Transitioning from GICs: Strategies for Diversifying Investments

A Canadian investor, referred to as Lino, is seeking advice on how to diversify approximately $600,000 received from the sale of his home. Currently, he has a significant portion of his funds in guaranteed investment certificates (GICs) and is interested in exploring dividend stocks or capital appreciation opportunities. Lino has already maximized his Tax-Free Savings Account (TFSA) with a global equity exchange-traded fund (ETF) and purchased $400,000 in laddered GICs with terms ranging from one to three years.

The decision to focus on a TFSA while holding GICs is a prudent approach, according to Andrew Dobson, a certified financial planner at Objective Financial Partners Inc. in London, Ontario. He emphasizes that given Lino’s current part-time income of $30,000 annually, contributing to a Registered Retirement Savings Plan (RRSP) may not be the most beneficial choice at this time. The potential tax refund from an RRSP contribution could be minimal, and withdrawals in the future might be taxed at higher rates.

Lino’s situation presents a unique opportunity to generate investment income outside of a TFSA, particularly through Canadian dividends. For individuals with a taxable income of $50,000 or less, dividends from Canadian stocks may be tax-free due to available dividend tax credits. This tax-efficient strategy enables investors to benefit from capital gains as well, with only 50% of any gains being taxable upon sale.

While Canadian stocks typically offer higher dividends compared to their U.S. counterparts, Dobson cautions against solely focusing on the tax advantages. The Canadian market lacks the diversification of the U.S. market, which could impact overall investment performance. U.S. dividends, despite being taxed at a higher rate, can still be advantageous due to the deferred tax treatment on capital gains.

In light of Lino’s existing investments, Dobson suggests a strategic approach to transitioning funds from GICs to equities. He recommends staggering investments into stocks as the GICs mature, thereby limiting risk while gradually increasing exposure to the stock market. Lino’s current allocation, with the TFSA fully invested in equities and most of his funds tied up in GICs, is a cautious strategy that allows for a balanced risk profile.

Assessing risk tolerance is vital as Lino considers shifting more capital into equities. Monitoring his TFSA performance will help gauge comfort levels with market volatility. Dobson highlights the importance of evaluating one’s investor profile regularly, especially for those new to stock market investing.

For Lino, the transition from GICs to stocks should aim to enhance returns while managing tax implications. Andrew Dobson advises that focusing on tax minimization is important, but other factors, such as investment goals and risk appetite, should also be carefully considered. As GICs mature, Lino can start to increase his equity investments, aligning them with his long-term financial objectives.

Investors like Lino, who are shifting from conservative investments to a more diversified portfolio, can benefit from tailored strategies that consider both current income levels and future financial goals. Overall, balancing risk and return while leveraging tax-efficient investment options will play a crucial role in achieving financial success.