In a provocative interview titled “Buy GICs. Only GICs.”, Author and Chartered Accountant David Trahair advocates saving for retirement in GICs and avoiding the stock market altogether. His argument is that the gap between GIC returns and S&P/TSX returns has been small and GICs carry no risk.
In his book Enough Bull: How to Retire well without the stock market, mutual funds, or even an investment advisor, Trahair ignored dividends from stock returns in his comparison with GICs and Canadian Capitalist took him to task for this. In the interview, Trahair quotes both returns with and without dividends. However, because the returns without dividends are irrelevant for comparison, we’ll ignore them.
Trahair quoted the following return figures over decades ending August 31, 2009:
Past 10 years: 3.35%
Past 20 years: 5.11%
Past 30 years: 7.28%
Past 40 years: 7.71%
Past 50 years: 7.35%
S&P/TSX Composite Total Return Index:
Past 10 years: 9.41%
Past 20 years: 8.86%
Past 30 years: 10.76%
Past 40 years: 9.77%
Past 50 years: 9.80%
Stocks do perform better, but the gap does appear to be modest. However, it can be misleading to compare average returns over long periods like this. What actually happened to real money invested over this period?
The following chart shows what would have happened to $10,000 invested solely in GICs or solely in the TSX index with dividends reinvested:
Over one decade, an initial investment of $10,000 in GICs grew to $13,900, but stocks ended at nearly double this amount: $24,600. For periods of 20, 30, and 40 years, the final value of stocks was more than double that of GICs, and for 50 years stocks gave more than triple.
As the chart shows, the seemingly small average advantage of stocks added up to a big difference over long periods of time.