Your savings have been shaken up and perhaps taken a hit. What constitutes wise investing during and after a pandemic?
By Olev Edur
The current coronavirus pandemic has ravaged the savings accounts of many retirees, and questions and uncertainty remain as to what comes next and how you should proceed with managing your investment portfolio.
Opinion is divided, for example, on how quickly the Canadian and global economies—and the stock markets—can return to a position of solid, sustained growth. Many developing countries have yet to reach a state of equilibrium and, even in jurisdictions where economies are being reopened, it will take time to gear up production, distribution, and all the rest of the economic machinery again.
So what should you do now? Is it time to reinvest in stocks, or should you stick to the safety of fixed-income securities, despite the negligible returns? What about cash holdings—do you keep your powder dry, so to speak, and await definitive signs of market stability?
If you still have debts, should you make an extra effort to pay these off while interest rates are at record lows? Or should you focus your reduced financial resources elsewhere for the time being, if they can generate greater returns?
For some answers and guidance, Good Times turned to four investment experts. Here’s what they had to say about your investment strategy going forward.
David Boyd, senior vice-president and portfolio manager, BMO Private Wealth
You have to do your best not to allow emotion to affect your decisions. Your latest account statements are going to be down, depending on your asset mix, and this may cause some anxiety. You need to take emotion out of the equation and not make decisions you’re going to regret down the road.
I’m a huge believer in having a financial plan for seniors—a road map for retirement. It’s particularly important in retirement, because you don’t have any further sources of income (other than fixed pensions and your investments). That means having, first of all, the appropriate asset mix. You should have a certain per cent in fixed-income investments and a certain per cent in equities.
If the market turns significantly, as has happened recently, then you need to have a conversation with your advisor. Is now the time to rebalance your holdings? Do you rebalance completely or partially?
Keep in mind that fixed-income investments are not all the same. You need to look at the different levels of risk for different types of fixed-income investments. The safest fixed-income investments are cash and government bonds, then GICs, then corporate bonds. Interest rates have fallen, so investors are trying to increase their yields. As a result, a lot of people start moving into corporate bonds, usually with mutual funds or ETFs. But before you make any moves, you need to understand the different levels of risk that apply to these different types of fixed-income investments.
Stan Wong, wealth advisor and portfolio manager, ScotiaMcLeod
First, it’s important to revisit your asset allocation to ensure that it’s suitable for your time horizon and risk tolerance. Second, focus on your long-term retirement objectives rather than on the near-term media headlines and market gyrations. If appropriate, consider the opportunity to rebalance into high-quality, dividend-paying equities and investment-grade corporate bonds.
North American government bonds have performed well during the recent volatility, while corporate bonds have suffered as liquidity risks have increased. While the duration and depth of the current coronavirus pandemic is uncertain, holding both government and corporate bonds in the fixed-income portion of one’s portfolio will continue to provide portfolio diversification and lower correlation risk.
As to taxes, one of the most important tax change policies to consider is the federal government’s decision to lower the minimum withdrawal rate for registered retirement income funds (RRIFs) by 25 per cent for 2020. The measure was part of a massive relief package announced by the federal government in April, and it will ease the amount of RRIF assets retirees will need to sell in a heavily discounted market and allow for an improved recovery in their portfolios. Of course, this will also ease the tax burden on retirees, as RRIF withdrawals are taxable.
Fred Zhou, senior financial planner, TD Wealth
We can think of the current situation like this: market volatility is very similar to experiencing seasonal changes. While we may have faced economic and financial winters before, we know for certain that spring will arrive.
One cannot deny that there are some potential buying opportunities when it comes to long-term investments. Therefore, if there is cash available, and looking back on the 2008 recession as an example, slowly adding to your high-quality portfolio over the coming months could prove a good entry point.
As for debt, this has always been an important part of any financial plan, so looking at this side of your balance sheet during times of uncertainty is important. Work with your financial planner to examine the best use of cash flow, which could include renegotiating your debt in favour of lower interest rates with an end date.
Natalia Sandjian, senior manager of investment and financial planning, National Bank
It’s not necessary to make major changes at this point if you already have a well-thought-out plan that’s in line with your risk tolerance, investment horizon, and retirement goals. If it was sound before, then there’s no reason to think it’s not suitable today.
It’s important to remember that retirement—if we assume an average retirement age of 65—will likely last for many years. It’s easy to think that when you retired, your investment horizon suddenly got shorter, but your lifespan could extend to age 90 or beyond, so the challenge is to ensure that your capital will last long enough to outlive you. The notion of an investment horizon doesn’t end when you start retirement. You don’t say, “Okay, I need every dollar of my savings right now.” Sometimes the period of retirement can be as long as or even longer than the time you’ve been saving.
If you’re 65 and want to cash out to prevent further losses, it will likely be to your detriment. Nobody knows when a market will hit its bottom for a given crisis—if you pull your money out, how will you know when to reinvest? If you cash out now, it’s unlikely that your capital will ever regain its former level and last long enough to cover the retirement years that you’ll need.