theglobeandmail.com
Inflation Risk Erodes Returns of 'Risk-Free' Investments
High-interest savings accounts and GICs, while seemingly safe, can lose purchasing power during inflation; alternative strategies like private real estate and tax-efficient income generation methods are recommended.
- What alternative investment strategies offer better protection against inflation and provide more tax-efficient income generation for investors?
- The "risk-free" label on HISAs and GICs is misleading; they expose investors to inflation risk, opportunity cost, reinvestment risk, and taxes. Real return, considering inflation and taxes, reveals the true purchasing power increase, highlighting the limitations of these investments during inflationary periods.
- What are the long-term consequences of relying solely on HISAs and GICs for capital preservation, and how can advisors help clients navigate these challenges effectively?
- Advisors should shift client conversations from nominal yields to real, after-tax returns. Alternatives like private real estate, offering tax-efficient capital gains and return of capital (RoC) distributions, provide better inflation hedges and preserve purchasing power, particularly for those in higher tax brackets.
- How do high-interest savings accounts (HISAs) and guaranteed investment certificates (GICs) perform in inflationary environments, and what are the real-world implications for investors?
- High-interest savings accounts (HISAs) and guaranteed investment certificates (GICs), while seemingly safe, can erode wealth in real terms when inflation exceeds interest rates, as these yields are tied to inflation. A $100,000 GIC yielding 4% loses purchasing power with 4.5% inflation, and taxes further reduce real returns.
Cognitive Concepts
Framing Bias
The article frames GICs and HISAs negatively from the outset, highlighting their shortcomings and using language that casts doubt on their value. The headline (not provided, but implied) would likely emphasize the risks, setting a negative tone before presenting a more balanced view. The emphasis is heavily on the negative aspects of 'risk-free' investments and promotes alternatives as superior solutions.
Language Bias
The article uses loaded language such as "erode wealth," "damaging," and "negative real return" when discussing GICs and HISAs. These terms evoke negative emotions and potentially sway the reader's opinion. More neutral alternatives could include "reduced purchasing power," "potential for lower returns than inflation," and "lower than expected return after tax and inflation.
Bias by Omission
The article focuses heavily on the risks of GICs and HISAs, but omits discussion of potential benefits or situations where they might be suitable. It doesn't mention the role of diversification within a portfolio, where these low-risk options might play a part in mitigating overall portfolio risk. The omission of other low-risk investment options beyond private real estate also limits the scope of the solutions presented.
False Dichotomy
The article presents a false dichotomy by framing the choice as solely between 'risk-free' investments (GICs, HISAs) and alternatives like private real estate and REITs. It doesn't acknowledge other low-risk or moderate-risk investment options that could offer a balance between risk and return, such as bonds or balanced mutual funds.
Sustainable Development Goals
The article highlights the unequal impact of inflation on different investment strategies. High-interest savings accounts (HISAs) and Guaranteed Investment Certificates (GICs), often favored by conservative investors, can erode wealth in real terms during inflationary periods, disproportionately affecting those reliant on these low-risk options. Alternative strategies like private real estate and tax-efficient investments offer better protection against inflation, potentially reducing the wealth gap between investors with different risk tolerances and access to alternative investments.