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The time to buy a segregated fund might – might – have been one month ago.

Now? Forget it. Why buy a product that protects you from losing money in the stock market after stocks have crashed?

Seg funds are an insurance-industry spin on mutual funds that guarantee you will at least get 75 or 100 per cent of your principal back after 10 years. This is an appealing feature right now, as you can see in this e-mail from a reader: “Are segregated funds a wiser alternative when closer to retirement, and during market crisis, such as the one we are living today?”

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The best way to lower the risk posed by stock market declines in a portfolio for someone approaching retirement is to lower the allocation to stocks and increase exposure to bonds, guaranteed investment certificates and cash. Seg funds do have some important attributes – you can name a beneficiary for your seg fund and have the assets go to that person after you die without probate fees. As a type of insurance policy, seg funds also offer a degree of protection from creditors.

But as a conservative investment, seg funds don’t make the cut. First off, their guarantee to return 75 or 100 per cent of your invested capital after 10 years is close to meaningless. Stock markets could easily have a five-year stretch of negative returns, but 10 years is highly unlikely. Second, seg funds charge higher fees than traditional mutual funds. In buying a seg fund, you’re essentially agreeing to give up returns as a result of these higher fees to protect yourself from a highly improbable event – 10 years of negative stock market returns.

Highly improbable, but not impossible. In hindsight, the all-time highs reached by the stock markets earlier this year might have been a time to buy seg funds. The recession caused by the coronavirus could be nasty – maybe even enough to keep stocks below their 2020 peak for 10 years. It seems unlikely, but who knows?

Now, with stocks down something like 30 per cent from peak levels, the likelihood of a 10-year loss in stocks is greatly reduced. In that context, seg funds should be considered on their estate-planning attributes and creditor protection alone.

-- Rob Carrick

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