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Learning, Sharing, and Teaching => Investor Alley => Topic started by: higginst on September 04, 2014, 05:54:45 PM

Title: Why are Market linked GICs (CDs) with guaranteed returns a bad idea?
Post by: higginst on September 04, 2014, 05:54:45 PM

I've seen ads for equity or market linked GICs (Canadian term for CDs). Here's a link to one example:
http://www.rbcroyalbank.com/products/gic/marketsmart-cnd-utilities.html

A guaranteed return of 5.25% on the 5 year product with potential for more seems like a pretty good deal, especially given it's much higher than any other gauranteed rate and the stock markets of the USA and Canada are generally accepted to be over-valued right now, making a guaranteed return even more attractive.

I get that you stand to make more by investing in index funds if the indexes rise and that early cancellation fees are hefty (but they often are for GICs anyway), but I can't see how these aren't a pretty good idea as a medium-term investment if you are sure that you won't need to access the funds before the 5 years is up. However, every source I find online says not to buy them, but that seems more directed to the funds where it is just your principal that is guaranteed, not your principal plus a rate of return.

What am I missing?

Title: Re: Why are Market linked GICs (CDs) with guaranteed returns a bad idea?
Post by: KMMK on September 04, 2014, 06:59:57 PM

Interesting- never heard of this before. But I saw in the fine print "interest rates are subject to change at any time". Appears that the 5.25 might be lowered even within the term, if I'm interpreting that right

Title: Re: Why are Market linked GICs (CDs) with guaranteed returns a bad idea?
Post by: MDM on September 04, 2014, 07:52:15 PM

Quote from: higginst on September 04, 2014, 05:54:45 PM

A guaranteed return of 5.25% on the 5 year product...
What am I missing?

That is 5.25% total over 5 years, or ~1%/yr.  So this could be a good alternative to a CD, but not a good alternative to an index fund.

See http://forum.mrmoneymustache.com/investor-alley/equity-indexed-annuity and http://forum.mrmoneymustache.com/investor-alley/a-new-start-with-everest-wealth-management-qa-with-the-management/, among others, for discussions on similar products.

Title: Re: Why are Market linked GICs (CDs) with guaranteed returns a bad idea?
Post by: higginst on September 05, 2014, 09:52:48 AM

Ah! I see now. Thanks so much for the second set of eyes!

Pretty sneaky quoting rates for entire term, rather than the annual rate.

Title: Re: Why are Market linked GICs (CDs) with guaranteed returns a bad idea?
Post by: arebelspy on September 08, 2014, 12:05:19 PM

Quoting a rate other than APY makes me not want to do business with a company.  How deceptive.