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As John nears retirement, he is becoming concerned about covering his future living costs with income from only interest-bearing investments. Along with many other investors globally who have poured trillions of dollars into government bonds over the past decade, John wants to feel safe and have his money guaranteed. But the price of safety in a low interest rate world is higher than you may realize.
For example, the best five-year GIC rate in Canada is currently about 5.0%. The after-tax return is between 3.0% - 4.0%. But if we include current inflation figures the net return is almost zero.
Legendary investor Warren Buffet once observed that many fixed income investors continually "miss the party" as equity investments have continued to outperform fixed income investments over the long term. "I don't know what I would do if I were in that position", Mr. Buffett said at Berkshire Hathaway's annual meeting. "I feel sorry for people that have clung exclusively to fixed-dollar investments."
The real dilemma for John is finding the correct balanced between short term (volatility) risks and the long term (inflation) risks. And which is worse - watching an investment balance bounce around, or a guaranteed investment losing a lot of purchasing power over time?
Purchasing power loss is one of those things in life that is hardly noticeable on a day-to-day basis. For example, John remembers his teen years when he could buy three loaves of bread for a few dollars. Today, he can't even buy two loaves for five bucks.
When included in a properly balanced portfolio, equity investments may help maintain and possibly increase purchasing power over time - both for retirees and for people still building their savings. In today's financial environment the dividend returns on many of Canada's largest companies (equities) are higher than the interest earned from 10-Year Government Bonds. This is also true for many Canadian equity mutual funds.*
The key issue is to find a way to properly balance the short term risk of market ups and downs with the long term risk of loss of purchasing power.
There are many different options available today for achieving a properly balanced portfolio during retirement. Contact our office to discuss your personal retirement portfolio strategy.
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This publication and website are intended for Ontario residents only and the information contained is subject to change without notice. Mutual Funds are offered and regulated through Global Maxfin Investments Inc. (GMII). Insurance products (including Segregated Funds) and Income Tax Planning is provided under the name of Ausim Mobeen. GMII does not supervise these activities and will not be accountable, responsible or liable for such activities. This publication contains opinions of the writer and may not reflect opinions of GMII. The information contained herein was obtained from sources believed to reliable, but no representation, or warranty, express or implied, is made by the writer or GMII or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional advisors for advice based on your specific circumstances.
