As the stock market gyrates and a possible recession looms, many young investors are likely rethinking their investment portfolios.
Financial planners are increasingly seeing Gen Z and Y members adding Guaranteed Investment Certificates (GICs) to their portfolios to regain a sense of security and, perhaps more importantly, because guaranteed returns have reached around 5%, their highest level in years.
After seeing some stock market indices fall more than 10% this year, “higher GIC interest rates have appealed to some younger investors who have never experienced a market downturn before,” said Graham Priest, investment at BlueShore Financial.
“At this stage (they) prefer a guaranteed return to greater growth potential. »
Many young people have only seen an exponentially rising stock market in their lifetime and may have thought it would continue, neglecting to withdraw some of their earnings, he pointed out.
“Some of them might want to avoid a second drop and feel that the overall economic environment may not be as supportive. »
Traditionally, young people have been advised to invest aggressively for the long term, which translates into high equity exposure, said Jason Heath, managing director of Objective Financial Partners.
However, this is not always the appropriate strategy as young people often have some short to medium term expenses to cover with their savings.
“For those saving for a short-term goal like post-secondary education, a car, a wedding, or a down payment on a house, risky investments may not be appropriate if the time horizon is only a few years or less,” Heath explained.
While GICs had unattractive rates over the past decade, Heath pointed out that the rate environment is now more reasonable for conservative investment options like GICs. While GICs at rates of 5% or more may not keep pace with inflation, inflation is unlikely to remain persistently high – although GIC rates themselves may not stay. high in the long term either.
While young people with medium to long-term horizons can currently profit from buying stocks whose prices have fallen – without getting caught up in trying to predict the bottom – GICs can be an option for those looking to take a small risk.
Another lower-risk option is a slow and steady, bi-weekly or monthly investing strategy, called dollar-cost averaging, Heath noted. In addition to reducing risk, it helps investors develop the discipline of saving first and spending later.
“Stocks can be volatile from year to year, but they can be a great hedge against inflation and a way to build long-term wealth,” Heath explained.
For young people looking to invest money in a down payment in a few years, Priest explained that GICs might be better suited due to the shorter time horizon, even though they have a greater risk appetite.
“So there’s no surprise about the value of those funds when they have to turn around and put them into buying a home,” Priest said.
MM. Heath and Priest both pointed out that with GICs, investors shouldn’t forget about liquidity.
“Those who tie up their money for one, two, three, four or five years may not be able to access that money if they need it. So make sure you balance risky long-term investments with term deposits like GICs, as well as savings accounts for cash that you might need to access quickly,” said Ms. .Heath.