Investing Unit 5: Guaranteed Investment Contracts

• Introduction
• Unit 1: Basic Building Blocks of Successful Financial Management
• Unit 2: Investing Basics
• Unit 3: Finding Money to Invest
• Unit 4: Ownership Investments
• Unit 5: Fixed-Income Investing

• Certificates of Deposit
• Series EE and I U.S. Savings Bonds
• Money Market Mutual Funds
• Bonds
• Unit Investment Trusts
• Bond Mutual Funds
• Mortgage-Backed Securities
• Annuities
• Preferred Stock
• Guaranteed Investment Contracts
• Five Tips for Fixed-Income Investors
• Summary
• Action Steps
• About the Author

• Unit 6: Mutual Fund Investing
• Unit 7: Tax-Deferred Investments
• Unit 8: Investing Small Dollar Amounts
• Unit 9: Getting Help: Investing Resources
• Unit 10: Selecting Financial Professionals
• Unit 11: Investment Fraud

• Study Guide
• Action Steps
• Monthly Investment Messages
• Glossary

Called GICs for short, guaranteed investment contracts are fixed-income contracts issued by insurance companies as an investment option for 401(k) retirement plans. Another commonly used name for GICs is "stable value funds." Like CDs, only tax-deferred, GICs pay a fixed-interest rate for a specified period of time (e.g. 3 to 5 years). Because they are backed by an insurance company, and not the federal government, GICs generally pay a higher return than CDs and other cash investments. Their return is lower than stocks, however, leading to criticism that they are inappropriate for long-term financial goals like retirement.

Five Tips For Fixed-Income Investors

1. Know the risks. All investments have risks, including fixed-income securities. To earn a higher return, for example, an investor may need to consider bonds from a less creditworthy issuer.

2. Beware of guarantees. Even with a portfolio of Treasury securities, an investor can lose money via interest rate risk. Beware of promises that "you can never lose principal." You can.

3. Ladder your portfolio. Stagger the purchase of bonds, CDs, and Treasury securities to spread out the tax owed and expose only a portion of your portfolio to interest rate changes at any one time.

4. Use bonds to hedge stock investments. Have your cake and eat it too. Buy a zero-coupon bond to guarantee the return of principal and use the balance of principal to invest in ownership assets (e.g., stock).

5. Match investments with financial goals. Invest with a goal in mind. For example, use a 2-year Treasury note for an upcoming car purchase or an 8-year zero-coupon bond for a child’s education.