Investing in a low rate, low growth, high volatility environment
Investing is a global thing. Macro events happening around the world like a slowdown (China), uncertainty (Eurozone), or debt crisis recovery (Greece and US), has an effect on our market at home in many ways. The global economy is an array of moving parts and pieces in different countries and currencies, each one setting the various markets off in one way or another; all at the same time.
Bruce Cooper CFA, Chief Investment Officer, TD Asset Management Forward Perspectives, Risks from Abroad notes, “…investors may be faced with a more uncomfortable journey then they’ve been used to. In this environment, we remain cautious – but not negative.”
An era of low rate, low growth, high volatility investing can be challenging. Some equites will struggle for a low rate of return in this current environment, all the while dealing with unusually high volatility to do so.
What about fixed income investments like bonds and Guaranteed Investment Certificates (GIC’s)? The challenge here is preservation of purchasing power. It’s hard to attain inflation-beating returns in a conservative fixed income portfolio in a low interest rate environment.
If interest rates are expected to rise and they come up too fast, it puts families with high debt load at risk of financial crisis, so rate rises need to be managed carefully by the central bank for many reasons. Investors likely won’t see high GIC interest rates back, like the one’s their parents saw in their golden years, for some time. While GIC’s seem like safe investments, the risk of having a full GIC portfolio is not staying ahead of inflation.
So what is an investor to do?
This environment is suited to a balanced strategy and means using some different strategies than you may have used in the past.
As an investor, you want to protect your capital, but fixed income may not keep pace with inflation; and you want to grow your money but you aren’t sure about the risk involved to do so. There is no one single asset class that will do all this for you so you will need to get a mix of them to balance out your volatility and inflationary risks.
Where equities are concerned, the natural question is, does the risk of volatility outweigh the potential for return? How much risk am I willing to take as an investor and for what potential trade off?
Although there is volatility in the equities, it isn’t really a matter of whether you should have equities or not. It’s more a question of how much equity exposure you can handle and choosing your equities carefully. Equities will still be needed if you want to drive growth, and to do so, you will need to embrace the volatility that goes along with it.
You may wish to consider including a dividend strategy in your portfolio. If you invest in high quality blue chip dividend paying companies, they typically pay out their dividends even when the market goes down. The earnings of these regular dividends are usually higher than GIC payouts.
Strategic income investing is a strategy for your fixed income investments. It will allow you to have a variety of bonds (government, corporate, investment grade, high-yield, emerging market) and income producing vehicles (floating-rate loans) that behave differently in various market conditions. Holding a mix of types and durations of bonds can help reduce your portfolio’s risk of rising interest rates and keep you earning income.
“We continue to encourage investors to take a long-term approach and believe that they can be well served by a diversified portfolio of high quality investments, including investment-grade fixed income (for stability and some income) and global equities (for currency diversification), and a focus on companies that pay consistent dividends and can increase over time” says Cooper.
There is good argument for professional management in a risk managed strategy.
Link to column as it appeared in Elgin This Month, February 2016 edition (page 26)
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When you open your investment statement
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Stephanie Farrow, B.A., CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc. About our Farrow Financial Team.
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