The job of saving for retirement has never looked so impossible.
Even after a rally on Tuesday, the S&P/TSX Composite Index was trading at levels close to those of early 2008. If you crave the safety of bonds, then you’ll find yields fallen to shockingly low levels in recent days.
The point of investing is to grow your money. Financial markets today look like they’ve conspired to prevent this from happening. What’s an ordinary investor saving for retirement supposed to do? Let’s check in with four experts who have seen plenty of past market corrections between them.
All agreed the current market downturn is plain nasty, and that returns for the next while will be modest at best. “We could be looking at a 12-month period where nothing works except cash,” said financial planner Rona Birenbaum of Caring For Clients. “It’s entirely possible that this will be one of those washout years.”
Fred Vettese, an actuary and author of the book Retirement Income For Life, has been rethinking his projection that a balanced portfolio with 60 per cent invested in stocks and 40 per cent in bonds will earn average annual 5 per cent returns in the years ahead. “Even that’s going to be a challenge going forward,” he said from his winter residence in Palm Springs, Calif.
Everyone agreed that stocks remain a key part of retirement investing, even in trying times such as these. Clay Gillespie, managing director of RGF Integrated Wealth Management in Vancouver, said he might actually increase a client’s exposure to stocks when markets are falling to take advantage of a market correction.
Someone with 60 per cent of a portfolio in stocks and 40 per cent in bonds might shift to a 70-30 mix to exploit the plunge in stock prices. “If you’re 20 years from retirement, you want a correction to happen two or three times before you retire,” Mr. Gillespie said.
Susan Latremoille, who ended a 35-year career as an investment adviser at last year, likes the tried-and-true strategy of dollar-cost averaging for putting money into the market now. Make small, repeated investments to protect yourself from making a big commitment before more market declines.
What to buy? Dividend growth stocks, suggested Ms. Latremoille, who now helps people with the non-financial side of retirement through her company, SuccessDNA. If companies have a history of passing on ever more of their profits to shareholders as dividends every year, it’s likely they have the stability to withstand any economic weakness ahead.
“My advice hasn’t changed in the 35 years I was an adviser – you need to have money in the stock market to take advantage of long-term compounding,” Ms. Latremoille said.
Just as shocking as the drop by the stock markets has been the decline in interest rates in the bond market. The yield on a Government of Canada five-year bond was in the 0.5-per-cent range on Tuesday, close to the record low.
Mr. Vettese says low interest rates will be with us indefinitely. The economic uncertainty caused by the spread of the new coronavirus has pushed rates to their recent lows. But there’s a bigger, longer-term trend driving rates down – an aging population that will slow economic growth and keep inflation at low levels.
The implication here for retirement is that you will not be able to reach your goals without holding stocks or equity funds. “People are going to have to have at least 50 per cent in stocks if they want a decent return,” Mr. Vettese said.
Whatever amount of stock market exposure you have, mind your global diversification. Weighed down by its heavy exposure to energy stocks, the S&P/TSX Composite Index earlier this week was roughly where it was in spring 2008. That’s without dividends included, so the total return (share price changes plus dividends) would be significantly better. But there’s no getting around the fact that our Canadian benchmark index has been left in the dust by the S&P 500.
Ms. Birenbaum said it makes sense to divide the stock side of your portfolio into equal investments in Canadian, U.S. and international markets outside North America. If you can’t bring yourself to start buying stocks or equity funds right now, she urges you to think back to the great buying opportunity presented by the 2008-09 market decline. “This time will be the same,” she said.
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