by Scott Ronalds
I won’t soon forget the images of driving down Robson Street in April. Every major retailer was boarded up, pedestrians were sparse and there was an eerie silence blanketing the normally bustling shopping hub. I told my wife that it felt like the Apocalypse.
As I stare out my home office window, I realize that I was early in my declaration. This feels more like the Apocalypse. I can barely make out the trees across the street, let alone the north shore mountains, thanks to the heavy blanket of smoke that’s made Vancouver’s air quality the worst in the world. The whole west coast is burning hot. And so is the second wave of the virus. And the election race. And tech sector. And housing market. 2020 seems to get weirder and more challenging by the day.
For investors, the concerns are plentiful and for those who are retired (or soon to be), the challenges are amplified. They have a shorter investing runway in which to deal with the ultra-low interest rates and highly volatile stock moves.
While there are no easy solutions, I’ll try to shed some light on the concerns we’ve heard from investors born pre-1960 and provide some possible options below.
“At this point, I just want to preserve what I have.”
It’s perfectly understandable. You’ve worked hard all your life and don’t want to see your nest egg shrink due to the vagaries of a once-in-a-century pandemic and its associated economic and market fallout.
Going ultra-conservative with your investments (i.e. cash or GICs), however, poses a new set of challenges. You’ll be lucky to eke out a return of 1-2%, which means a loss of your purchasing power (due to inflation) and a potential downgrade to your quality of life. You also run the risk of outliving your savings.
Permanently moving your portfolio to preservation mode may be a viable strategy if you’ve accumulated a substantial amount of wealth to fund your standard of living for your retirement years, but for the majority of Canadians, it’s not an option (our How Long Will my Money Last? calculator can help you determine this). Rather, if you’re convinced you need to get more conservative, you should explore dialing down your stock exposure, not eliminating it, or setting aside a portion of your portfolio in cash to act as a spending reserve. Our Investor Specialists can help you with this.
It’s important to remember that you still need growth from your portfolio in retirement. With today’s historically low interest rates, the only viable way of achieving this is to maintain some exposure to risk assets (stocks, real estate, alternative investments, etc.). It’s all about finding the right balance of stocks, bonds, and cash.
Bond yields are laughable
“Bond yields are pathetic. How am I going to generate a paycheque from my portfolio?”
The last I checked, a 10-year Government of Canada bond was yielding 0.55% (and you need to scour the credit unions to find a GIC close to 2%). It’s a huge problem for savers and retirees. And while bond returns have been good this year because of falling interest rates, their prospects are muted. Over the next five years, we expect the asset class to return around 1-2% per year.
Conventional wisdom says retirees should hold a heavy weighting in bonds because of their safety and stable income generation. An old rule of thumb says you should hold your age in bonds (if you’re 70, your portfolio should be 70% bonds, 30% stocks). This theory is being questioned by many experts as yields sink further.
Fixed income securities will always hold a place in a diversified portfolio, but that place is being reconsidered. Given bonds’ dreary return outlook, retirees need to shift their focus towards total return (i.e. interest income, dividends, and capital gains) rather than just yield.
The ‘cash sleeve’ strategy is becoming more common in this regard, whereby investors set aside a reserve of 12-24 months of spending requirements to serve as the source of their paycheque. The rest of the portfolio can then be invested with an eye towards diversified, longer-term growth. This means having a higher-than-traditional stock weighting in retirement, which of course comes with more volatility. Unfortunately, this is the world we live in.
So there are two solutions to low bond yields: hold less bonds and more stocks; or own a high proportion of fixed income and tighten the belt on spending and expenses. Neither is ideal. The reality, though, is that those with bond-heavy portfolios need to adjust their return expectations. And old rules of thumb need to be thrown out the window.
I’ll wait until next year. Or the year after
“This market is crazy. I’d rather just sit on the sidelines until things calm down.”
We hear you. This is a weird market and a tough economy. But trying to time it is even tougher. Just look back to late March. Nobody would have predicted that stocks were poised for such a swift and remarkable run. Nobody.
Getting out of the market can seem like a reasonable decision, especially when the world is clouded in uncertainty. But what follows is the hardest decision in investing — when to get back in. We’ve studied this topic extensively and recently wrote a report (fittingly titled The Hardest Decision in Investing) for those struggling with the conundrum.
The bottom line is that timing the market doesn’t work. It will toy with your emotions and wreak havoc on your psyche. There will be no green light or ‘all clear’ signal to get back in. Many investors who have gotten out in times of turmoil have never fully gotten back in and have foregone significant returns. Moreover, getting out in retirement (with the intention of getting back in at some point) is especially dangerous as your investing horizon is shorter.
Again, if you’re convinced of the need to move your portfolio to cash, consider a measured adjustment rather than an all-out shift.
Missed the boat
“I missed the boat on the rally in tech companies; there can’t be much upside in stocks from here.”
The runup in tech stocks has been dizzying, not to mention confusing for investors that pay attention to valuation. Many portfolios and funds (including ours) have not seen the same appreciation as those stuffed with Tesla, Netflix, Amazon, Peloton and Apple. It’s led some investors to think they’ve missed the boat and a second downturn is imminent.
Another selloff would be particularly harrowing for retired investors given their shrinking time horizon and lifestyle impact of a suddenly smaller retirement nest egg. We’ve fielded a few questions on whether clients should be dialing down their equity exposure for this reason.
I’ll turn to our Founders Fund for the answer. Despite the market’s impressive rally, we continue to hold an above-normal weighting in stocks. Our positioning reflects the potential we see in our holdings, which haven’t rebounded to the same extent as the market (which has been driven by a small cohort of tech stocks). Many businesses outside Silicon Valley have compelling long-term prospects and solid upside, and are trading at reasonable valuations.
In our view, retired investors need to maintain adequate exposure to stocks despite the challenging climate we are in. This means different things to different people, but those in the early phase of retirement, with an investment horizon of 2-3 decades still, should think about having at least half their portfolio in equities.
2020 has been a tough test for investors. And the exam isn’t over yet. Those in or nearing retirement are justifiably nervous, as the luxury of time to ride out storms is shrinking. But the fundamental principles of investing haven’t been turned on their head and nor should your plan. If there’s one takeaway from 2020 so far, it’s to be especially thoughtful about your asset mix. And wear a mask.
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