Dale Jackson

Personal Finance Columnist, Payback Time

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It has become abundantly clear that the near-term future of the United States is unclear. Even when the vote counting is complete, runoff elections and the reluctance of the incumbent president to accept the results will likely carry that uncertainty well into the New Year. 

And then there’s the worsening global pandemic.

There’s not much the average investor saving for retirement can do as the world’s largest economy sorts out its domestic problems. Stock market reaction has been equally perplexing; initially rallying amid the chaos on hopes a divided government could be good for corporate profits.

The market ebbs and flows that come out of that chaos could bring short-term opportunities for traders, but the stakes are much higher for long-term investors who need to hold on to what they have, and generate steady returns for a decent retirement.

Canadians are more exposed than ever to the whims of the broader markets as workplace pensions shift to defined contribution pensions from the safety of defined benefit pensions, where payouts are guaranteed. For those without generous workplace pensions, investments in registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are the only alternatives. Being out of the market is not an option for most of us.    

What really matters for anyone investing for retirement is how well their portfolios are positioned before market-moving events even happen. The best way to hedge against future downturns in the market – while maintaining exposure to new opportunities – is through diversification.

A diversified portfolio includes a mix of fixed income for capital preservation, stocks (equity) for growth, and cash to take advantage of those opportunities. The appropriate mix depends on the investor’s tolerance for risk – and how soon they need to access funds in retirement. Older investors will generally hold a larger fixed-income weighting to ensure they won’t have to sell stocks in a down market when they need the cash. It’s easy to scoff at rock-bottom fixed income yields, but it is money in the bank.

A diversified equity portfolio includes stakes in every major sector in all geographic regions in the world. Major sectors include financials, technology, health care, resources, industrials and consumer businesses. Geographic regions generally include the United States, Europe, China and emerging markets in Asia and Latin America. A portion of Canadian equities should be included in a Canadian portfolio to eliminate currency risk, but it’s important to know they are heavily weighted toward the resource and financial sectors. 

Individual sectors and geographic regions go up and down over the short term, but over longer terms, the broader equity markets – like the benchmark S&P 500 Index – have always gone up regardless of governments and government policy. The general assumption behind a diversified equity portfolio that mimics the broader equity markets is that they will continue to go up.    

Identifying and investing in the best companies is difficult for the average investor. A good advisor can help identify the companies with the ability to grow profits better than their competitors, or help choose mutual funds with good track records for finding them.

There are fees when investing through advisors and mutual funds, which ultimately means less money invested. If you buy into the assumption that the broader markets will continue to go up, and you want to keep fees low, you can invest in the indices more directly through exchange-traded funds. The are ETFs that track just about every conceivable index, including the S&P 500 and its sub-indexes. Fees are normally based on a fraction of a per cent invested each year, which means returns are a fraction of a per cent less than the underlying index.

No one knows how circumstances will play out in the United States, but uncertainty is always certain. Hedging your portfolio through diversification is certainly the best way to get a good night’s sleep.

Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.