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Lessons We Can Learn From the Canada Pension Plan

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It’s expected that the CPP will grow to $1 trillion before the middle of this century. Just 17 years ago, in the first year of the plan’s Investment Board, they had just $18 million in the bank. All that money was invested in Canadian government bonds.

Today, the CPP is a global giant, closing in on $300 billion and projected to be worth $500 billion by the year 2030. Two-thirds of its assets are now held outside Canada and invested globally to find the best return opportunities. For example, royalties from intellectual property, dividends from public and private investments and its biggest single public stock holding worth $2.3 billion in IMS Holdings, an American company that provides IT services to the global healthcare industry. Its number two holding is in Apple!

Based on this success and continuing Canadians contributions, there will be enough money to pay pension obligations at current levels for the next 75 years, an enviable position considering many national pension plans are in trouble. But the CPP wants to go further, wanting even better returns, so they are changing the mix of investments to add more stocks and private companies and fewer government and corporate bonds. This may eventually mean a bigger pension, or lower CPP premiums for us.

But for the rest of us there are three things to consider:

The most important is your risk tolerance: A 27 year-old should be able to take a lot more risk than a 91-year-old. CPP works on a 75 year time horizon and their investment assumptions are based on that.

Diversify: Spread the risk between different investment classes. Considering that Canada accounts for less that 3% of global market investment opportunities, you can see that global exposure is important. CPP’s more aggressive stance on investing is working well for them!

The last thing is patience: If you can afford to be patient, be patient! If you’re changing your portfolio frequently it’s likely you are incurring a lot of costs. Having a long term investment plan and sticking to it is very important.

Thoughts on the future economic outlook: Globally there are a number of things happening that should increase investor confidence going forward. A positive development is the gradual convergence of emerging market economies with developed ones. Plus today’s low interest rates may persist for some time, but over the longer term will move more towards the 3.5% to 3.75% range. Growth is coming back, but possibly not quite what has been experienced in previous decades.

CPPs default investment mix reference was 65 per cent equities and 35 per cent bonds, which is the default of an average Canadian investor, but based on CPP’s 75 year time line will move to over 80% equities and 20% bonds. What it means is that they are working towards a diversified and safe portfolio, but with a higher risk allowance than in the past.

Here’s some simple take-a-ways from this: Staying stuck in fixed income won’t get you anywhere if you’re looking for growth. Balance your individual risk tolerance and your investment time line for the money. Diversify in the types of investments held, and look globally for increased growth. And lastly be patient! Many Canadians lose out trying to chase returns, when buy and hold would have been the prudent thing to do!

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