This year, some investors are asking why they would invest in a Balanced Fund when they can get a decent rate on a Guaranteed Investment Certificate (GIC). This is a common question we hope to answer.

In 2023, Balanced Funds got a bad reputation. There was an uproar of reports claiming that the traditional 60/40 portfolio was “dead”, but according to Fidelity portfolio managers David Wolf, David Tulk, and Iian Kolet, these reports were greatly exaggerated. Equities came roaring back, and bonds lagged, which is what’s “supposed” to happen. For example, Fidelity’s largest 60/40 fund, Global Balanced Fidelity Managed Portfolio, returned 12.7% in 2023 (net of series F fees).

Returns

Stocks and bonds have an inverse relationship; when one goes up the other goes down. Within a 60/40 (Equities/Fixed Income) portfolio you have a greater return potential with added downside protection. A mix of both asset classes provides diversification and reduces risk.

GICs base their returns on the current interest rates, which also means that when interest rates come down, GIC returns will follow. Many people find GICs attractive because they’re guaranteed, they pay interest, and they’re low risk.

When would I buy a GIC?

GICs are great for the short term. If you want to use the money within 1-3 years it is a great investment option to keep your money safe and earn some interest. If you are investing for longer than 3 years you may be losing out on economic growth and market opportunities. “If an investor has a short-term time horizon and zero appetite for risk, GICs are indeed more attractive than they’ve been for years. But for those with a longer time horizon and any degree of risk appetite, more (return) can be expected (from a Balanced Fund) over time.” – 11 Questions for 2024 by Portfolio Managers David Wolf, David Tulk & Iian Kolet.

You should also consider that most GICs are locked in, which means that if you want to take the money out before the term is over, you may lose all the interest you have earned. Furthermore, when held outside a registered plan the interest earned is 100% taxable.

GICs and Balanced Funds are both great investments; choosing which one best suits your needs depends on your investment goals, objectives, and time horizon. For the short term, a GIC will give you a guarantee of safety and some interest. For the medium to long term, a Balanced Fund has greater growth potential because it holds a diversified mix of both stocks and bonds.

If you have any questions about your portfolio or need help choosing what type of investment is right for you, please don’t hesitate to contact us.

Have a great weekend,

Tracey & Paige

Source:

​​https://www.fidelity.ca/content/dam/fidelity/en/documents/thought-leadership/tl-gaa-2024q1.pdf 

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