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What we know...what we don't

Wednesday August 15, 2012

We have been walking though troubled times in the investment world for a good decade now. And many things have been turned upside down. In nine decades out of ten, equities would outperform risk-free investments like guaranteed investment certificates. Unfortunately, this past decade has been the one-in-ten exception, with equities underperforming even the very low returns on risk-free investments. This has naturally led some people to wonder whether changes are necessary to their portfolios or indeed to their entire investment style. Is it truly the end for equities, as some pundits would have it? Or is this just an aberration and unlucky timing? I believe it’s the latter.

Here’s why: First, the nine out of ten positive decades for equities happen consistently for a reason. Second, do we really want to move to guaranteed investments that have no hope for better returns just as interest rates have bottomed out? Doing that seems like a reaction to the negativity in the media. Let’s face it, bad news sells. Should we change a 20- to 30-year retirement plan just because we hit a few speed bumps and some gurus declare the end of equities to great fanfare? I don’t think so.

Perhaps it would be helpful to examine what we know for sure and what are the unknowns affecting our investing and retirement plans.

What we know (the controllables)

Insurance plans. Do you have adequate insurance for death, disability, home, and long-term care (to name a few)? Most people don’t like to think too much about this, but it’s critical that you do.

Estate and will plans. Take care of this while you are healthy and of sound mind. Revisit your estate plan every five years to encompass any major life changes. Do you have powers of attorney set up? This is very boring to many people, but also very important.

Investment plans. You know how much money and where (RRSP, TFSA, RESP, or non- registered) you are allocating resources for the future. If markets correct, you can increase or add lump sums to take advantage of the event that caused the drop.

Tax planning. Always examine (or have professionals examine) the tax consequences of investing, purchasing a second home, and how various streams of income will be taxed in retirement. Redeeming $30,000 in your RRIF gives you $30,000 of income in retirement. Redeeming $30,000 in a non-registered or TFSA would be much more tax efficient for most people. Is your RRIF going to give you tax problems in retirement because you have invested very well? You can plan for such events.

What we don’t know (the scary stuff)

Interest rates. It currently looks like they’ll stay at historic lows for years. But you’d be wrong to bet on it, just as rates didn’t stay at historic highs in the 1980s. Rates will rise. We just don’t know when or by how much.

Inflation rates. Right now, inflation is under control. It hasn’t always been so in the past. And it won’t always be so in the future. Inflation will return. We just don’t know when or by how much.

Investment returns. Unless you are fully invested in guaranteed vehicles, the best you can do is take an educated guess based on historic norms. But, as the well-known warning goes, past returns are not indicative of future performance.

Geopolitical events that may cause markets to drop temporarily. Nobody can predict these major events. In fact, the bigger the event, the more unpredictable it is. The Asian tsunamis, 9-11, the credit crisis, and the eurozone debt crisis have all had a major negative effect on stock markets around the world. In our globalized world economy, problems can spread in a domino effect.

Our health and employment income. Our health can change at any time. We could get downsized next week, or the company we work for might go bankrupt. Any negative (or positive) change in income will require an update in our plans. A promotion may mean you can retire earlier or in more comfort. The unknowns are not always bad.

The big problem for us as financial advisors and investors alike is that movements in interest rates, inflation, and investment returns can affect our planning in a major way, and we have to be prepared for that. If the things we can’t control affect us adversely, it will require changes in our plan. Maybe a change in our investing.

Knowing that many things utterly beyond your control can have a major impact on your retirement is scary. But if you plan with this principle in mind, and update your plan as events occur, you will be better equipped to roll with the punches when they come.



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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.