Question: Can I purchase a GIC from BUYandHOLD? I hear that they are very safe. True?

Geoffrey Schmidt

Answer:

Dear Mr. Schmidt,

For those who don't know, GIC stands for Guaranteed Investment Contract. This is a large denomination debt instrument (or investment product) sold by life insurance companies, not by stockbrokers, therefore it may not be purchased through BUYandHOLD. There is also not an active secondary market for GICs, and thus they are often considered ill-liquid investments.

For the most part, insurance companies make them available to institutions that qualify for favorable tax status under federal law -- their most popular use being within qualified retirement plans. So, indirectly you may be able to invest in them if they are among the choices offered in your 401(k) or 403(b) or other type of pension plan.

GICs typically pay higher yields than bank savings accounts or U.S. Treasuries and they guarantee paying this return for a specific length of time. The return could be fixed or variable. With most GICs, you know what the rate will be for one year in advance. That eliminates worrying about changes in rates or in the value of the contract.

And, yes. GICs are considered safer - provided the insurance company offering them is AA or AAA rated. (GICs are backed by the full faith and credit of the issuing firm - but not in any way by our government.)

Keep in mind that although GICs guarantee interest payments and although their rates are higher than those paid on bank savings accounts, CDs and Treasuries, they do not provide you with an opportunity for long-term appreciation of your money - the way a growth stock does. You are essentially sacrificing growth for a greater degree of peace of mind. In that respect GICs may not be such a wise choice unless you are close to retirement.

Good luck!

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