No doubt you have heard or read about Equity- or Index-linked GICs. Many financial institutions market variations of these products. The intention is to provide the guaranteed return of your principal and give you the potential of higher returns based on some external equity fund or market index. The options for early withdrawal are virtually none – except your death! Sarah and Lee are frustrated with the choices available for several other reasons too.
This product is not always available. Many institutions only offer these products during “RRSP Season”. In addition, sales of new issues are sometimes suspended because of periods of poor market performance.
Limited choice of terms. Usually these products are only offered for a 3 or 5 year term. If Lee and Sarah want a different term, they are out of luck.
Limited choice of equity or index links. The company offering the product makes the investment choice. All issues have a maximum rate of return that they will pay – a cap on returns. Clients are in a take-it or leave-it position.
Lee and Sarah are looking for greater choice and control over their investment, both in duration and the investment linked to the GIC. They are looking for a better way to invest and get the best of both worlds. There is good news for them – it can be done and without the restrictions of the other products.
Lee and Sarah, together with their financial advisor designed their own personalised equity-linked GIC with no restrictions, full flexibility and no cap on returns.
First, they choose their own term. In most cases, a long term – say 5 to 7 years at least, is preferable. Time is their friend since it gives the equity portion of their investment a higher probability of good returns. A term of 10 years or more is even better!
Next, they buy a plain, regular, off-the-shelf redeemable GIC to guarantee their full principal. After discussing things, they decide a 7-year term is appropriate and they have $75,000 to invest. After pushing a few buttons on a financial calculator and knowing the 7-year rate is 4%, they need to deposit $56,993 today so it will be worth $75,000 in 7 years.
Finally, they choose their equity investment. With just over $18,000 left to invest in equities, they now consult their advisor for an appropriate solution. They can use mutual funds, segregated funds, Index funds, ETFs or individual stocks. Their advisor will have them complete a Risk Tolerance questionnaire to determine appropriate choices. This will be their profit with no cap!
Sarah and Lee are happy to have control of their investment with no upside limits and no restrictions on liquidity or withdrawal. Shouldn’t you take control of your choices?