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"Risk free" can be expensive - how T-bills and GICs measure up against equity investing

With the "risk-free" rate on short-term government treasury bills and GICs, shouldn’t investors move significant capital out of equities and into short-term cash equivalents? 

Matt is a Private Wealth Advisor & Portfolio Manager and has been with CWB Wealth Partners since 2016. He builds client relationships, designs and implements investment policy statements, and manages the overall asset allocation of client portfolios to ensure long-term financial goals and objectives are met.  
The past 18 months have seen the sharpest increase in benchmark interest rates in over 40 years, and for most of us, this is our first time personally experiencing such a rapid rate hike as investors. It’s raised a lot of questions, one of the biggest being: “With the risk-free rate on short-term Government Treasury bills (T-bills) and Guaranteed Investment Certificates (GICs), now paying 4 – 5% annualized interest, shouldn’t investors move significant capital out of equities and into short-term cash equivalents?”

Should an investor relocate funds to guaranteed, short-term strategies?

To evaluate the merits of this strategy, we’ve examined historical rates of return on both cash equivalents and equities over a 20-year period. Our findings? While the attraction of high “risk-free” rates is undeniable now, the data suggest this isn’t the most lucrative approach long term1.

Figure 1: Highest Bank of Canada policy interest rate in 22 years 

Highest interest policy rate in 22 years in Canada

Source: National Bank Financial Economics & Strategy (as of June 7, 2023)


We tested it – here’s our approach

We tested the risk-free approach versus a few different equity investing strategies, where we back-tested investing $50,000 per year (the approximate amount of annual RRSP contributions for a middle-class couple) over a 20-year time horizon. To assess the value of staying in cash versus being in equities, we looked at the historical returns on T-bills, as well as the assumption that one-year GIC rates remain near the current level for the next 20 years (which is unlikely, but not impossible).

For our equity investment vehicle, we chose the MSCI All Country World Index (total return in $CAD) as this is a widely accepted benchmark for diversified global equities. We compared this to a strategy of investing in 91-day Canada T-bills or one-year GICs and rolling them over upon maturity for 20 years.

When investing in the global equity benchmark, we examined four different investment timing strategies:

  • Perfect Timing – the investor puts $50,000 into the equity market at the low point of each year
  • Investing Immediately – the investor puts $50,000 into the market on the first trading day of the year, every year
  • Dollar Cost Averaging – the investor divides their $50,000 into twelve equal amounts of $4,167 and invests this into the market on the first trading day of each month for 20 consecutive years
  • Terrible Timing – the unluckiest investor, who somehow manages to invest their $50,000 annual amount at the top of the market each year 

It’s worth noting that the Perfect Timing and Terrible Timing strategies are impossible to replicate over 20 consecutive years. Both would require a level of chance that’s statistically close to zero probability. By contrast, the Invest Immediately and Dollar Cost Averaging strategies are easily achievable as they require no analysis or guessing – just a full commitment to it. Anyone could choose to follow either of these strategies.

For the risk-free T-bill/GIC investing strategy, we considered two possible scenarios:

  • Historical T-bill rates – we looked at the past 20 years of 91-day Canada T-bill rates and what the ending wealth level would be for an investor who put $50,000 into T-bills on the first day of each year, and rolled them over every 91 days into the new rate
  • Permanently higher GIC rates – we assumed that the one-year GIC rate would remain at the 4% annualized level for the next 20 years, with this investor adding $50,000 every year while rolling over on the first day of the new year

While we consider the “constant 4%” scenario to be quite unlikely to occur, we wanted to evaluate equity investing in the context of the current interest rate environment. That’s a significant departure from what investors have experienced over the prior 20 years.

Having defined these two strategies, we then did a comparison. The results are shown in figure 2.

The results

Figure 2: Equities outperform cash in all scenarios (investing $50k/year from 2003 to 2022)

Perfect Timing equity strategy outperforms all other stategies

Source: CWB Wealth Partners (via Bloomberg)

As we can see, investing in equities for 20 years produced a significantly higher ending-wealth level when compared to any T-bill/GIC risk-free strategy. Comparing the returns on the global equity benchmark to the constant 4% GIC scenario delivers a return that’s anywhere from 43 – 78% higher. Even the unluckiest equity investor would have ended up with almost twice as much wealth as someone who sat in T-bills for the past 20 years!

There are a few other observations here as well.

First, the more realistic (and achievable) equity strategies (Invest Immediately and Dollar Cost Averaging) produce similar results – an increase of roughly 2.4 – 2.5 times the invested capital. Also, the investment return on the T-bill/GIC strategy will consist entirely of regular interest income, which is taxed at your marginal tax rate in the year it’s earned, whereas the equity index-based investments will have a significant component of (deferred) capital gains, which are taxed at half your marginal tax rate when realized. So, the after-tax returns could show an even bigger gap for any taxable investment account.

While current interest rate levels are attractive from an historical perspective, the true opportunity cost that investors will incur to avoid equity volatility may be much higher than they realize. As our analysis shows, investors with a medium to long-term horizon would be much better served by sticking with a disciplined equity strategy and letting the equity markets grow their wealth. In other words, “risk free” can be expensive.

Sources: Bloomberg, National Bank Financial


1 While cash equivalents (like GICs) are not an ideal medium or long-term investment strategy, they can be useful for cash that has a defined short investment horizon with a known use date. As the data show, these are not a suitable replacement for market-based investments in a medium or long-term portfolio.


This article is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon as advice. Please contact your lawyer, accountant or other advisor for relevant advice. CWB Group takes reasonable steps to provide up-to-date, accurate and reliable information but is not responsible for any errors or omissions contained herein. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by CWB Group or any other person as to its accuracy, completeness or correctness. CWB Group reserves the right at any time and without notice to change, amend or cease publication of the information.