After a significant market downturn like the one we’ve recently experienced, one of the first and perhaps most fundamental impulses for investors is to want to recover their losses as quickly as possible.
That might be a great idea, but how you go about doing it is what really matters.
“The most natural reaction is to want to make up what you’ve lost,” said Lee Anne Davies, head of retirement strategies at RBC.
“The idea of catching up shouldn’t mean taking on more risk, however. Your risk profile should stay the same; make sure you clarify your goals and stick to the basics.”
If market volatility has derailed your portfolio and retirement plan, get it back on track using the STEW principle — Save more, Take less, Earn more and Wait, suggests Patricia Lovett-Reid, senior vice-president of TD Waterhouse.
“A balanced asset mix of blue chip dividend-paying stocks and investment-grade bonds is a good starting point for most investors,” she said.
Between June 2008, when the market was at its peak, and the trough in March 2009, an equities-only portfolio would have declined by just over 50 per cent, compared to a balanced portfolio, which would have depreciated only 22 per cent over the same period, Lovett-Reid said.
Even accounting for the sharp recovery in equities since March 2009, an equities-only portfolio would still have been down 23 per cent between June 2008 and the end of October 2009, compared to only eight per cent for a balanced portfolio.
“When it comes to investing, a boring, balanced portfolio can be a beautiful thing,” said Lovett-Reid. “Depending on your requirement for income or capital appreciation, you could start with a balanced portfolio and tilt the asset mix to a higher fixed-income or equities allocation. Financial market fluctuations will lead to changes to your asset mix over time. Rebalance your portfolio periodically to bring it back in line with your desired asset allocation.”
Norman Raschkowan, chief investment officer at Mackenzie Financial, said investors shouldn’t expect the typical post-recession economic rebound of six to seven per cent.
“This recession has the making of a much more modest recovery of two to three per cent,” said Raschkowan. “Why? A steady increase in U.S. residential mortgage delinquencies along with consumers’ desire to rebuild their balance sheet and companies showing restraint in rebuilding inventories to avoid high costs of financing capital requirements.”
As investor confidence mounts, more money will be directed toward equities and corporate bonds, and emerging markets will grow by as much as 29 per cent in 2010, Raschkowan predicts.
“Earnings forecasts for North America and Europe are excessively optimistic, but the leading Asian and Latin American economies did not experience the same credit bubble that OECD nations did,” Raschkowan said. “As a result, consumers in these markets are positioned to drive a strong economic rebound.”
Other things you can do to get your portfolio to catch up to where it was before the recession include contributing to a tax-free savings account, taking a loan to top up your RRSP (as long as you can repay it quickly), using all tax benefits possible — such as spousal income splitting — reducing expenses, paying off debt and developing a habit of regular saving and investing through a pre-authorized plan.
Davies said people can even bring their real estate holdings into their financial picture and consider selling or downsizing and investing some of the proceeds.
“Generally, people don’t downsize easily, but they should see real estate as part of their portfolio,” she said.
If you’re still stewing about your portfolio after doing everything you can to catch up, there’s one other thing you can do.
“Live your life and enjoy living,” Davies said. “It’s not just about money.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.