Are interest rates going up?  Could be – the U.S. Federal Reserve Board has been making noises about raising the federal funds rate in that country, and Canada often follows suit with our American neighbours.  But interest rates have been quite low for a long time, now.  That may have you looking at the rate of return on your investments – especially Guaranteed Investment Certificates (GICs) and other interest-generating investments coming up for renewal – and wondering what to do? 

As a smart investor, you obviously want the best possible returns – but the potential rewards of investing all of your assets in fluctuating investments, such as equities, may be beyond your risk tolerance level.  And even though fixed-income investments like GICs offer lower potential returns, prudent investors know they can form a vital part of any portfolio because they are investments that pose lower risk to your capital.  The key to the long-term success of any portfolio is correctly-balanced diversification among the three basic asset classes: cash, equities and interest-generating investments.

So regardless of whether or not interest rates will go up in the near future, you may want to continue including fixed-income investments in your portfolio.  The question is how do you get the best possible returns from these types of investments?  Here are some answers:

Understand your ‘real’ rate of return – that’s the rate you earned on your investment, minus the inflation rate.  Like interest rates, the inflation rate is low right now.  So if you’re earning 5 percent on your GIC and the rate of inflation is just 2 percent, you’re earning exactly the same rate of return as you would with a GIC paying 8 percent when inflation is 5 percent. (By the way, unless your GIC is held inside an RRSP, you will be subject to tax on the full amount of interest earned.) What’s most important is that your ‘real’ rate of return keeps you ahead of increases in the cost of living.

Make the most of your short-term savings.  Take your money out of low-interest bank accounts and move it to higher return alternatives like a money market mutual fund that combines competitive income with quick, no-penalty access to your funds.

Stagger investment maturity dates.  It’s true that a five-year GIC pays higher interest than a one-year certificate, but you don’t want to lock all your money in for five years when the rates could move up within those years.  A better strategy may be to stagger the maturity dates of GICs and similar investments so you can take advantage of interest rate changes each year.

For example, instead of taking $50,000 and locking it into a five year GIC, split that money equally among GICs with terms of one, two, three, four and five years.  When the first GIC comes due after one year, reinvest that money into a longer-term GIC.   By staggering your maturity dates in this way, you will always be reinvesting in longer terms that generally pay a higher rate than shorter terms, at the same time as smoothing the average return of your portfolio year over year.

Consider fixed-income mutual funds like mortgage or bond funds that generate somewhat higher interest income with relatively lower risk. 

Regardless of the current interest-rate environment, you should talk with your financial advisor about the best investment portfolio mix for your risk tolerance level and future goals.

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.