If you are worried about investing in a rocky market, you can always play it safe with a guaranteed investment certificate, treasury bill or money market fund (Getty Images/eclipse_images)
Overpriced assets, rock-bottom interest rates, volatile markets: deciding how to invest in an uncertain environment is never easy.
But if you are going to build a solid foundation for your retirement, staying on track is important. And, as it turns out, many of the rules that apply in more stable times also apply in a volatile environment.
Here are some tips to keep in mind.
1) DECIDE TO SAVE
Before choosing where to invest, you have to decide to actually put money aside. “That is step No. 1,” says CPA Jamie Golombek, managing director, tax and estate planning, private wealth management, at CIBC.
2) MAKE THE RRSP VS. TFSA DECISION—OR CHOOSE BOTH
Before deciding on individual products, you need to know whether you are going to use a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). These registered vehicles could be called the “containers” for your investments. As Golombek points out, RRSPs are meant for retirement, while TFSAs are general purpose (i.e., the money can be used for a down payment on a home, education, buying a new car, fixing a leaky roof and so on).
Generally speaking, if you are in a higher tax bracket now than when you will be withdrawing the money, you may choose an RRSP; but if you expect to be in a higher tax bracket later, you may opt for a TFSA. However, if at all possible, you should try to maximize both, says Golombek.
3) WAIT IT OUT
Once you have decided to save and chosen your preferred vehicle(s), you can consider how to invest your money. But, as Golombek explains, there is no need to box yourself in; if you are worried about volatility or overpriced investments, you can opt for a guaranteed investment certificate, treasury bill or money market fund. “Of course, the rates of interest are close to zero for the most part right now, but the money is secure, or even guaranteed: you have Canada Deposit Insurance on some products.”
4) CHART YOUR COURSE
If you’d like to consider a wider range of products, your choice will depend to a large extent on your goals, risk tolerance and time horizon, says Golombek. “Your risk can vary from zero to 100 per cent,” he says. “The choice is a very personal matter.”
For his part, Golombek advises sitting down with a knowledgeable and objective financial adviser who can explain your options. “Obviously, there is a vast array of products and services available across the financial industry,” he says.
Golombek adds that getting a financial plan is ideal. “In that case, the adviser will look at your income, expenses, goals, when you want retire, what level of risk you can tolerate and so on, and work backward to determine what rate of return you need to achieve. From there, they will make recommendations on products.”
5) INVEST AS SOON AS YOU CAN
Some experts recommend using dollar cost averaging to help smooth out the impact of volatility on an investment purchase. With this technique,you divide the total amount to be invested into a series of purchases that are made at regular intervals, regardless of the price.
However, Golombek does not think this technique is a good idea. “If you have the money, you should invest it right away,” he says. “If you believe that markets ultimately go up over the long term, you are better off investing the money from day one.”
6) SAVE SYSTEMATICALLY
With systematic saving, you might not have a large sum of money to invest immediately; but you can arrange to have a certain sum withdrawn on a regular basis from your account or paycheque and transferred into an investment account. “As with dollar cost averaging, you will be buying assets at different times, so the prices should average out,” says Golombek. “But, in this case, you’re only choosing this system because you don’t have the cash on hand. It’s a great way to save.”
7) GO FOR SYSTEMATIC ASSET REBALANCING
Every year, you should ensure that your investment mix (i.e., cash, bonds, mutual funds, fixed income, stocks or other investments) still corresponds to your targets. As Golombek explains, you might have decided to allocate 60 per cent of your portfolio to fixed income and 40 per cent to stocks. So, you should compare your actual allocations with your targets to see how well they align. “If the alignment is off, you should rebalance,” he says. (He adds that with an RRSP and TFSA there is no tax cost to rebalance, although there may be other fees.)
8) BACK TO BASICS
In a volatile environment, as in any other environment, it’s important to go back to basics—and the basics start with making the decision to save. “That will set you on a solid course for securing your future, no matter what twists and turns you might encounter along the way,” says Golombek.
STAY UP TO DATE ON FINANCE AND TAX
CPA Canada has a wealth of resources to help you stay on track with your finances. And be sure to check out our financial literacy resources, including our tax blog, as well as our federal government COVID-19 tax updates.