Conservative investing these days means consigning yourself to returns between 1 to 2 per cent at best, which seems extra horrible with stocks up by double-digit amounts from last year’s low.
So it’s no surprise that a reader did a double-take when reading a recent Carrick on Money newsletter with some thoughts on how a 57-year-old could ramp up his retirement saving. The suggestions outlined by a financial planner used a conservative rate of return of 4 per cent.
“My question is where on earth does one invest to obtain a 4 per cent ‘conservative’ return without undue risk these days?” this 62-year-old reader asked.
What we have here is a disconnect on the meaning of conservative return. This reader is looking for safe investments yielding 4 per cent. Unfortunately, there aren’t any. Some blue chip dividend stocks yield 4 per cent and more, but they could easily fall in price and thus are in no way safe in terms of keeping your principal intact. The same applies to preferred shares. The only bonds yielding 4 per cent would be in the high yield category, which also goes by the name junk bonds.
So what’s the deal with the conservative 4 per cent return? In this case, the term ‘conservative’ refers to the estimate of future returns for a diversified portfolio of stocks and bonds.
The S&P/TSX composite index jumped 44 per cent on a total return basis over the past 12 months, and the S&P 500 made 54 per cent in Canadian dollars. Even with a solid weighting of low-yielding bonds in a portfolio, 4 per cent seems decidedly conservative as an estimate of returns. And yet, an investor would have to take on a fair amount of risk to get it -- maybe 60 per cent of the portfolio in stocks and 40 per cent in bonds.
Both stocks and bonds could fall in price as we look ahead to the rest of 2021 and beyond. The FTSE Canada Universe Bond Index was down a little over 5 per cent for the first three months of the year. Stocks are having quite the party during the pandemic, but a pullback is coming at some point.
The investor wondering about conservative returns is obviously well-acquainted with disappointing yields - that’s why he got in touch to ask about 4 per cent gains. We won’t see returns like that from conservative investments until the economy ignites and interest rates surge from current levels.
Four-per-cent gains for diversified portfolios are another matter. With a conventional mix of stocks and bonds, that’s a reasonable after-fee estimate of your average annual returns over the long term.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Rob Carrick’s 2021 ETF Buyer’s Guide: Best Canadian dividend funds
The average total return for the year to March 31 was 41 per cent for the nine dividend funds included in this fifth installment of The Globe and Mail ETF Buyer’s Guide. As good as dividend ETFs were, most still trailed the S&P/TSX Composite Index in total returns (share price changes plus dividends) over the past one-, three- and five-year periods. Rob Carrick has the breakdown of the dividend funds that may work best for your portfolio.
Dividends on the rise: Canadian companies restore payouts back to pre-pandemic levels
Canadian companies have accelerated their payouts to shareholders, restoring dividends overall back to levels seen before the pandemic ushered in a wave of reductions and suspensions. Similar trends are being seen in the United States. David Milstead and Darcy Keith report.
BP’s rosy remarks could be good news for energy sectors elsewhere
BP PLC delivered an upbeat outlook this week ahead of its first-quarter financial results later this month. Is there an upbeat takeaway for Canada’s energy sector, too? David Berman takes a look.
Mexico vs Brazil - Populist presidents confound investors
When a left-wing populist and a far-right lawmaker rose to power in Latin America’s two largest economies, investors thought they knew who was going to show them the money. But more than two years and a costly pandemic later, disillusioned investors are now busy shifting from a Brazil that once promised compelling reforms and privatizations into a Mexico expected to benefit from a U.S. economic rebound. Rodrigo Campos of Reuters reports.
Investments get ‘real’ as inflation fears dim appeal of bonds
Electric vehicle infrastructure, top-end offices and industrial metals - with a resurgence in inflation seemingly on the horizon, investors are slashing their exposure to bonds in favour of “real” assets. While such investments tend to generate income and often appreciate in value, they are particularly prized as a shield against inflation, which many economists expect will make a return as economies recover from the pandemic. That means major changes for multi-asset portfolios run along traditional 60-40 lines. Saikat Chatterjee and Thyagaraju Adinarayan of Reuters report.
A clause in Rogers’ 128-page takeover offer has hedge funds eyeing big gains from Shaw’s preferred shares
Rogers Communications Inc. executives have been saying all the right things about their commitment to a $20.4-billion takeover of rival Shaw Communications Inc. Over the next three months, hedge funds are betting the telecom company will show it is willing to put its money where its mouth is. The hedge fund crowd is putting money into what amounts to a preview of the potentially lucrative, or disastrous, play on Rogers’s takeover by investing in Shaw’s preferred shares, in anticipation of cashing out at the end of June. Andy Willis reports.
Reality check for copper bulls as Chinese demand growth slows
Copper long speculators are at risk of a price pull-back due to a delayed pick up in Chinese demand in its traditionally strong industrial consumption season in the second quarter. Bullish investors, who poured money into copper eyeing a commodity super-cycle, have already reduced exposure amid fears of Chinese monetary tightening, a firm dollar and fresh coronavirus lockdowns in Europe. Mai Nguyen of Reuters reports.
A taxing question for multinationals leaves stocks unscathed
A global minimum corporate tax rate could deal a major blow to the multinationals that some governments allege shift billions of dollars in profits every year to low-tax havens, as well as triggering a fundamental reassessment of corporate earnings. The chances of such reform rose this week as Treasury Secretary Janet Yellen threw the weight of the U.S. government behind a push to upend international tax rules. Thyagaraju Adinarayan and Sujata Rao report.
Others (for subscribers)
Number Cruncher: Profitable TSX dividend stocks that you may have overlooked
Number Cruncher: Fifteen tech stocks to watch as earnings season approaches
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What’s up in the days ahead
Ian McGugan moderates a lively debate about the high-flying stock market between bearish investment adviser John De Goey and pro-stocks pension consultant Keith Ambachtsheer.
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Compiled by Globe Investor Staff