Nowadays there are numerous options to invest your money and achieve your financial goals. While some prefer the stock market for its high potential returns, others find it too nerve-racking, preferring the more predictable experience guaranteed investments provide. However, all investments, even low-risk ones, have pros and cons.
GICs (Guaranteed Investment Certificates) & GIAs (Guaranteed Interest Accounts)
GICs and GIAs are quite similar. Money is deposited for an agreed-upon term. In exchange, you are paid interest. The interest is generally paid annually, either directly to you or reinvested into the GIC/GIA to earn more interest.
The differences between the two are that GICs are purchased through a bank, credit union, broker, etc., whereas GIAs are purchased through an insurance company. GIAs also offer longer terms than the 1-5 years GICs give. And GIAs allow a beneficiary to be named.
GICs & GIAs are good options for conservative investors as they are considered low-risk investments - They miss out on the highs of the stock market but avoid the lows. There is however a risk that inflation creeps higher than the GIC/GIA rate locked in, resulting in a loss of purchasing power when they mature. Or that offered rates increase while you're locked in.
Segregated Funds
Segregated funds are mutual funds with an insurance wrapper. The insurance guarantees that your investment will not drop below a certain amount upon maturity or death. Most segregated fund contracts guarantee between 70 – 100% of your initial investment. Many also allow for resets, meaning you can reset the guarantee if the account value increases.
Segregated funds limit your losses from sharp market drops. The downside is the fees. Fees on segregated funds are higher than their mutual fund counterparts, largely due to the insurance feature. They also have far fewer options than mutual funds.
Annuities
Annuities are much like self-funded defined benefit pension plans. You place money into a contract and in return, you receive specific payments over a predetermined period. The more you invest, the longer or larger the payouts.
Annuities are great for people wanting a set payment schedule independent of the markets. Or individuals needing help with cashflow management.
The fine print is important in these contracts. Payments may reduce or stop upon the owner's death, affecting the surviving spouse. It also takes years to recoup your initial investment in payments – i.e., break even.
The Risks & Value
While investment risks traditionally come from volatility, the risks for guaranteed investment are generally higher fees and/or more modest growth. Additionally, the fine print involved in some of these products can be cumbersome to consume and understand.
Despite this, the real value of guaranteed investments is not their growth potential but the peace of mind they can provide. And for some, security is the top priority even if it comes at a cost.
For more information on guaranteed investments and your financial plan, contact KLT Wealth Management
- Courtney Beach QAFP
