Pattie Lovett-Reid: Amid market volatility, is it time for investors to move to the sidelines?
I was working in the financial services arena during the 2008 market meltdown. The uncertainty was real. If Lehman Brothers was allowed to collapse, who would be next? It felt like the survival of the fittest of financial institutions with many recognizing a bailout from the government wasn't a given, and a strong balance sheet was a top priority.
Questions I'm being asked today are not all that different than those being asked a decade ago. Should I stay invested or move to the sidelines?
It’s a dilemma: you hate uncertainty, feel uncomfortable with risk, yet you want growth in your portfolio. What’s an investor to do? Well that depends on who that investor is.
For many first-time investors, this is the first serious market meltdown they’ve experienced. For seasoned investors on the cusp of retirement, many are worried their retirement dreams are being compromised. It’s understandable there is a tendency to want to move to cash and wait it out – and maybe never venture back into the markets again.
This is called capitulation: where the last retail investor says they are throwing in the towel and moving to the sidelines.
However, there is still risk associated with that strategy. Over time, inflation may creep back and erode the value and purchasing power of your portfolio. After taxes and inflation, you could actually be losing money.
Age may also bring associated risks.
Although younger workers have the benefit of time, it is near impossible to accumulate sufficient wealth from salary alone. On the other hand, retirees who fear outliving their retirement income need some exposure to markets in order to cover additional expenses.
Let's break it down further:
If you are younger investor, having a balanced portfolio comprised of stocks and bonds will provide a cushion during periods of volatility. However, the real key to success for younger investors is frequent rebalancing to manage risk, while not overlooking the biggest advantage of all: their ability to keep working. I keep saying to our adult children that their future earning potential, in other words, human capital, is their most important asset through all this turmoil. How well they develop their human capital will dictate their financial capital down the road if they choose to live below their means and invest wisely for the long term.
If you are edging closer to retirement, you need to be razor-sharp on what you are spending your money on. You might like to work longer, but that decision may not be your choice. And if you err on the side of caution and sit in cash or near-cash equivalents, it’s going to be very difficult to maintain your purchasing power over time. As ironic as it sounds, the savvy pre-retiree just might start to pick up some good quality investments that have been beaten down with prices too good to ignore.
Finally, if you are in retirement, you’ve naturally been rattled by the market gyrations. Now is the time to re-evaluate your spending targets and consider purchasing an annuity to cover off your living expenses. An annuity is a lump sum payment to an insurance company with guaranteed payments for life. Not all of your money should be put in the annuity - just a portion - as you can and should be exposed to the markets. It provides a little peace of mind that your expenses will be covered.
For weeks, we have been chatting about how much the markets are up or down. But how the market moves as a whole is just a number. A more important number to track is the movement of your portfolio and its performance. Your portfolio is unlikely 100 per cent in the market, regardless of your age, wealth, or appetite for risk.
Former RBC CEO Gord Nixon told BNN Bloomberg's Jon Erlichman "all you can do is be patient."
“Cash and liquidity is an important thing whether you are an individual or whether you are an organization,” the chair of BNN Bloomberg's parent company BCE Inc. said Monday. “Maintaining the highest level of liquidity as possible is extremely important as we manage through this.”
“There will at some point be a bottoming and a recovery – the issue is when.”
It’s tough. But know that it’s okay to tweak your plan, because nothing is carved in stone.