Dale Jackson

Personal Finance Columnist, Payback Time

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In the words of Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful.”

As COVID-19 lingers with no resolution in sight, greed has driven equity markets back to pre-pandemic levels. With too few reasons to feel greedy and too many reasons to be afraid, it might be time to take the Oracle of Omaha’s advice and shift to defense.

That means taking money off the table by selling stocks or equity funds that have advanced beyond reason, or trimming part of them to lower overall portfolio risk.

Before you hit the sell button, it’s a good idea to know where that money will go. Right now the options don’t look good, which partly explains the rally. Here are a few ideas.

Keep it in cash

Having a lot of cash feels good; like a big comfy pillow to rest your head on at night. But cash doesn’t grow. In fact, it loses value even in the currently low inflation environment. That might not jive with investors who have factored in a growth rate to meet retirement goals. If that growth rate has already been met you’ve earned that comfy pillow; especially if you need to draw on it soon for living expenses.

Short-term cash can also come in handy when everyone else gets on the fear bandwagon and stocks are cheaper when markets eventually dip or correct. 

Re-deploy your profits

If your portfolio is diversified, not everything is peaking on the greed metre. If the thesis for buying your under-performers in the first place is still intact, consider topping them up with the cash from selling your over-performers. It’s a great way to rebalance your portfolio and spread out risk.

The big Canada banks are a good storehouse for equity because they are likely to grow in value and pay out generous and consistent dividends.  

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Top up your fixed-income

Sure, bonds and guaranteed investment certificates (GICs) will be paying out paltry yields for a long, long time. But that’s not what fixed-income is all about. For investors saving for retirement, the primary objective of fixed-income is to balance, or cushion, risk from the equity portion of a diversified portfolio.

As a general rule, the percentage weighting of fixed-income in a portfolio should be equal to the age of the investor. That rule has been tossed aside because yields are so low, but keep in mind fixed income could be the best performing asset class if another wave of the pandemic hits and markets tank again. A big fixed-income weighting could keep your entire portfolio above water.   

Get insurance through an annuity

The ultimate defensive strategy involves putting some (or even all) of your savings in an annuity — an insurance product that guarantees fixed returns along with the principal.

Annuities are like defined-benefit pension plans. Holders receive a regular allowance for the rest of their lives no matter what the markets do. They come in a wide variety and can be tailored to an individual’s risk tolerance, return expectations and life expectancy.

When, how much, and what kinds of annuities are up to the individual. They can provide a specific payment amount for a specific period of time. If the holder dies before the end of the period, a beneficiary could receive the remainder of the payments for that time.

Payouts are determined by complicated formulas based on the amount invested and actuarial calculations. 

As always, safety has a price. Annuities are tied to interest rates, which means returns are low. A tax efficient annuity will generally pay an annual yield in the lower single digits.

Of course, greed has no bounds and the rally could continue indefinitely. Those with long time horizons might be better off not doing anything, catching whatever upside they can, and weathering out an eventual downturn.