by Salman Ahmed
It's a scary world out there. There are angry protests happening across the U.S., a growing wave of populism around the world, and terrorism remains rampant.
As investors, it's tough to predict how global events will impact markets in the short run. For example, after 9/11 stocks in the U.S. fell sharply; whereas last year, pundits proclaimed inevitable market catastrophe following the Brexit and Trump victories, and that didn't happen.
In the long run, however, investment returns are driven by fundamentals (namely a company’s ability to grow profits) and valuation, or how much you're willing to pay today to receive future cash flows (dividends, earnings or income). The more you're willing to pay, the less your future returns are likely to be. It’s these two factors – fundamentals and valuation – that should guide decisions rather than geopolitical events.
Of course, focusing on the long term is easier said than done. It’s hard to ignore negative headlines and understandably, many clients have asked us what to do in the current environment. Here is some of our advice for these testing times.
RRSP and TFSA contributions: Based on the opportunities available today, we’re advising our clients with medium to long-term time horizons to stick to their target mix of stocks and bonds. If your portfolio holds more stocks than your plan calls for, use those RRSP and TFSA contributions to rebalance.
Buying real estate: if you plan on purchasing real estate in the next couple of years, we suggest estimating what you’ll need at closing and moving that amount into short-term instruments like our Savings Fund or a high interest savings account. This advice isn’t just applicable to real estate investors – we recommend holding cash-like investments anytime you need money within two years.
Sitting on cash: We’ve had a few investors ask us what to do with the cash they’ve been waiting to invest. We suggest having an emergency buffer for unexpected expenses, but the remainder should be invested per your long-term plan.
It's tempting to wait for an ideal time to get it invested. Unfortunately, it’s impossible to know when that moment will arrive ahead of time. Instead of waiting, consider investing a portion each month over the course of a year.
Retirees’ spending reserve: Early in 2016, we recommended you use your spending reserve to invest in stocks. Stock prices rebounded through the year and we no longer see the same opportunities today. We’re recommending retirees use their gains from last year to top up their reserve if they have one.
This advice is general. Every investor has unique circumstances that we consider when providing tailored advice. So, give us a shout if you’re thinking about what to do with your portfolio. We’re here to help.