As the glow of a stellar 2021 for equity markets fades, retirement investors are faced with the stark reality that the world remains fraught with risk.
The COVID-19 pandemic is far from resolved, and the promise of interest rate hikes by central banks to cool inflation brings another layer of uncertainty as access to cheap cash dwindles.
It’s easy to get lulled into a false sense that markets will continue to steam ahead but logic tells us corporate earnings can not continue to grow at their current pace - and it’s corporate earnings that drive equity markets.
If your retirement plan targets average rates of return over the long term, outsized gains from 2021 could provide a boost to lock in gains and lower overall portfolio risk.
Risk management is a complicated task and a qualified investment adviser could help you find your comfort zone for 2022 without sacrificing returns too much.
Here are some areas to explore:
TRIM THE WINNERS AND REBALANCE
Diversification is, and will always be, the best way to hedge against equity market risk while keeping your portfolio exposed to opportunities wherever they might be.
For most investors, portfolio growth is essential to their retirement plans; so cashing in 2021 gains and sitting on the profits is not an option. You need to be in the market.
Last year was an anomaly in the sense that all the major sectors included in the benchmark S&P 500 posted gains. It’s no different than any other year because some performed better than others.
Holdings in top performing sectors including energy, real estate, technology, and financials could now be occupying outsized weightings in a portfolio; making it more vulnerable to sector corrections.
The darlings of 2021 are where you should be looking to sell or trim. Energy’s meteoric rise, for example, brings a great opportunity to lessen your reliance on Canadian oil and gas stocks and Canadian equities in general. With the Canadian dollar holding its ground near 80 cents to the U.S. dollar, it also brings an opportunity to convert the Canadian dollars from the sale to U.S. dollars and increase your foreign holdings.
Reinvesting in the sectors that underperformed can provide better growth opportunities and also restore balance to your portfolio. The S&P 500’s 2021 laggards include industrials, consumer staples, and utilities.
Emerging markets are getting bashed by economic restrictions resulting from the pandemic. The promise of freer trade in the future and a relatively strong Canadian dollar can make topping up emerging market funds worthwhile.
FIXED INCOME AND THE AGING INVESTOR
Why would anyone want to put their money in fixed income products that yield less than one per cent - especially with inflation rising?
It’s a tough question that has more to do with personal security than portfolio growth. Most investment advisers recommend a portion of any retirement portfolio be allocated toward fixed income, and that portion should rise as you get closer to retirement.
Remember the global financial meltdown of 2008 when equity markets lost half of their value? Even the lowest yielding government bond in a portfolio helped stem equity market losses. Retirees could also draw day-to-day living expenses without having to sell battered stocks before they could recover.
There was a time when fixed income yields could match portfolio growth expectations, and that time could come again as central banks boost interest rates.
How much of a portfolio should be dedicated to fixed income is up to an individual’s risk tolerance and overall portfolio return expectations, but experts recommend short maturities to take advantage of rising yields as often as possible.
How high - or even if - fixed income yields will rise is anybody’s guess, but having a pillow full of near-cash should help anyone sleep at night.