Are investors disconnected from today’s investment choices? Almost half of Canadian investors that were polled said that the main objective for their investments was growth, because they were investing for the long-term and didn’t need the money right away. Over 30% of these said that they were looking for annual returns of 6% or higher. But how well are their portfolios positioned to deliver this?
Here’s the Catch 22; over 40% of these same survey respondents indicated they’re mostly invested in GICs, savings accounts or other guaranteed investments and plan to stay in these products for the foreseeable future. In addition, over one-third of them in these low-yielding, guaranteed investments said they were expecting annual returns of 4% or more in order to meet their long term investment goals!
Interest rates would have to increase significantly from current levels in order for these investors to achieve these kind of returns. Considering that the Bank of Canada has indicated rates will remain at ultra-low levels for the foreseeable future, given our economy’s slowing growth and declining inflation, it’s probably safe to say that annual interest rates won’t hit 6% any time soon. Given this, the only real option going forward is to increase the level of risk in their portfolios, in order to generate their desired returns. Which begs the question – why aren’t they moving their savings into investments options that have greater potential to meet their expected long-term savings goals?
It all boils down to fear and lack of understanding. Over two-thirds of those polled commented they would not consider higher-returning investments due to fear of losing their capital. Many others simply were not aware of their options, especially younger investors aged 25 to 34. In addition, a small number of investors felt that other options are either too complex or expensive.
This is when the advice and counsel of an experienced investment professional is beneficial. It’s important that an investment advisor to be able to identify and empathize with what investors are experiencing. Someone who can openly understand that their feelings and fears are real, and also to understand whatever their reactions are. Memories of recent market losses do contribute to investors’ fears. But a good advisor should also be able to temper their fear and greed in reaction to the markets. Investors often need reassurance before more suitable investments can be recommended to achieve their long term goals.
Looking at the market events in 1929, 1987, 2000 and 2008, it’s clear that capital markets continue to rebound and tick along, and is an indication that the financial markets work. Often it takes only a few months for markets to rebound from downturns. Many are now hitting all-time highs, and still provide tremendous opportunities to create real wealth.
It’s time to Take on More Risk: I believe that despite today’s market volatility, equities are positioned to be the strongest-performing asset class going forward, but probably with more modest returns from equities and limited upside for bond yields. Should you buy a dividend ETF? Check out this older article from Robb Engen. I think that today’s central banks’ stimulative programs will continue to support capital markets and will help generate sustainable earnings growth going forward.
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