The March stock market decline was especially hard on seniors.
I’ve had a steady flow of e-mails since the beginning of March from seniors aghast at how their retirement savings were hit by the COVID-19-driven stock market plunge. One reader is worried about a repeat performance.
“From what I can tell, and pundits/economists are all over the place, I think the market is due for another correction downward,” this 66-year-old wrote. “Am I better off to sell and preserve my capital?”
A bit of background: She owns a home, and has no debt and no pension. Her retirement assets are in blue-chip stocks held in a tax-free savings account, a registered retirement income fund and a cash account. “Given all that’s going on in the stock market and general economy I am (along with thousands of people) in a quandary regarding whether or not I should sell off all my equities and put my hard-earned money in GICs.”
GICs would solve the problem of stock market volatility for the investor, while raising these questions:
- Tax: Would selling stocks in the cash account generate taxable capital gains that leave her already depleted portfolio even smaller on an after-tax basis? Also, GICs held in the cash account would pay interest, which is taxed like regular income (unlike dividends, which benefit from the dividend tax credit in non-registered accounts).
- Income: GIC yields range from 2.3 per cent to 2.45 per cent at best these days for terms of one through five years. A diversified portfolio of dividend stocks bought years ago would almost certainly yield more than that, probably a full percentage point at least. By the way, the yield on the S&P/TSX Canadian Dividend Aristocrats Index – let’s use it as a benchmark for dividend stocks – was close to 6 per cent in early May.
- Growth potential: GICs have none – they just pay a modest amount of interest. Canadian stocks can be expected to produce average long-term total returns (share price gains plus dividends) of 6 per cent a year over the next 10-plus years before fees.
The one area where GICs clearly beat stocks is in downside risk. GICs have none if you stay within deposit insurance limits, while stock markets are risky. Given all the uncertainty about the economy, this reader is quite legitimately worried about another leg downward for stocks.
But a 66-year-old woman can reasonably expect to draw on her investments for another two decades or more. Blue-chip dividend stocks sound like the sturdier portfolio holding in this eventuality. GICs sound like a case of buyer’s regret in the making.
-- Rob Carrick
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Stocks to ponder (for subscribers)
Kinaxis Inc. At a time when the fortunes of corporate Canada are shrouded in uncertainty, Ottawa-based Kinaxis Inc. is brimming with confidence. On Thursday, the company’s leaders assured investors it is on track to meet its 2020 growth forecasts, which were set well before the coronavirus sabotaged the global economy. Kinaxis is one of a group of Canadian information technology firms that is practically tailored to the lockdown era, by helping other companies adjust to a radically altered operating environment. Those same homegrown IT names are also some of the hottest stocks on the market. Tim Shufelt reports (for subscribers)
Shopify Inc. The stock on Wednesday surged past Royal Bank of Canada to become the largest publicly traded Canadian company after another impressive rally. RBC the next day took back the crown. But it’s still worth asking: can the Ottawa-based retail software giant break the curse of predecessors that have risen to the top of the Toronto Stock Exchange only to nosedive soon after? David Berman has more
Peloton Interactive Inc. This company, which last year endured a rocky initial public offering and a widely mocked holiday ad, is emerging as a potential winner of the quarantine economy. While gyms, boutique studios and personal trainers have been sidelined, home workout systems are thriving. Since mid-March, Peloton’s stock has soared 95 per cent, valuing the New York company at US$10-billion, or twice as much as the gym chain Planet Fitness. Last month, Peloton reported a record: More than 23,000 people had joined one of its live classes. Erin Griffith from The New York Times has more
A proven strategy for buying domestic bank stocks
BMO Capital Markets’ chief investment strategist Brian Belski sees a lucrative buying opportunity ahead for Canadian bank stocks. Loan losses for the banks are set to rise because of business shutdowns and low oil prices. Mr. Belski’s research shows that peaks in banks’ loan-loss provisioning – funds set aside to offset expected defaults and writedowns – have historically signalled periods of strong outperformance for the sector. Importantly, the strategist points out that banks tend to “front load” loss provisions – which implies that their peak could occur as early as the current quarter. Read more about the strategy from our Scott Barlow (for subscribers)
The no-fear, no-hype take on how much you’ll make in stocks and bonds over the long term
Stocks fell off a cliff as the pandemic took hold, then rallied furiously amid worse and worse economic news. Can you really trust them to get you where you need to go, financially? For an answer, consider the latest Projection Assumption Guidelines for financial planners to use in their work. Rob Carrick reports (for subscribers)
Others (for subscribers)
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What’s up in the days ahead
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