|Investment strategies for rangebound markets
Tuesday November 22, 2011
Market volatility has increased greatly in the past four years
compared with the previous four years. And the big stock indexes
have largely been tracing a “sideways” pattern, neither descending
into a new bear market nor breaking out in a new bull. That’s
not great news for investors and people moving towards retirement,
I know. But rather than complaining about the current environment,
or worse yet, moving everything to GICs or other forms of fixed
income, what can you do to increase your odds of success? Here
are several key strategies that that have helped me and my clients,
and that may also help you move closer to your goals in our
current uncertain markets.
Geographic diversification hasn’t provided investors with a
“smoother ride” as the world’s main economies have become more
closely aligned, but you can still diversify using many other
assets that have low correlation to stock markets. Real estate,
gold, silver, resource funds are viable options.
The most effective strategy has always been prudent asset allocation
– having a decent percentage of your portfolio in fixed income.
When I started in the business, fixed income consisted of government/corporate
bonds, mortgages, and GICs. Today there are many different types
of fixed income assets to provide your portfolio with stability
when markets correct. If you are 100% invested in equities,
I’d rethink your strategy, unless you are young, understand
volatility, and know what “long term” means.
Lower your costs
Your costs as an investor involve trading costs, MERs for mutual
funds, and fees charged by financial advisors charge. You can
thus trade less, negotiate your fees with your broker/advisor,
use mutual funds with lower MERs, and switch to special fund
series with lower fees based on higher asset levels (usually
$100,000 to 150,000).
Dollar cost averaging
Invest monthly to make sure you don’t buy when markets are
trending up or just before they correct. This strategy works
for lump sums too. For example, if you have a $100,000 lump
sum, you can invest it all in a money market fund but set up
the account to invest $5,000 per month, say, in equities or
As long as you are working, you should contribute something
to your impending retirement, and this method is the best for
the majority of people. If you are married and both spouses
work and don’t save anything, review your spending and make
some changes to non essentials that will allow savings of at
least $200-$300 a month.
It’s always a good idea to lower debt, and paying down your
mortgage is no exception. But remember, if you add $10,000 to
your RRSP and you are in a high tax bracket, you will save about
$3,500 in taxes and have the $10,000 building towards retirement.
My only caveat here is that with interest rates at near record
lows, your net savings aren’t terribly large, but if you have
a huge mortgage or are afraid of stock markets, this is never
a bad plan. I prefer having clients invest in their RRSPs first
and direct any refund monies to debt reduction (pay highest
interest debt, like credit cards, first).
Avoid it, unless you can handle extra volatility/stress associated
with the strategy, have a secure job, already are maximizing
your RRSP contributions, and are preferably mortgage free or
close to it. Leverage is the strategy that hurts more people
than anything else.
Unscrupulous or greedy financial “advisors” and their firms
make a huge amount of money by presenting leverage to unwitting
clients, using slick presentations, fancy charts, and graphs
that move in only one direction, without fully disclosing the
immense risks associated with the strategy. But make no mistake:
Leverage is about using borrowed money to invest, and it gives
the illusion of increasing your asset base. But only you – never
the advisor – will ever be on the hook for repaying the debt
if the borrowed investments “don’t work out.”
If you don’t want to be fully invested in equities, but aren’t
thrilled with low returns for fixed income, dividend stocks
and investment funds are an alternative. These will continue
to pay dividends regardless of what the market does. Corporate
North America is in very good shape now, and dividends are increasingly
used to “reward” shareholders. And in fact, over time, a large
proportion of the stock market’s total return is derived from
Always remember that most financial planning is a marathon,
not a sprint. Meet with your financial advisor, decide what
financial vehicles will get you where you want to go, and stick
with your plan. There are times when you will need to adjust
and make changes, of course, but not too many and certainly
not during a market correction.
Don’t look at your portfolio too often. For long-term planning,
a statement every three or six months is plenty. Looking too
frequently will make you sell when you should buy or seek safety
when you should get more aggressive.
Generic Mutual Fund Disclaimer
Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read the
simplified prospectus before investing. Mutual funds are not
guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There can be
no assurances that the fund will be able to maintain its net asset
value per security at a constant amount or that the full amount of
your investment in the fund will be returned to you. Fund values
change frequently and past performance may not be repeated.
Personal Opinions & Recommendations Disclaimer
The foregoing is for general information purposes only and is the
opinion of the writer. This information is not intended to provide
specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice. However,
please call the author to discuss your particular circumstances.