October 27, 2014

What is GIC laddering?

By Brenda Spiering

Looking for a place to park the cash portion of your investment portfolio? Consider purchasing a series of GICs with gradually increasing terms.

With today’s low interest rates, deciding where to park the cash portion of your investment portfolio can be a challenge.

If you leave it sitting in a savings account, you’ll make next to nothing. But if you lock it into a long-term GIC, you won’t have the option of reinvesting it at a higher return should rates rise. One simple solution is to ladder your GICs.

What is GIC laddering?

“Laddering” means purchasing a series of GICs with gradually increasing terms (usually from one to five years). Typically, like rungs in a ladder, each term will step you up to a slightly higher interest rate.

Simply put, laddering your GICs means dividing the amount you invest into equal portions and investing each portion for a different length of time (usually in terms of one to five years). This means a section of your savings will mature each year and be available for reinvestment at the going rates. Instead of trying to predict where interest rates are headed, laddering enables you to reduce risk by evening out your investment returns.

GIC laddering example

If you have $25,000 to invest, you could ladder it as follows:

  • $5,000 in a 1-year GIC
  • $5,000 in a 2-year GIC
  • $5,000 in a 3-year GIC
  • $5,000 in a 4-year GIC
  • $5,000 in a 5-year GIC

In this GIC laddering example, each year you would have a $5,000 GIC mature. If you chose to reinvest that amount for another five years, you would still have the security of knowing you will have another $5,000 GIC maturing next year.

The advantages of GIC laddering

It’s impossible to accurately predict where interest rates are headed. While locking in your savings for a longer period of time usually means you’ll receive a higher interest rate, you’ll lose out on the opportunity to reinvest the funds should rates rise between now and the time your investment matures. When you ladder your GICs, a portion of your savings comes due – and is available for reinvestment – each year.

In the above example, if each year you were to roll over the maturing portion into a new five-year GIC, you would eventually end up with all your savings invested for five-years – at five-year rates – while still having $5,000 mature on an annual basis.

Along with enabling you to reinvest at a higher rate should rates rise, laddering also provides you with the advantage of being able to access a portion of your savings each year to use for another purpose, should the need arise.


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