War, inflation and your investments

Very clever who could have predicted that in 2022, we would be afflicted by a war in Europe, a global pandemic and a level of inflation unequaled in three decades in Canada. But here we are, facing a powerful trio that is not sparing investors.

When you watch the news, it’s normal to have a little tightness in your heart.

In his 35-year career, the financial planner and president of De Champlain Financial Group, Sylvain De Champlain, had never seen such a situation. “Multi-millionaires are as worried as young kids with $5,000 in a TFSA! »

The decline in the stock markets since January must, however, be put into context. It occurs after three years of marked increases, recalls the expert, whose “first reflex” is to say that “we were due”.

But that does not mean that the stock market yoyo is easy to live with. So, we close our eyes, we no longer look at our yields and we wait for the storm to pass without moving?

No, answers Sylvain De Champlain. Now is a good time to take some action. Like investing immediately in your RRSP (stocks, mutual funds, exchange-traded funds) and your TFSA, rather than waiting until next January. When the price of his favorite wine drops, it’s not the time to run away from the SAQ, but to buy cases of bottles, he illustrates. Such investments will make it possible to take advantage of the rebound.

It’s also an opportunity to have a good conversation with your financial advisor and rebalance your portfolio.

Bonds that impoverish

Anyone who owns a high percentage of bonds has to make tough choices, as they yield virtually nothing in the context of inflation hitting 5.7% in February. “It’s the worst asset class as we speak,” summarizes Richard Guay, former president of the Caisse de depot and professor of finance at ESG UQAM.

“When there is inflation of more than 3%, it is a guarantee that we will get poorer. So, for me, this is the thing to avoid. What is misleading with bonds is that it gives the illusion of capital preservation”, also slice François Rochon, portfolio manager and founder of Giverny Capital.

However, many retirees use bonds precisely to preserve their capital and for the sake of security.

Unfortunately, you have to have “a lucid vision of life” and accept that there is no longer anything “stable and guaranteed”, continues François Rochon.

“I think these people should go into equities and accept more volatility. I have no other solutions. When you are retired and you have no other sources of income than your capital, the number one objective is to stay ahead of inflation so as not to see your purchasing power reduce each year. . We can decide to live in impoverishment, but it is not constructive. »

Obviously, this requires additional planning and adds stress, but it is the price to pay for not becoming poorer, believes the one who describes himself as a “fan” actions.

One of the solutions for a retiree who is uncomfortable with market volatility is to turn to bank preferred shares, suggests Richard Guay, since they yield 4% in dividends. “It’s much more stable than the stock market and the probability of the dividend being cut is almost zero. In addition, the dividend is taxed less than the interest paid by the bonds.

The effect of wars

The tragic images that come to us from Ukraine tear our hearts out. And it would be more than indelicate to think that it could benefit us financially in one way or another. But it turns out that historically, wars have often had a positive effect on stock markets.

Banque Nationale Investissements (BNI) has analyzed the behavior of the S&P 500 during 15 military conflicts over the past 80 years. His observation: the fall in the indices is more severe before the event (it is rarely a total surprise) than after. Moreover, the markets retreated in January, before the Russian invasion.

The month preceding the war, the average return is -2.1%, while the following 3 months give rise most of the time to gains (average of +3.7%). And the average maximum pullback was around 12%, which is not far from the reality this year.

“Of course, these historical trends do not guarantee anything for the future, especially since Russia’s next moves seem to depend on the will of one man. However, they demonstrate the anticipatory nature of the stock markets which have certainly discounted a lot of concerns since the beginning of the year,” writes BNI.

In short, the experts expect a good year 2022 on the markets. Inflation could favor certain types of businesses that benefit from higher prices (supermarkets, stores), while insurance companies generally benefit from interest rate increases. The end of the pandemic should also stimulate consumption (travel, outings, clothing) of households who have saved as never for two years.

One thing is certain, the current situation allows us to verify what our real risk tolerance is, not the theoretical one that we have entered on the papers provided by our financial institution.