Canadians are renowned for being conservative with their finances. A recent bank survey found that over 50% were investing in low risk, guaranteed options for their RRSPs. Ironically, this may be putting future retirement dreams at risk because the real risk in sticking with “low risk” investments is that the returns man not keep up to inflation. Gone are the days when one could earn a decent retirement income from Canada Savings Bonds and GICs, which is part of the reason why Canadians are adverse to risking retirement savings.
Part of the problem might be the understanding of risk which has an almost exclusively negative connotation. It’s important to understand the different types of risk, and how they can affect your individual situation. There could be significant risk sitting on the sidelines earning 1% return while missing out on a major market rally.
While the some investors may be trying to avoid risk, many don’t know what kind of investment returns they need to achieve their retirement goals. It’s hardly surprising that two thirds of 18 to 24 year olds don’t know what level of savings they need to retire in comfort. But it’s especially alarming that one third of people over 55 don’t know either. We baby boomers are running out of time, especially the 30% who are approaching retirement with significant personal debt.
It’s important that investors focus on the returns earned in their portfolios. Equities are being driven down with the flight of capital to fixed income options, but as Europe’s debt woes and the U.S. recovery get behind us, investors will flock back to equities for their greater return potential. The down market cycle will reverse, but as investors sit on the sidelines and wait to see a 20% return, they will miss out on that 20% recovery.
The consensus among industry professionals is for North American equities to earn high single digit returns in 2012, while emerging markets earn low double digit returns. On the fixed income side, bond yields should be 2% or 3%. It’s suggested that investors rebalance their fixed income portfolios to 40 to 60% in investment grade corporate bonds, as they are as safe as government debt but offer a higher yield potential. High interest savings account will earn 1% to 1.25%, which isn’t great, but better than most savings accounts.
44% of the people surveyed who planned to make an RRSP contribution this year were not planning to seek professional investment advice. Considering that they also expected that their 2012 rate of return to be less than in past years, it appears there is a definite need for people to seek some advice about how returns affect their investment plans.
The need for diversification hasn’t changed, but recommendations can change from time to time. Seek out a licensed financial professional who will ask the hard questions and help design an achievable investment plan that suits your time line and risk tolerance. Someone who will provide you with unbiased recommendations suited to you and your family’s financial needs.
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