Many people think of Guaranteed Investment Certificates as the investment to have: they’re reliable, respectable, risk-free. But the safe haven of GICs or government bonds has a big downside: really low interest. A quick check of current rates shows that the best five-year GIC, from National Bank, pays you a whopping 3.45%; the highest one-year rate is all of 1.45% (Pacific and Western Bank).

Low interest rates are a boon for borrowers, but a curse for conservative investors. In my experience, those hardest hit by these low rates tend to be retired people, who guard their nest eggs and aren’t willing to take many risks – even if it means a reduced lifestyle. Many investments nowadays do offer substantial incomes, but GICs aren’t among them.

The current credit-market meltdown has made accessing capital markets tough for most corporate bond issuers, who have to pay up big to coax capital out of shell-shocked investors. Canadian banks, which normally don’t have to offer much more interest than government bonds, have had to dramatically increase their payouts in order to attract capital from equity investors, and to bolster their beat-up balance sheets.

There are a few encouraging signs. Some investors have begun to wade back into the credit market, causing bank preferred shares (for example) to rise as much as 50% from their lows of only a few months ago. Despite this rise, they still offer investors healthy yields of 6%.

Most people are still cautious, and with good reason. Markets – both credit and stock – gave everyone a drubbing over the past year. Governments threw themselves into debt, trying to stimulate the global economy and prop up their ailing financial systems. Problem is, government debt tends to raise the spectre of runaway inflation. In this environment, investors are quite right to be wary of risk.

But veteran money men know that the best moment to invest is always when things look worst. Look at Warren Buffet: just seven months ago, at the pit of the crisis, he made billions by buying up bargain-basement shares in Goldman Sachs and GE. It’s the old truism: as prices go down, value to the investor goes up.

However, the “buy low, sell high” maxim is always easy to say, and very tough to do. Investors who need a high yield for their living expenses are in a tough spot. They may not want to take on any risk, yet they have little choice. If they need more return than a GIC can offer, they’re pretty well forced now to look at alternatives they’d previously dismissed.

In terms of capital markets, some of those alternatives can be pretty compelling. For example, you can buy a security representing the Toronto index through an exchange traded fund, and get a dividend yield equal to most five-year GICs. The income gets better tax treatment, and should give you some capital appreciation over time.

More conservative investors can buy bank-preferred shares, which still yield a healthy 6%. Real-estate investment trusts, hard hit in the global meltdown, now offer issues of 8-12%. High Yield bonds can also go north of 10%.

Each of these has risks, of course, differing from one to another. You’d be well advised to devote some time getting to understand them, and then trying to minimize the danger by diversifying among the asset classes as much as possible.

Obviously, such investments aren’t appropriate for everyone. The one point in their favour right now: the market meltdown has made them relatively cheap. Adding some of these elements to your portfolio can increase your income, and also offer the potential for longer-term capital appreciation once the economy improves.

Alan MacDonald is an investment advisor with Richardson Partners Financial Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.

Richardson Partners Financial Limited is a member of CIPF.

*Source: Yields and interest rates – Globe Investor.com