With Wednesday’s Bank of Canada decision to hold its benchmark interest rate at five percent, many investors remain in a state of limbo as they await a rate cut from the central bank.
Inflation, employment and productivity data all remain under scrutiny, with fixed-income interest rates and yields on lower-risk vehicles such as GICs remaining at their highest in years.
“Yes, we’re hearing conversations of, this is going to happen, rates are going to be moving down,” said Kalee Boivert, a Calgary-based financial advisor with Raymond Jones. “The thing is, as investors, we don’t have an ability to change the trajectory of when or how much, so I always remind clients to focus on what you can control.”
The possibility also exists that we’ve reached an equilibrium and rates won’t change as much as some expect. Looking at a longer time-frame, the recent era of interest rates at or close to zero “was the anomaly,” said Diana Avigdor, head of trading at Barometer Capital Management. “So this is the normal, not what we had for 20 years.”
Higher rates on money market funds and fixed-income options like GICs have driven billions in that direction since the Bank of Canada’s (BoC) benchmark rate began its post-pandemic climb in March 2022. Data from the Investment Funds Institute of Canada (IFIC) show Canadians had more than $75 billion in money market ETFs and mutual funds as of the end of February 2024, more than double the amount two years earlier.
Money market mutual funds have been the only fund type with consistently positive monthly net sales during this time period: IFIC’s 2023 annual report notes that long-term mutual fund sales were negative in 2023, but Canadians’ fixed-term deposits grew by $141.8 billion.
Remember the long view
Boisvert suspects the stock market’s volatility in 2022 drove many investors to these low- or no-risk options. “They’re thinking, ‘This is the best place to put my money. There’s no risk. I wouldn’t have to see something like that happen again,’” she said.
“But we still have to remember long-term investment returns. And when we compare GIC investment returns long-term to equities over things like 10-year, 20-year, 30, 40 — your time investors have done substantially better investing in equity markets.”
Investors still a long way from retirement, “probably don’t really need a GIC allocation, although they might be really appealing with these higher rate right now,” Boisvert said.
Avigdor said she rates the risk in the equity market at around five out of ten.
“I think earnings are expected to continue to grow,” she said. “The things that I’d be watching very closely are the employment numbers and the earnings. As long as those two are in the right place, I think I’m OK being invested in good stable companies that provide me with growth and dividends and that sort of thing.”
Climbing the ladder
Investors who do need lower risk options – for example, people closer to retirement or people saving for a down payment in the medium term – might consider laddering their GIC investments, Boisvert said, distributing their funds across, say, 1-, 2- and 3-year GICs.
The strategy gives you some security over the uncertainty of rates in the months and years ahead, Boisvert said. “So if you locked in for something like a 3-year 4.75, that might be better than when your one year comes due” if rates have dropped, for example, to four percent.
Liquidity considerations
In most cases, for a shorter duration low-risk investment, Avigdor recommends treasury bills over GICs because of the liquidity advantage. “Treasury bills have a secondary market so you can sell them anytime. But keep your money in short-term and have the liquidity there for you, should you want to change your mind.”
Money market ETFs and mutual funds also offer flexibility that GICs don’t, Boisvert noted, with rates that remain competitive.
“You’re still going to get a much better rate of return than we saw previously on these type of instruments, so you’re going to get around maybe four percent or so — a bit lower than a GIC, but you have the flexibility of having that convert back to cash pretty much at any time.”
Other thoughts for cash on hand
As long as interest rates are up, it’s worth making sure you’re taking full advantage of the opportunities. That means a bit of vigilance with your everyday bank accounts, Boisvert suggested. A few years ago, savings accounts delivered negligible interest, but today rates around four percent are common.
“So if your bank is not offering that, take a look around at other options because it does make a big difference,” she said. “You want your money working for you and you want to get the most out of it.”
Banks won’t go out of their way to make sure your money is in the most productive place, Boisvert warned, so checking your own accounts and also making sure you understand the rules of any higher-interest savings accounts is essential.
“There might be a minimum balance you have to invest in order to get that rate. It might be that they offer it only for six months and then all of a sudden it goes back down to a two percent or something like that.”
Another key consideration in the high rate era is mortgage payments. People with a renewal on the horizon might consider some lump sum payments instead of investing cash elsewhere, if there’s cash available, Boisvert said.
“It might really make sense for you to be putting a lump sum down, or any sort of extra payment you can on the mortgage versus investing it,” she said. “Because we’re seeing quite high rates, like seven percent plus for some people.”
