Guaranteed Investment Contracts (GICs)

Guaranteed investment contracts are similar to certificates of deposit that can be purchased at banks; however, they are sold by insurance companies. Like money market funds, they're very safe investments; and like all investments that are considered to be "very safe", they won't make you very much money. Also known by other names – fixed-income fund, stable value fund, capital-preservation fund, or guaranteed fund, for example -- they generally pay interest from one- to five years. Like CDs, a GIC's value remains stable, not fluctuating up and down the way stock and bond prices might. When the GIC's term ends, it can be renewed at then-current interest rates.

GICs are not without their detractors among the investing and financial-planning set. Some of the more common complaints are that GICs are often saddled with high fees and their fixed rates don't always beat inflation. Critics also contend that too many people put too much of their retirement money into guaranteed investment contracts, thereby shying away from the stock market, which is generally where the larger profits are located. This locks them into minimal gains as well as the very real possibility of reaching retirement with far less money than will be needed to maintain the lifestyle that they've grown accustomed to.

But perhaps the worst accusation that's levied against GICs is that the word "guaranteed" in their names is misleading to the inexperienced investor. They aren't backed by the full faith and credit of the United States government, as Treasury securities are. Nor do they have the luxury of being insured by the Federal Deposit Insurance Corporation as deposit accounts and bank-sold CDs do. (While banks can't issue GICs, they can and do issue BICs, or bank investment contracts. Unlike GICs, these instruments are FDIC-insured up to $100,000 per depositor.) Generally, guaranteed investment contracts are guaranteed only by the insurance companies that issue them, which could certainly be problematic. For instance, if the insurance company becomes insolvent, your GIC investment may well end up being worthless, as well. For this reason you should periodically check the financial stability of the company that's issuing the contract.

Guaranteed investment contracts do, however, have some advantages. Although safe, they're not as conservative as money market funds; as such, they generally pay adequately, usually more than money market funds and CDs, and actually closer to short-term bonds. And because most insurance companies are financially strong and sound, the "guarantee" realistically should not be much of a concern.

For the novice investor, GICs are a good place to start; they won't cause the anxiety or sleepless nights that might occur due to losses (albeit possibly temporary) in the stock or bond markets. They can also help to shield a portfolio against too much stock market volatility, which could panic even an experienced investor into prematurely selling in a down market. For example, a portfolio made up of fifty percent equities and fifty percent GICs would likely be cushioned from wild swings in the value of the investor's assets. In the future, GICs may become more sophisticated investment instruments, actively managed to earn higher returns from a variety of fixed-income vehicles.

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