A GIC That Doesn't Completely Suck

So I normally don't dish out specific investment advice (i.e I won't tell you exactly which stock/bond to buy or sell), but I'll make a quasi-exception here.

I'm not a big fan of GICs (Guaranteed Investment Certificates) given their lousy rates of return, but I understand that some folks might be highly risk-averse. If you're the type of person who really can't stand losing your capital, but would still like to earn some decent rates of return, or if you'd like to partially benefit from the gains of the stock market while not suffering any of the losses, there are some GICs out there for people like you.

RBC (just as an example, as there are other banks/institutions that offer them) offers what they call MarketSmart GICs. These are broken down into two types: Guaranteed minimum and unlimited returns.

Guaranteed minimum returns GICs guarantee you a minimum return, but also impose a maximum - the maximum return is the penalty you pay for principal protection. Unlimited returns GICs give you...well, the name is pretty self-explanatory. The catch with the unlimited return is you only partially participate in the market returns. For example, their Canadian Market-Linked GICs have a participation factor of 35%. This means you'll receive 35% of the rate of return of the market (if it's positive - remember if it's negative you simply get 0% but don't lose any of your invested capital). So if the market is up 10% in any given year, your GIC will get a return of 3.5%. You give up 75% of the potential market return (or in this case 7.5%) in exchange for capital protection.

While any given year can be quite volatile in the markets, if you buy one of these GICs and hold them for a 5-year period, there's a really good chance that you'll get a positive return. While there's obviously no guarantee, historically the stock market tends to return somewhere between 7%-10% per year (on average over a 5+ year period). Based on historical averages, you should be able to get 2%-4% returns on these GICs, but once again no guarantees (though your invested principal is).

Anyway, I thought I'd share this information, since the current low interest-rate environment can make it hard for those looking for guaranteed fixed-income products that can provide more than 0.5% interest rates, and give you a taste of stock market returns without any of the risks.

Of course, if all you're looking for is a moderate return on your savings in the short term, I suggest you check out EQ Bank. They're an online-only bank (much like PC Financial or Tangerine/ING Direct) but they offer interest rates of 2.25% on all deposits all the time. Since they're a member of CDIC, your deposits are guaranteed by the federal government (up to a maximum of $100,000).