Many financial advisors used to recommend setting up a GIC ladder of 5-year GICs to maximize GIC returns. Is this idea now outdated?
What is a GIC Ladder?
To make a GIC ladder, an investor would buy a GIC with a 1-year term, another with a 2-year term, a third with a 3-year term, a fourth with a 4-year term, and a fifth with a 5-year term. From then on, whenever a GIC matured, it would be re-invested for a new 5-year term.
Written: 2012
Reviewed: 2023
Revised: 2023
The idea was that this strategy would smooth out bumps in interest rates. Generally, the interest rate for a GIC that cannot be cashed for 5 years is the highest one offered for a GIC covered by CDIC insurance.
When the 5-Year GIC Ladder Strategy Worked Best
This strategy did actually result in optimized earnings for some investors. As interest rates fell year after year approaching 2010, investors found they were still earning good rates on their not-yet-matured long-term GICs.
However, when they went to re-invest, they could not get the same good rates for the new certificates. For example, one online bank was offering RSP 5-year GICs at 4% in 2008, but their best available 5-year had dropped to 2.3% in 2012.
When does the 5-Year GIC Ladder Strategy Work the Worst?
You can probably guess that this strategy is the most dangerous when interest rates are rising quickly and sharply.
If interest rates are increasing slowly and gradually, perhaps at 0.25% per year, then investors won’t lose too much by locking in for 5 years at a time.
However, if interest rates are increasing quickly, say at 1% per year, or sharply, say in a sudden spike of 3% one year, investors could lose a lot by being locked in for a long time at a lower rate.
Here are some examples of these scenarios.
Value of 1000 invested. For simplicity the interest is only compounded at the end of each year.
| Year 1 Rate % | Year 2 Rate % | Year 3 Rate % | Year 4 Rate % | Year 5 Rate % | Year 6 Rate % | Year 7 Rate % | Final Value |
| 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 1189 |
| 2 | 2.25 | 2.5 | 2.75 | 3 | 3.25 | 3.5 | 1209 |
| 2 | 3 | 4 | 5 | 6 | 6 | 6 | 1366 |
| 2 | 4 | 4.5 | 4.5 | 6 | 6 | 6 | 1380 |
You can see that locking in for 5 years at 2.5% earns less than buying 1 year terms that increase by 0.25% per year. However, the difference is not painfully large.
Locking in for 5 years when rates are increasing 1% a year or when rates are spiking up 2% every few years however is costly. The investor was lost between $175 and $200 by locking-in. A loss of $200 on an investment of $1000 is a fairly considerable loss in income.
.Related Reading
- Investing in GICs at the Banks an Exercise in Anger Management to Optimize Earnings
- Maximize GIC Returns by Carefully Considering the Annual Rates Before Locking In Long Term
- Pros and Cons of Buying GICs in a Self-Directed Online Brokerage Account
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Do you think you should stick with a rolling 5-year GIC ladder regardless of the rates? Please share your opinion with a comment.