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In the last bull market many investors started to develop unhealthy expectations as to the long term yields their investments would provide. Many had come to accept returns as high as 15% to 20% per annum as the base return their fund and portfolio managers would earn for them. Of course, these expectations came crashing back to earth in 2008 as the bull was chased away by a very large bear. Today, many fund managers are of the opinion that double digit returns are going to be very difficult to achieve with any consistency over the long term. Perhaps it is time for us to lower our expectations.

If we have to accept lower rates of return do we want to be exposed to the same previous level of risk? Currently, there is tremendous volatility in the equity markets and, as a result, many of us are now wondering whether or not we are on the right track with our investment strategies. Given recent developments in the world markets over the past few years, there are other questions we should ask ourselves in order to make this determination.

1. What are my goals?

If we don’t know what the target is, chances are it is going to be difficult to hit. It is important to have an understanding of what we are investing for. Are we accumulating for shorter term goals, such as the purchase of a house, the education of our children? Or is the major objective to save for retirement? Perhaps it is a combination of these goals. If we know why we are investing and what the time frame for accumulation is we can determine how much risk is acceptable.

2. What is my risk tolerance?

This probably will depend on where you are in the life cycle. Investors who are in their 20’s to mid 30’s usually tolerate greater risk as they have sufficient time to make up any losses. In the middle years, especially when trying to save while raising and educating our children, steady growth with less risk is often the approach. At retirement, investors usually become extremely risk adverse as this is the time that capital is turned into income to replace earnings.

3. What are my retirement needs?

Converting capital into a consistent income might be the objective for the retirement years. For example, if we know what our fixed expenses will be, providing a guaranteed investment income that covers these expenses will help us to enjoy a comfortable retirement. While GIC’s might guarantee the capital, it only guarantees the interest rate up to the maturity date. The new Guaranteed Minimum Withdrawal Benefit plans (GMWB) guarantee the cash flow for life while still providing the opportunity to enjoy investment growth.

In the years prior to retirement we pay particular attention to ensure that our investments receive favorable tax treatment. We should not have to abandon that concern in retirement to have safety of our capital?

4. Are my investments tax efficient?

With a registered plan (RSPs, IPP’s etc.) all investments are treated the same – tax deductible going in (highly tax efficient), totally taxable as income coming out (highly inefficient). Looking at non-registered investments, usually the higher the risk the more tax efficient the investment. Pure capital gains are taxed at the lowest rate, guaranteed income (such as a GIC) at the highest rate. Dividends are taxed somewhere in the middle. Ideally, it would be extremely beneficial to have the safety of a GIC paying a reasonable rate of return that is guaranteed for life, while at the same time taxed at the lowest possible rate – exactly what the GMWB provides.

There are many types of financial vehicles and most of them are appropriate in the right circumstances. Employing effective portfolio allocation can ensure that you are not unduly affected by equity volatility, fluctuating interest rates, or high rates of income tax.

Knowing the answer to these four questions should go a long way in determining whether or not you are on the right track. Having a full understanding of the options available to you is important.

There is nothing as certain as uncertainty. We live in very turbulent times with respect to the investment climate and developing an investment strategy during this time can be a very daunting and confusing task. Given that there are now investment vehicles that deal specifically with many of the issues facing investors today, discussion and consultation has never been more important.



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