Tempting Bank Offers? Wait. Calculate Your Real Return

Take the time to calculate your real return. Bank offers may seem tempting, but wait.

When it comes to making investment decisions, one of the key factors to consider is the real return, that is, the return adjusted for inflation. While guaranteed investments offering returns of 3% to 5% per year (historically much closer to 3%) may seem attractive, it is crucial to compare these returns with inflation trends in order to measure their true purchasing power.

Let’s look at recent economic data for Canada:

• 2020: Inflation (Consumer Price Index – CPI) was 0.7%. One-year GIC rates ranged from 1.25% to 2.00%. A guaranteed return would therefore have slightly outpaced inflation.
• 2021: Inflation rose to 3.4%. In 2021, with interest rates still low, the range for a one-year GIC was 1% to 2.5%. A guaranteed return would have generated a negative real return.
• 2022: Inflation jumped to 6.8%. A guaranteed return of 2.5% to 4% would now have been below inflation, resulting in a loss of purchasing power for investors.
• 2023: Inflation continued to rise, reaching about 6.9% in December. In this context, a guaranteed return of 4% to 5% remains insufficient to maintain the real value of the investment, as it cannot even keep up with rising prices.

Conclusion:

From 2020 to 2023, guaranteed investments at 1.25% to 5% failed to offset the rising cost of living, particularly in 2022 and 2023, when inflation far exceeded these returns. Therefore, while these returns may seem attractive in the short term, their real return is largely negative once the impact of inflation is taken into account.

It is therefore essential to think not only about nominally guaranteed returns, but also about their ability to preserve purchasing power and generate long-term value in the face of economic fluctuations and inflation.

We encourage you to evaluate these factors carefully before making your investment decisions, and to consider strategies that can offer more robust long-term protection against inflation.

REAL RETURN = RETURN – INFLATION

The importance of getting a complete picture of your financial situation 

With an investment horizon of several years, an investor should not invest in a Guaranteed Investment Certificate, because as we have seen it is very difficult, indeed nearly impossible, to beat inflation over the long term and achieve a positive real return. 

Of course, when you need to set money aside for a planned short-term expense, it can be wise to keep that amount secure while still earning a modest return. 

To help you maximize the real value of your investments, we invite you to get in touch with us.

Our team will be happy to present personalized investment strategies that take real return into account, to ensure that your investments work effectively for you, even in the face of economic fluctuations.

Don’t hesitate to contact us to learn more and discuss the options that suit you best. We are here to support you in achieving your financial goals.

Have a great week!

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