I recently received an e-mail from a couple in their mid-seventies that read as follows:
"Our portfolio is over half a million in stocks and mutual funds. Should we be protecting this by moving it to safer GICs? Many thanks, Susan."
It's easy to understand their concern. GIC rates continue to be stuck in the doldrums, while the stock market posts new all-time highs almost every week, leaving many people worried that it's overvalued. It's the old greed versus fear dilemma. Do you take greater risks in pursuit of higher returns, or do you sacrifice profit to protect what you already have?
A lot depends on age. People in their forties and fifties can afford to take more risk because they have a longer time horizon. The Great Recession of 2008 had a traumatic impact on investors at the time, but today it seems like ancient history. Think about how much money you would have lost if you had taken the GIC route back then!
But a couple in their seventies has a much shorter time frame to work with. A major stock market correction now could wipe out perhaps half the value of their portfolio, leaving them little time to recover. So in this case, some degree of risk reduction is appropriate.
But moving from an equity-based portfolio into 100 per cent GICs is too extreme. There is a middle ground that would add more safety while still retaining decent cash flow and some growth potential. I suggest dividing the portfolio into four roughly equal segments, as follows.
Preferred shares. A careful selection of preferred shares can provide steady, tax-advantaged cash flow with less risk than common stocks. But you need to focus on investment-grade securities and avoid paying a significant premium to par.
High-performance equity mutual funds. These offer diversification and professional management, which makes life a lot easier than trying to select individual stocks. Some of my favorites are Mawer Canadian Equity, Beutel Goodman American Equity, Steadyhand Founders Fund, and Edgepoint Canadian Portfolio.
Fixed-income securities. With interest rates on the rise, the bond market doesn't look very attractive right now. But owning some fixed-income securities will generate cash flow and provide a cushion for your portfolio in the event of a market crash. The PIMCO Monthly Income Fund has gained over 6 per cent annually in the past five years and is also now available in an ETF format (PMIF).
Laddered GICs. Finally, devote the last 25 per cent of your portfolio to a GIC ladder. This involves investing equal amounts in GICs maturing in one, two, three, four, and five years. Each year, one-fifth of your holdings will mature and can be rolled over into a five-year term at then-prevailing rates. At a time of rising rates, such as we are now experiencing, this strategy ensures you benefit from any increase in GIC yields.
Of course, this is not a totally risk-free approach. Nothing in life is. But it's a good compromise between the two extremes of an all-equity or all GIC portfolio.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca. Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney