Financial Post, Garry Marr
It’s RRSP season and I’m sitting here looking at my statement, which is now below book value after 20-plus years of investing.
Granted, the larger investments were in the last decade and so the plan has not fully benefitted from the rapid rise of the S&P/TSX Composite Index and other indices around the world. That is, before their spectacular fall.
But the question for me, still 20-plus years from retirement, is whether I should continue to buy into equities or get more conservative by purchasing fixed income products like government bonds.
Certified financial planner Cynthia Kett of Stewart & Kett Financial Advisors Inc. in Toronto, says every investor needs to have a certain amount of money in safe fixed-income products. This was the case even before this severe market correction.
"I’m a financial planner so I always take a financial-planner perspective. Regardless of age, investors should always have a mix of investment assets in their portfolio. The degree of risk should be based on their goals," says Ms. Kett.
She says the 2008 market declines were a good test of whether or not investors had their assets appropriately allocated. Unhappy investors who are accepting of the loss probably had the right asset mix, says Ms. Kett.
The problem is many portfolios are now out of whack because the equity portion has fallen so much. The temptation is to get more conservative.
I would be lying if I said I haven’t cast some glances at Government of Canada bonds and their paltry returns – stuff I wouldn’t have touched six months ago.
"Our rule of thumb is you should have five to seven years of cash flow available in earnings or fixed income, interest income or dividends, so that in times of downturn like this your lifestyle isn’t impacted," says Ms. Kett.
She says it’s not the end of the world for someone who is self-employed to use his or her RRSP as an emergency fund, so having some fixed income products in your plan to draw on is a good idea. You wouldn’t want to sell equities at the bottom of the market to fund your lifestyle.
"It doesn’t matter what your age, you have to have some sort of balance and everybody should have some fixed income, some equities and maybe some cash," says Ms. Kett.
Of course, that raises that question of what counts as fixed income. Corporate bonds? Government savings bonds?
"Maybe your first question should be whether I will be retiring in 30 years instead of 20," laughs Rick Robertson, a professor at the Ivey School of Business at the University of Western Ontario in London.
He says people have changed some of their habits and are now putting cash into tax-free savings accounts for a rainy day. "Maybe it’s something we should have done before," says the professor.
But, he adds, there is a danger in knee-jerk reactions. "People have been saying, ‘I lost a lot of money, I feel sick.’ We’ve had periods where the market hasn’t done much, but you really need some type of long-term strategy," he says.
Prof. Robertson says regardless of whether it’s an RRSP or the new TFSA, conservatism is taking over the investing market.
"If you are all in equities right now, I think you are crazy. You need to go back and look at your portfolio. I remember a colleague who every January would go back and rebalance his pension portfolio. He wanted 40% in equities, 40% in long-term bonds and 20% in short-term bonds," he says.
That sounds like a plan – one a few of us should have thought of before the market fallout.