GICs, like other fixed-term investments, suffer from something called “interest rate risk.” If you have $20,000 to invest in GICs, you have to decide whether to lock that money up for one year, two years or five years (and everything in between). Thing is, you don’t know where interest rates are going.
If longer-term rates are higher, you may be tempted to go with that. But then you run the risk that rates might go up in the interim and you’d be stuck earning less. Or maybe rates are really good right now, but you’re worried that in five years when your GIC matures you’ll be stuck renewing at some pathetic interest rate.
Eliminate the stress. Lose the guess work. Ladder your GICs.
When you “ladder”, you stagger the maturities on a series of investments (as with bonds or GICs). Imagine leaning a ladder up against the wall. Each rung up the ladder represents the next longest term available.
If you have $10,000 to invest in a GIC, you could put all $10,000 away for 5 years. Or you could ladder them, $2,000 for 1 year, $2,000 for 2 years, $2,000 for 3 years and so on.
The benefit to laddering is two-fold:
1. You don’t have to guess at which term will give you the biggest bang since you’ll have some money invested for each term.
2. Since you have some money maturing each year, you can take advantages of upward swings in interest rates. If the interest rate movement is downward, only some of your money is exposed to the lower rate.