Maximizing
returns on GICs
Author:
News Canada
1.
Start early and invest often – The longer your investments have to grow,
the more opportunity you have to reap the benefits of compounding interest.
2.
If you are not relying on your GICs as a source of regular income, then opt
for compound interest to maximize your return – Compound interest is
the interest that you earn on your interest. For example, if you invested
$10,000 and earned four per cent interest in the next year, your interest
income would be $400. If you earned four percent again the following year,
the $16 you would earn on the $400 would be your compounded interest. Compounding
interest is a compelling reason to invest for the long-term.
3.
Make sure your portfolio is well diversified – Divide your assets across
a range of investments such as stocks, bonds and term investments. "By
selecting a diverse range of investments that react differently to economic
conditions you limit your exposure to risk in even the most unpredictable
economic situations," says Julie Sheen, Vice-President, BMO Term Investments.
"The high and low performance of a particular holding can be offset
by the performance of the other holdings in the portfolio."
4.
Ladder the maturity dates of your GICs – This is one way to diversify
the GIC component of your portfolio to help you meet your goals and reduce
your risk. Laddering helps maximize your overall return by using the GIC
with traditionally the highest rate of interest – the five-year GIC
– while giving you flexibility and access to your funds. Here's how
it works:
•
First, you divide your total GIC investment into five equal portions, and
invest them in five different GICs – ranging from one-year to five-year
maturities. This way, one of your GICs will mature each year.
•
Next, when each GIC reaches maturity, you use that portion of your investment
to buy a new five-year GIC.
In
addition to giving you access to some of your money each year, laddering
helps smooth out interest rate fluctuations and increases your return potential
by reducing the impact of interest rate dips. Some GICs, like the BMO RateOptimizer,
even offer automatic laddering – a convenient solution for investors
interested in this strategy.
Information
provided by BMO Term Investments. For more information visit your nearest
BMO Bank of Montreal branch, call 1-888-771-0123 or visit www.bmo.com/gic.
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News Canada
