The worst time to put your faith in near-term stock market gains is when everyone’s feeling great about investing.
Like now, for example. Stock markets are up by staggering amounts over the past year and a lot of investors have benefited. There’s no way to tell when the next downturn will happen, but it seems reasonable to suggest that upside potential for stocks is matched by comparable downside risk.
For long-term investors, who cares? If you’re investing for 10 or more years, near-term fluctuations mean nothing. For the reader who recently asked about what to do with savings for near-term home renovations, the outlook for stock market risk should be a deal-breaker.
“We have savings that we would like to access in a couple of years’ time for a home renovation,” this reader wrote. “We are thinking of transferring them to a tax-free savings account and investing in conservative exchange-traded funds, or possibly mutual funds. Is this too short a time horizon? If so, what is the best thing to do with these funds until we need them?”
The best thing to do is put the money in a high interest savings account, where returns today are 1 to 1.5 per cent at best. Conservative ETFs and mutual funds are dicey at the best of times for near-term money, but more so now. The risk-reward outlook for stocks looks iffy, and bonds as well (conservative funds might have all or mostly bonds, with some stocks as well).
Economic growth has held up pretty well so far in the pandemic and is expected to accelerate once lockdowns ease. Interest rates will rise from today’s depressed levels, and this will put downward pressure on returns from conservative funds holding a big position in bonds. Many blue chip dividend stocks would also be vulnerable to a drop in price as interest rates move higher.
Guaranteed investment certificates are an alternative to high interest accounts to keep money safe. The best rates for one-year GICs are in line with current returns from high interest accounts, but the latter could adjust rates lower at any time. In fact, some online banks have recently cut their savings rates. A one-year GIC cannot be cashed without penalty, but it does give you a predictable return.
Longer term GICs offer slightly better returns – up to 2.1 per cent for five years. But having money locked in for that long may not square with the timing of those renovations.
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Rob Carrick