Creating a 100% investment guarantee – still possible!

If you were to combine a segregated fund with a 75% guarantee over 10 years and a GIC with a 10 year GIC, you could guarantee that at a minimum your capital in 10 years would be the same as what you put in.  At the same time, you would be able to participate in the market. 

Let’s look at an actual example to see how this works.

Jane is 54 years old and does not plan to retire for another 10 years.  She has experience ups and downs in the markets and has decided that with this last downturn, her risk tolerance at age 54 is no longer what it once was.  She would like to reduce the risk in her portfolio.

Jane has $300,000 in her RSP and while moderately able to tolerate risk, she does not want to lose any of her hard earned capital over the next 10 years. 

Our recommendation is that Jane may want to consider a combination of a segregated fund and a GIC or GIC equivalent. 

A segregated fund is an investment product offered by an insurance company that has a capital guarantee over a certain number of years (usually 10 years).  In this case, we would recommend that Jane purchase a segregated fund that promises in 10 years that at a minimum 75% of whatever she has invested be returned to her.  Of course, if Jane’s portfolio were to perform well, she would be entitled to her portfolio gains.  If Jane were to invest 62% of her investment (or $186k) in the segregated fund, she would be assured that in 10 years no matter what the market returns, in a worst case scenario, she would get 75% of this amount back (or $140k).

The remainder of her $300k, 38% (or $114k) would then be invested in a 10 year GIC or GIC equivalent.  While rates are low, Jane could purchase this GIC today and receive 3.5% annual compound interest on this GIC.  What Jane would know, is that if she did not touch this GIC for 10 years, it would collect interest and be worth at the end of the 10 years $160k. 

Jane would be able to sleep at night knowing that if she were to employ this strategy, after 10 years, she would be guaranteed to have at a minimum her capital back: $140k guarantee on the segregated fund and $160k guarantee on the GIC.

Furthermore, Jane would still have the opportunity to participate in normal market returns in her segregated fund investment.   For example, if her segregated fund returned 6% over that time frame, Jane’s portfolio would be worth $494k (see table below).