“At 67, I am finally finalizing the sale of my business. I currently have several millions in my bank account to finance my retirement. Over the past year, my financial planner has presented me with retirement scenarios including different investment strategies based on projected returns on my investments. But as this is the fruit of a life’s work, I must admit that I am hesitant these days to invest this significant capital in the stock markets. From what I understand of the economic news, the markets are uncertain, and so is the economy. Shouldn’t I rather wait and invest later since the interest rate on the high interest account and the GICs offered by my financial institution are quite comforting at the moment? How do you know if it’s the right time to invest? » —Martin
Is it all a question of “timing”?
We would all like to be able to invest exactly in the trough of the stock markets and sell only when they rise sharply. Unfortunately for our reader, it is impossible to accurately predict whether markets will decline further this fall or in the coming months, as some of the most pessimistic forecasters claim. Waiting for the right moment to act is more complex — if not impossible — as an investor, but also in other spheres of life.
In Martin’s case, it is true that investing immediately and then seeing your investments decline in the short term represents a more than uncomfortable situation. However, knowing that following a stock market trough, the various indices usually show a marked rise, it would be an even greater shame not to take advantage of it. Since 1950, when the S&P 500 lost more than 25% – which was the case in August 2022 – the recovery has averaged nearly 37% over three years (source: Fidelity).
It is certain that the media attention on the question of a possible recession accentuates the feeling of discomfort of certain investors. What history tells us is that stock markets bottom before the declines in GDP, falling wages and shrinking corporate profits that characterize periods of recession. Once again, the data is easier to interpret a posteriori, but according to other forecasters, they demonstrate that the recession is already setting in, the trough could already be behind us and could have been that of last August .
So, how to find your way? Is the 2022 trough really the trough of this cycle or is another correction still to be expected in the event that the current recession is very severe? On this question, I advise the gentleman to let the economists speculate and, in a very pragmatic way, continue his investments by purchasing over a long period of time so as not to play Russian roulette with his retirement.
To comfort themselves, our reader should remember that uncomfortable markets represent opportunities for returns in the long term. The only way to benefit is to continue investing new capital and not be guided by emotion for the portion already invested. An amount of $10,000 fully invested between 1986 and 2022 in the S&P 500/TSX Composite Index would have had a value of more than 177,000 at the end of the period (source: Refinitiv). But by missing the best 50 days, this value would have been reduced to just under 18,000…
Diversify risk
Without postponing his retirement investment plan, Martin must absolutely respect his risk tolerance and focus on diversifying his portfolio. Furthermore, while investing in stock markets must take into account several specific risks, it is common to forget that the risk of inflation must also be considered. Yes, GICs offer attractive rates for short-term needs, but they are products that are highly correlated to inflation. Unlike the long-term returns of a portfolio invested in stock markets, the specific risk of remaining forever in cash and guaranteed products results in a reduction in purchasing power.
This does not mean that our reader should absolutely use stock market investing only. The purchase of a prescribed life annuity, for example, for part of one’s capital offers a “concrete” guarantee for investors who are less risk tolerant and who want to protect themselves against longevity risk. Real estate investment, more technical and currently more difficult to convert into short-term liquid income, could be considered by an investor with a more “growth” profile or comfortable with an investment that requires more management time in general. .
Reminder of the importance of the integrated approach
The annuity example cited above brings us back to the importance of integrated planning. So, looking solely at GIC performance without considering overall taxation is only part of the job. According to our reader’s other taxable income, interest income, although guaranteed, is fully taxable. The prescribed life annuity allows the taxation to be spread evenly each year rather than paying a very high amount of interest in the first years of disbursement, when the capital is greater. Tax optimization of the investment portfolio and a personalized disbursement plan are as crucial as the portfolio’s rate of return, as long as the projected rates of return are realistic in relation to risk tolerance.
In conclusion, adopt an appropriate investment strategy — distinguishing long-term growth needs from short- and medium-term income and liquidity needs. It is not a question of not taking advantage of advantageous interest rates for a certain proportion of assets, but of doing so in addition to other types of investments.