BY BLAIR CORKUM
With stock markets reaching new highs, historical rates of return are looking great again. Lots of advice abounds from investment firms to buy stocks with little discussion on related risks, in spite of prices being at record highs. I recommend looking at the risks and your needs before exploring the stock market.
For example, in the Managing Your Money article on Saturday, Jan. 13, Investors Group suggests one should hold stocks longer because we are living longer. Living longer may give you more time to recover from a setback but the amount of equities you own should first depend on your willingness and ability to accept possible losses of your principal.
You first need to figure out the amount to hold in safe fixed income securities, like GICs or bonds. This decision is based on when you need that money, not based on your life expectancy. If the money you need over the next 7 to 10 years is in a safe place, you know it will be there when you need it. Safety first.
They recommend saving “longer-term monies in growth equities to mitigate the effect of shorter-term market volatility” and to use a three bucket approach. I generally accept that concept, although I would modify their second bucket. They recommend investing “short-term needs in bonds and defensive equities for a more assured income stream.” Any type of equities may lead to temporary or permanent loss of principal, whether defensive or not.
They also state that, “it’s a simple fact of investing life that equities compound at a higher rate than bonds.” I wish it was fact. I am not a licensed advisor, and cannot discuss pros and cons of particular securities. However, I randomly selected one example from the Investors Group product listing to demonstrate risk and returns, and the need for long-term commitment. Look at Fund Facts dated June 30, 2017 for Investors Canadian Equity Fund – Series A. If you do the math on that Fund’s 10-year history, $1,000 invested in 2007 would grow to $1,081 by 2016 (about 0.80% compound return). If you sold before 2016, you would have lost money. The best 3-month return over those 10 years was 35.1 per cent; however, the worst 3-month return was a negative 34.8 per cent. If you bought at a different time, or hold it for a longer period, the results will be different.
The comment that inflation can erode your portfolio over time is true, but stock market losses can erode your portfolio much faster than inflation. What is the impact of inflation on your ability to retire? With interest rates and inflation both at 2 per cent, if you spend $50,000 per year, you would fall behind inflation by $500 or less per year. Obviously you need to save enough money before you retire to cover inflation. Your advisor can show you the math and how much you need; depending on how much risk you take. Plan for GICs or bongs if living with stock market risk worries you. Many people do not have the courage to watch their stock values drop (as in the above example of 34.8 per cent within 3 months), and then sell at a loss.
All I am saying is “know the risks, keep the money that you need safe, and invest the balance in a quality diversified portfolio that you understand.” Meet with your advisor at least annually to review your risk, and to assess your performance compared to your expectations, market averages and your investment costs; then adjust as required. Perhaps that is what the article intended to say, but like so many these days, I am not sure it did so.
- Blair Corkum, CPA, CA, R.F.P., CFP is a self-employed hourly based fee-only financial planner in Charlottetown