Investing in an age of doubt

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The zigs and zags that are rocking financial markets have left investors wondering how to safeguard their money. Between Europe’s debt crisis and the related global economic slump, there is one thing they can count on: It will be a long time before things return to “normal.”

That can be a harsh realization. While markets were turbulent in 2010, it appeared that the worst had passed. Many people were eager to latch on to that optimism and brush off the damage that the prior two years had inflicted on their portfolios.

But now, with the turbulence continuing, long-cherished beliefs are being questioned and middle-aged investors are being hit with hard truths, much like children learning about Santa Claus. It turns out that house prices don’t always go up, as the U.S. market has illustrated. Greece has shown that government bonds aren’t always a safe bet. And investors who were relying on debt securities to provide them with a steady and reliable flow of fixed income have been disappointed.

Investors are making mistakes, experts say. Ironically, one major flaw might be eliminating too much risk in your investment portfolio. Doing so could leave you shortchanged when retirement comes, experts warn.

“You can bury your head in the sand and hope for the better, or you can try to participate in these markets,” says Serge Pepin, head of investments at the Bank of Montreal. “And we hope that you would try to participate in these markets.”

The first mistake to be dealt with is living in a blissful state of denial.

“I’ve been a victim of it myself – not opening up your quarterly statement or your semi-annual statement because you know it’s going to be bad news. That is perhaps the worst thing to do,” Mr. Pepin says. “ You should know where you are.”

Another mistake is throwing your tried and true strategies out the window.

“Many investors are abandoning their long-term investment program due to extreme pessimism,” Joel Clark, managing principal of the private client services team at Toronto-based investment management firm KJ Harrison & Partners Inc., wrote in a recent note to his clients. “In August 2011 alone, the equity market experienced the largest net monthly outflow on record, marking the fifth consecutive year in a row in which the equity market has experienced net outflows.”

Indeed, a number of investment experts are cautiously steering their clients back into the stock markets.

“The CIBC Investment Strategy Committee recommends being overweight in equities, yet we do so with considerable trepidation,” Peter Gibson, the bank’s head of portfolio strategy and quantitative research, wrote in a recent note.

Mr. Clark is currently a fan of cash and equities, and has a very negative outlook for bonds. His advice is counterintuitive, as investors typically think of stocks as being relatively risky compared to bonds. But the bigger risk, he suggests, is that you won’t have enough money come retirement.

“If you go back to 1994 and 1982, right after a period where governments were lowering interest rates to help reflate the economy, once they marched down the path of getting rates back up, the bond market dropped 30 per cent in six months,” he adds. “Bonds may prove to be the worst investment strategy over the next 10 to 20 years as interest rates rise, which will shock investors that perceive them to be safe investments.”

Nancy Woods, an adviser at Royal Bank of Canada, says that dollar-cost averaging is an ideal strategy in this period of uncertainty. Investors who are looking to increase their equity exposure would be wise to chop their investments into pieces, rather than buy a large chunk of stock at once, she says.

“I sort of equate it with standing at the bus stop and watching a bus go by,” Ms. Woods says. “If you don’t get on the bus, then you may have missed the opportunity. Because we don’t know, we can’t pick when it’s the bottom of the market.”

Again, no matter what, it will always be necessary to check your statements and fine-tune your portfolio over the years.

“Folks who are, say, 35 to 45 still have the luxury of time, and can afford to start a portfolio that will have more equity exposure without being afraid,” Mr. Pepin says. “But it’s not a ‘set it and forget it.’ As you get closer to retirement, that’s when you perhaps adopt a little bit more of a conservative, balanced approach in your portfolio, and perhaps some guaranteed investments.”

And even in the short-term, Mr. Pepin is a proponent of diversification, and he is among those experts who remain fans of fixed income investments.

“If you are risk-averse, you definitely want to make sure that you have a balanced portfolio,” he says. “Your fixed income will be the boring part of the portfolio, it’s as exciting as watching paint dry, but it will protect you in a down market.”

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