most of the time anyways.

When interest rates are steady, laddering is suboptimal at the start because of 4/5 of the funds are in lower rate one-year to four-year GIC's instead of in higher-rate five-year GIC's.

When interest rates are falling, laddering is suboptimal at the start because 4/5 of funds mature and are reinvested in lower, falling rates GIC's instead of at the higher five year rates initially.

That's 2/3 out of three possible interest rate scenarios.

People ladder because they understand that they can't forecast interest rates and laddering gives decent results without the need for such forecasts.

Keep in mind that the goal is to get decent results on one's savings. The goal is not to win one of those best fixed income fund manager of the year awards.

September 16, 2023
11:06 am
phrank
Member
Members
Forum Posts: 314
Member Since:
January 3, 2009
sp_UserOfflineSmall Offline

With laddering you are always getting the best and worst rate within a 5 year window.

IMO, that is the most important fact about laddering. If you don't value this stability and removal of decision making over taking risk for higher returns, then I don't think laddering is right for you.

September 16, 2023
1:49 pm
Loonie
Member
Members
Forum Posts: 9293
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

If laddering is suboptimal, then what is optimal?
I think that laddering is in fact as good as it gets - 85% of the time. You'd have to be extraordinarily lucky to be optimal 100% of the time, and you could equally get it wrong.
If you see the goal as always getting the maximum total return, then I think you will always be disappointed.

I don't see much point in the strategy of term deposits less than one year. The first question that occurs to me is, what are you waiting for, and why do you imagine it will occur? The second question is, where do you find rates for 3 - 9 months that are at least as good as one year rates? A ladder implies spreading out your money for periodic maturities, so you'd be better to buy a series of one years. You could buy them at Hubert if you really need possibility of early redemption, but you can do better elsewhere on one year rates at this time.

The short video above from Justin Bender is good and reliable, as I have always found him to be.

As a side note, despite my general belief in ladders, there are times when one may feel compelled to reconsider.
I didn't buy any GICs in 2022 as I couldn't imagine rates going down that year, only up. (I should have avoided 2021 as well, but the situation then was not as easy to foresee!).
I used this opportunity to reduce my ladder from five to three years, something I'd been considering for a while. My weighted average return after a GIC came due last week is now about 4.9% and I am happy about that.

September 16, 2023
4:08 pm
althisa
Member
Members
Forum Posts: 105
Member Since:
September 5, 2023
sp_UserOfflineSmall Offline

Thank you everyone for sharing your experience and knowledge.
The different reasons for long term annual laddering makes more sense to me now.

September 17, 2023
10:39 am
friskyib
British Columbia
Member
Members
Forum Posts: 117
Member Since:
August 29, 2023
sp_UserOfflineSmall Offline

I do 5 year ladder with various FIs. I choose the highest rate. I have built an excel program to report my results and what year is over or under contributed and react accordingly.

September 21, 2023
1:08 pm
RetirEd
Member
Members
Forum Posts: 1053
Member Since:
November 18, 2017
sp_UserOfflineSmall Offline

I use laddering, too, but when each tranche comes due I look at the yield curves and decide what term (or terms) to invest in for the best rate while leaving myself enough cash maturing in the next few years. I generally have 2 tranches coming due each year, and using the TFSA/non-reg/RRSP CDIC classes - along with some institutions that have more than one institution status (such as Home Bank/Trust and some banks) as well as BC credit unions (no insurance limit) I don't have much worry about exceeding limits.

In the summer, I took some 5-year and some 3-year; this month I took a healthy 2-year and got it bumped within 10 days. I have started to think about my lifespan and may shorten things in the future, but still have some 5-years waiting to mature.

RetirEd

Please write your comments in the forum.