Mar 17, 2023
Is your retirement portfolio ready for what's to come?
By Dale Jackson
Picking assets that will stand the test of time for Ontario pensioners: OMERS CIO
Personal Finance Columnist, Payback Time
The market selloff sparked by the near-collapse of Silicon Valley Bank and Credit Suisse was the latest wreck that has slashed the value of the benchmarks TSX Composite Index by 13 per cent and the S&P 500 Index by nearly 20 per cent in less than a year.
In just the past month, the infamous Fear & Greed Index - a compilation of seven stock market behaviour indicators that measures extreme greed as 100 and extreme fear as zero - has jammed into reverse from 71 to 17.
Fear is no basis to make rational investment decisions and that is what good investment advisors are telling their clients. Like any market turmoil, however, there are teachable moments that could morph into opportunity.
IT ALL COMES DOWN TO INTEREST RATES
Legendary value investor Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” The tide in this case is an unprecedented hike in interest rates of about five per cent in the past year. Over-leveraged investors including Silicon Valley Bank, Credit Suisse and many Canadian real estate speculators, are being exposed.
The tide is still going out as central banks wind down their inflation-fighting rate hikes but the question driving up the fear gauge is whether it can be contained by the measures governments and central banks are taking. Another way of putting it is “contagion.”
There will be other shocks as the global economy shifts to the new reality of higher (not unprecedented) interest rates. Experts are predicting a wide range of scenarios with RBC calling for a mild recession later this year.
WHERE YOUR PORTFOLIO STANDS
You can open the other eye now. If your overall portfolio is properly diversified, losses should be less than the broader benchmarks. A good portfolio should always be diversified across sector and geographic lines to temper losses confined to one sector and maintain exposure to stronger performers.
As examples, rising interest rates have dragged the S&P 500 financial sector down by 9 per cent so far this year compared with the consumer discretionary sector, which is up by nearly the same amount over the same period. That could shift as banks bottom out and consumer debt levels become more of a concern.
Similarly, the energy sector has tanked by 12.5 per cent since the start of 2023 compared with technology, which is up by nearly the same amount. It was the opposite in 2022 when technology tanked and energy rallied.
If your portfolio losses exceed broader market losses, you might have a diversification problem that needs to be addressed over time.
WIDE RANGING OPPORTUNITY
When news of a major bank collapse surfaces, multi-billion dollar pension managers tend to sell first and ask questions later. If it seems to be contained to a few banks, as it is so far, they buy more at the lower prices they helped create.
Shares in big Canadian banks, staples in most Canadian retirement portfolios, took a hit after the Silicon Valley Bank news broke, but are showing signs of recovery as markets learn their exposure is small.
Risks for lenders prevail in the higher rate environment but there’s no reason to suspect the big Canadian banks will pull back on their consistent habit of paying out dividends.
Well managed, profitable, companies will pay out dividends regardless of short-term fluctuations in their share prices. They could be a bargain now.
There is also opportunity in higher interest rates. Yields on investment grade government and corporate bonds can top five per cent; offering a lucrative portfolio cushion most retirement investors have not had for decades.