It has been a rough 10 years for financial markets—and for current retirees looking for income and baby boomers looking at their last chance for some serious compounding to make retirement as comfortable as possible.
Recent performance indices are down, or flat at best. If you have your money professionally managed your retirement portfolio may well be in a negative position after the manager’s fees are deducted. In the meantime, interest rates remain at historical lows with continuing “price controls” by central banks.
After taxes and inflation, the value of your retirement savings is going down even in “safe” products like GICs. If you are already retired, you may be revisiting your budget. If you were anticipating retirement, you may be postponing the date. So what can a 55-plus reader do with their money, with the best hope for enhancing their quality of life in retirement?
To lend or to buy?
First, though,the disclaimer: the views expressed here are a general “opinion” and not to be taken as advice.
As discussed in an earlier column, most investing comes down to a choice between lending and owning a piece of a business. Lending tends to be more predictable in terms of income but over the long term owning a piece of a business tends to generate better returns.
So your first strategic choice is between lending your money (for example, bonds and real estate funds) or owning a piece of the business, typically in common stocks not managed within a mutual fund. This decision is mostly based on the direction you expect interest rates and stock prices to go over the next year or two – or five.
Governments and central bankers have made it pretty clear they are going to control basic rates at a very low level at least until strong economic growth is restored – which is not expected in the near term. Funds based on quality corporate bonds issued by major corporations, utilities and real estate trusts, or mortgage funds are still making money even in this flat economy and paying reasonable rates, in the five to seven per cent range. Active management is simpler and fees cheaper so you can still expect to net four to five per cent in such “fixed income” investments, still twice as good as GICs at very minimal additional risk.
Another “standard” worth considering is the Canada Pension Plan which has over 50 per cent of its portfolio in equities. CPP made almost 12 per cent on its well-diversified portfolio in 2011 (2012 has been flat for everyone); even after two to three per cent MER (management) fees, that still nets eight to nine per cent, which will double your money in eight to nine years with the magic of compounding. So a senior cautious investor, who at the same time is trying to make up for lost time in the past decade, should be looking at putting at least 50 per cent of their portfolio in ownership positions through equities.
The second strategic choice is “when”. An investor wants to catch the upturn in stock prices by buying low. In my opinion, the time is now, or at least very soon in 2013. The major cause of the current flat markets is uncertainty. With the U.S. election out of the way (and hopefully the fiscal cliff), Europe muddling along , China stabilizing with its growing domestic market, the rising middle class of Latin America and new emerging markets in Africa, uncertainty should diminish and some confidence return, even at the new normal.
The $500 billion that U.S. investors have taken out of equity investments (and put into bonds) over the past five years will start coming back, driving up stock prices. But here is the best part. Despite slow growth in the GDP, companies continue to make money. Besides building cash for growth (when it returns), they are paying it out to shareholders as dividends.
There are many “value” based investment funds (in the style of Warren Buffet’s Berkshire Hathaway) which are generating yields as good as or better than bonds. So equity investments in the blue chip companies (banks, utilities, entertainment) will generate medium returns now while positioning you to catch the capital gains when the market turns up.
Stay with the big firms
How should you choose your money managers? First you develop a relationship with one or more financial planners that will help you fit your overall financial plan together. Then for your retirement investments it’s worthwhile sticking with a major company which has a wide choice of investment funds, without extra fees when you want to rebalance between fund offerings.
All kinds of get-rich-quick “alternative” investments are being touted but, again, there is no free lunch. Big companies can afford to hire and partner with the best money managers. They are in the game for the long term – hopefully, they are less likely to do anything foolish.
So think about moving, soon, at least half your retirement portfolio into equity investments in funds that are stable and well diversified within major leading firms. The markets have to go up eventually, and in the meantime you get decent returns from dividends.
Fred Petrie, of Navigator Finance, provides financial planning for families and independent businesses. He can be reached at 204-298-2900 or firstname.lastname@example.org.