How Volatility Affects Your Investment Portfolio
Equity and Bond market volatility continues…and WILL ALWAYS be with us to some extent.
VOLATILITY IS NOT LOSS!
As I have always said, and continue to say ‘volatility (not loss of money) is the price paid for average returns above that of 5 year GIC’s’. Average means just that, AVERAGE. It does not mean getting the target return each and every year…it means achieving the average return over a 5 year period.
If you can achieve all your financial goals while earning 2% then there is a case to be made for having no exposure to the equity markets…very few people can do this over a longer period of time if they are realistic and truthful to themselves about their needs now and potential future needs.
If you cannot handle any volatility (drop over a 12 month period) then only a very high allocation to cash, GIC’s and investment grade bonds will be appropriate. These assets will on average generate an annual and average return of about 2% over the next 5 years.
It is very important to understand what you need as an average return before you increase allocations to low volatility/low return assets since one of the highest risk clients face these days is ‘RUNNING OUT OF MONEY BEFORE RUNNING OUT OF LIFE’.
IT IS VERY IMPORTANT TO UNDERSTAND THAT VOLATILITY IS NOT PERMANENT LOSS OF MONEY!
Consuming CAPITAL is permanent and that is what happens when your cash flow needs are higher than your average return…that can be dangerous.
To find that balance of volatility and average return it is important to update/complete your personal financial plan. I encourage everyone to arrange a time to review that with me.
This analysis/review is just as important for those in retirement as those saving for retirement as the range of possible needs are substantial including:
Income needs for travel
Minimum income need for lifestyle
Renovation cost (if owning residence)
needing long term care ($30,000 approx. per year)
Additional nursing in home or in long term care
Increasing life expectancy for most (average for 80 year old is 92)
Possibly leaving capital for next generation
Please remember… I do not want to take on more VOLATILITY/RISK than is needed to maximize your ability to have sufficient income and the capital to meet your PROBABLE needs in retirement.
The views expressed do not necessarily reflect the opinion of Argosy Securities Inc. This does not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. Please consult a professional before making an investment decision.