'KNOWLEDGE IS AN ANTIDOTE TO FEAR’
- Ralph Waldo Emerson
The chart below shows that the SP500 since the start of 2015 (over 1 year ago) is where it started although the volatility has been significant. The TSX (Canada) is about 3-4% below where it started 2015 with similar volatility.
VOLATILITY IS NOT LOSS…unless you make it so! Did you sell in August/September of 2015 or January/February of 2016? If so then you may have created a loss, NOT the market.
The chart below shows from mid-2006 till now…a period that includes the significant drop in GLOBAL equity markets. The SP500 (U.S. market) has gained about 61% over that time PLUS dividends (approximately 2% per year).
Will the next 10 years generate a similar returns? In this current LOW GROWTH world perhaps not, BUT what are the alternatives?
First let us look at government bonds as an alternative. The 10 year U.S. bond is currently paying 1.7% so it will take 42 YEARS to double your money (for those saving). For those sticking to Canadian bonds it will take about 55 YEARS to double your money as the 10 year bond rate is about 1.3%. If rate move to 3% over the next 3-5 years it will ONLY take 24 years to double your money.
A laddered GIC approach (money in 5 years GIC with one maturing every year) will take about 36 years to double your money with the current 5 year rate in the 2% range.
With many Canadians not even starting a significant savings program till late 30’s (and later) that means their investment may only double once. IS THAT REALLY AN ALTERNATIVE?
It currently takes saving 10% from age 25 to 65 to build a pension to replace (just) 25% of your pre-retirement income (assuming 6% average return) BUT the volatility or uncertainty of SHORT TERM returns bothers you.
You could save more in GIC/government bonds BUT the savings rate would have to be closer to 30%! That is if you start at 25. You don’t want to even know the numbers if you start at age 35 and after.
With most people struggling to save I do not think that SAVING MORE is a viable alternative for most people.
Working longer for most people may not be an option…it will probably be the reality, however with the largest growth segment of the population being those over 65 the opportunities will shrink and the income will shrink with it.
RELY ON THE ‘GOVERNMENT’
The government in reality is just the current representation of the TAX PAYER so when you say rely on the government you are really saying rely on OTHER TAX PAYERS. With more and more Canadians entering retirement the pool of tax payers is shrinking so ‘government programs’ will in all likelihood start to shrink as well. The last budget was an example of that with most Canadians giving up something (or at least not getting anything).
We have probably seen the lowest average tax rates in Canada. Benefits will probably be less and not more.
FOR THOSE IN RETIREMENT most of the above holds true. Most people in retirement need to extend their timeline of how long they believe they will need to generate income from their assets and unless they are willing (and they should be) to take on SOME volatility risk the target return should be in the 2% range.
65 year old need to think age 95
75 year old need to think age 95
85 year old need to think age 95
Everyone in that group needs to allow for a large capital need if they (or a spouse) needs long term care or nursing. The longer we live the more potential for that need. Most people already know the story regarding my mother so I won’t bore you (except to say $400,000 in cost over 3 years).
Almost everyone in retirement needs some exposure to fixed income…if only to cover the next few years cash flow to minimize risk of volatility. But as we have just stated interest rates are low and will remain lower for longer.
If you have been in for taxes over the last couple of months or a planning meeting you will have heard me talk about my concern of holding INVESTMENT GRADE FIXED INCOME inside a traditional mutual fund. There is no way Canadians can continue to own bonds that pay .5% to 3% in a fund/wrap account/fee based account that has a cost of ownership of 1.5% to 2.5%. THE MATH DOES NOT WORK!
Would you pay 2% to own a GIC paying 2%? I believe (hope) the answer is no.
When the facts change I adapt… what do you do?
We are transitioning retired clients who have an income need to strategies that will work in this environment such as:
There is a need for lower volatility positions in most retirement portfolios BUT we need to make sure that there is a return on those assets not just a return of those assets.
I look forward to meeting my clients over the spring/summer to review their retirement accumulation/retirement income plans. Please contact myself, Erin, Gayle or Jim to arrange a meeting.
FOR TAX CLIENTS WHO MAY BE READING THIS I HAVE AN ADDITIONAL MESSAGE…
I often hear ‘tax clients’ say…
“he/she is really nice at the bank”
Many bank clients also deal with the ‘revolving door’
experience with a new advisor every 18-24 months. This makes it
difficult to receive consistent advice.
My question to you is…For your ‘cost of ownership’ (MER) what are you looking for?
A BEST FRIEND?
THE BEST ADVICE!
Please come in to discuss our all-inclusive proposition.
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.