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Answer:
Dear
Arturo,
No,
we don't offer GICs but it is important that you know
what they are because their name is somewhat misleading.
GICs
Defined...
GICs
are Guaranteed Investment Contracts. They are issued
by insurance companies and typically sold to pension
funds and various other types of retirement plans.
The
word "guaranteed" sends out a pretty positive message
-- like it sounds very safe. However, I want you to
realize that the "guaranteed" part of this product
comes from the insurer and not the government. And
it's not 100% guaranteed, even by the insurer.
GICs
pay a fixed interest rate for a fixed length of time,
usually one to five years.
A
great number of 401(k) plans offer participants, not
individual GICs but rather a GIC mutual fund. These
funds may also be called "stable value funds" or "insurance
contract funds." The fund managers purchase GICs from
many different insurance companies, not just one.
Best
For...
Generally
speaking, a GIC fund is best for those who are coming
up on retirement. That's because they pay a high interest
rate just when you will be needing more income. They
also return the principal on a stated date. So there's
no uncertainty about how much one will earn during
that specified period of time.
The
Downside...
As
with any investment, there are negatives. And, with
GICs one negative is inflation. If it's strong
enough and lasts long enough, inflation can eat away
at the value of GICs.
Of
course, if you're say 5 years or less away from retirement,
that's not a huge risk to take. But if you're considerably
younger, you should be much more diversified. We discussed
the importance of diversification and spreading out
your risk over a number of different types of investments
in a previous column on asset allocation. Click
HERE
to read.
A
second negative is limited guarantee. As stated
above, the interest rate paid by this debt instrument
is guaranteed, but the principal is not. Many people
fail to realize that if an insurance company issuing
a GIC runs into financial problems, your investment
could be at risk.
Caution:
Many 401(k) plans will not allow participants
to transfer money from a GIC fund to a money market
fund (another conservative choice) or any other options
in their retirement plan. The reason is that the fixed
rate that a GIC earns is based upon leaving the investment
in place until the end of the initially stated time
frame. That means if you and all the other people
in your retirement plan who own shares in a GIC fund
were allowed to cash in early to take advantage of
rising interest rates, the fund might be required
to sell its investments at a loss to meet the payments
due to participants.
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