An article in a recent business magazine referred to 2019 as “The Year of Fear” in investment markets. Certainly, we saw the return of volatility to investment markets in 2018. At the end of October, we witnessed two weeks of mostly declining equity markets, possibly bringing back unpleasant memories of 2008.
As much as we would love to be able to predict where financial markets will go in the future, that is something – regrettably – that no financial advisor can do. What we can do, however, is help you control the things you can control.
Is your current mix of equity and fixed income assets one you can live with? If your advisor says to you “in the last 12 months your portfolio has fallen "x%”, how low can “x” be where you won’t panic and stay invested? Besides reviewing your risk tolerance, one of the most important roles of an advisor is to put that risk into context. For example, this context could be historical, showing how – even after the most severe corrections – markets will eventually recover to growth.
Another aspect of asset allocation is the mix of assets within a particular category. For example, two people could both have 60% exposure to equities in their portfolio, but if one has 100% of that exposure in Canadian equity funds while the other has a third each in Canadian, American, and International funds, there are differing risk profiles. In a similar manner, a fixed income portfolio consisting of a mix of bond funds and GICs presents a different risk picture than one just with bond funds.
If the equity fund exposure in your portfolio can remain the same for 7 years or more, it may be unlikely that changes need to be made, since 7 years is a long time in any environment. What if you know that in the next 5 years you will need to withdraw money from your portfolio, or are thinking it may be a possibility? Identifying the extent of those potential withdrawals and ensuring that money is placed at low risk gives you the peace of mind that knowing you have already secured those funds. This strategy will be particularly important in “payout” portfolios such as a Retirement Income Fund (RIF).
Suppose you are considering making an investment today where the highest probability is that you will not personally require the money and thus the issue becomes one of estate planning. Segregated funds – the investment funds offered through life insurance companies – provide a death benefit guarantee for the policy beneficiary that in many cases will be the greater of the market value and 100% of the money invested (adjusted for withdrawals). This provides the peace of mind of knowing that you have downside protection for beneficiaries.
Even the best portfolio organization will not prevent some queasy feelings during market corrections. The pain relief can come through working with your Scrivens advisor to ensure your portfolio is sturdy enough to sail through choppier seas.