Comfort in discomfort is one of the big principles behind the sport I’ve been doing for almost five years now. If, at the start, this practice seemed so demanding to me that I thought I would never succeed, I see with hindsight that it works; I approach each workout with openness. I now know my strength and my ability to have fun while being destabilized. This attitude serves me not only in the gym, but in many facets of life. It will certainly serve me in the next few years if, or rather when, we have to go through a bear market and a more difficult economic situation. Of course, with the current market situation, it is easier to find this uncomfortable comfort during the accumulation period than during the disbursement period.
Here is what a reader wrote to me this week: “Aged 71 and 75, my spouse and I are in a period of disbursement. We have a portfolio of around $800,000 each, more or less 50% in stocks. I inherited $240,000 recently and am hesitant to invest that amount. Watching the markets since January, I thought I would invest $10,000 each month, on the same date as our RRIF withdrawals [Fonds enregistré de revenu de retraite]. Since I mostly want to protect capital, anticipating that there won’t be so many years to remake us, I feel more conservative. I thought about using guaranteed products linked to the market, but I feel insecure about choosing. »
The right profile
The current context offers many investors an opportunity to review their risk tolerance. Remember that it is impossible not to feel certain disadvantages when the markets are less good. The right level is one that you can tolerate for a long time, because unlike market volatility, a potential bear market can last for several months. Unlike the rapid rise in the bear market after March 2020, the next episode may well be longer.
Seasoned investors will remember the 17 long months of market decline after the 2008 crisis and may be calmer. New investors will have their risk tolerance tested for their first experience. So, before you dwell on the products and their comparison, I believe that you should focus your reflection on your portfolio and your financial planning, in order to determine if they are based on the right profile.
In the case of our reader, her portfolio, already made up of 50% fixed income, would increase with the use of guaranteed products for the amount of her inheritance to 70%, ie a much more conservative than moderate profile.
Products guaranteed, or not
With rising rates, marketing from financial institutions leads us to believe that a 5-year guaranteed investment certificate (GIC) at a rate of return of 3% is an incredible offer right now! Given the inflation currently observed, this type of product protects capital, but in return, it greatly reduces the purchasing power of investors. As for the market-linked guaranteed products mentioned by our reader in her message, it is indeed a GIC, with the same capital protection, but with a slightly higher return potential over time. This type of market GIC often has a longer term, with a maximum return annually.
Don’t forget that the institution presents a cumulative rate of return which may seem impressive, but which is not annual! For all guaranteed products currently, my advice would be to pay attention to the duration, knowing that the rates are rising, and this, also considering your personal disbursement needs. Who says “guaranteed” says “immobilized”. The idea of investing in the markets on a regular basis, as our reader envisages it, seems to me a good idea: if she chooses the stock markets, she protects herself against volatility and if she chooses guaranteed products, these could offer him higher rates in the coming months.
Our reader should also ask her wealth manager for a precise disbursement plan, which takes into account her couple’s taxation, their annual needs, the cost of living, all based on tests of strength based on performance. If the plan operates with very low projected rates of return, then choosing guaranteed products could provide them peace of mind even if long-term return may be sacrificed.
Annuity, an avenue to explore
As our reader does not have a defined benefit pension plan, she might consider purchasing a life annuity that can diversify and replace a portion of the fixed income in her portfolio. Since state plans already consist of guaranteed indexed annuities, it is not a question of transforming the entire portfolio with this solution—which also has disadvantages—but of remaining open to it, if the tolerance profile at risk has become more conservative and your age more advanced.
Finally, a good universal strategy that allows you to tame the current discomfort is also to remain proactive with the elements that you can control: your budgetary choices, the value of the advice you get and the maintenance of savings.