Dec. 22, 2020
With vaccinations underway and the economic recovery continuing in fits and starts, we can anticipate an improving financial situation in 2021.
You’ll probably hear pundits say they are “cautiously optimistic.” But it’s important to position your finances so you can both benefit reasonably well from an optimistic scenario, yet also cope successfully in the event of a more pessimistic outcome.
Here are four financial principles to help you deal with both the good and the bad in the year ahead and beyond.
Have “emergency” money ready.
The benefits of having a readily accessible “emergency fund” that can tide you over for at least three to six months was readily demonstrated in the pandemic. (Note retirees can usually benefit by having quite a bit more.) People typically set this aside in a high-interest savings account. But the part of your investment portfolio held in relatively safe and liquid form (including money held in short-term government bond funds or money market funds, or government-insured GICs if they are “cashable”) can also do double-duty and serve this purpose. In either case, the “emergency” money should be held in a non-registered account or possibly a TFSA, but not an RRSP (mainly because RRSP withdrawals for an emergency could give you a big tax liability at the wrong time).
Of course, getting a rate of interest that is materially greater than zero is a real challenge. These days the big banks typically pay a negligible amount (one-tenth or one-twentieth of one per cent interest per year) on their so-called high-interest savings accounts. However, you can still get around 1.5 per cent by putting your money in a high-interest savings account with a handful of small financial institutions, as shown on the highinterestsavings.ca website. (If you go with a small institution, be sure to stay within deposit-insurance limits.)
Make sure you get the investment advice you need.
Your investment adviser had their chance to shine during the pandemic’s wild market swings this past year. A key part of doing their job well was to be a calming presence that helped you “stay the course” during these wild swings while, ideally, helping you rebalance when the market reached extremes. If you received consistently sound advice and responsive service that helped you through this stressful time, then your adviser has gone a long way toward providing value for the fees they charge.
Find the right balance for your portfolio.
This is the time of year that many stock market experts come out with their market forecasts for 2021. While they sound confident and knowledgeable, one-year forecasts are notoriously unreliable. No one really knows what’s going to happen over a short period like a year. So you have to be prepared for a year where markets could be very good, or very bad, or anything in between.
That means you need to find the right balance in your portfolio. Stocks can be expected to drive higher expected returns over long periods of time. While interest rates are at ultra-low levels, you generally still need relatively safe forms of fixed income to provide protection in the short-term in case stock markets crap out again. While you deserve credit if you stuck with your guns when markets crashed in March, understand that particular bear market was incredibly intense but unusually short-lived. The next big downturn — whenever it happens — could be far more prolonged.
Finding the right portfolio balance for you is highly personal based on your financial objectives, risk tolerance, time horizon and other personal circumstances. The classic asset split of 60 per cent equity and 40 per cent fixed income is a common benchmark used by many investors investing for the long-term. Some experts advocate that investors should go with more equity than they would have in the past because of low interest rates, but that determination should depend on an individual assessment. Younger investors with a high risk tolerance who are in a position to ride out a long downturn in markets might well consider a far higher equity allocation. On the other hand, my view is that retired investors with long-term horizons typically suit portfolios ranging from 60 per cent equity/40 per cent fixed income to 50 per cent/50 per cent. In the past, retired investors often went with much higher fixed-income allocations, but ultra-low interest rates make that far less viable now.
Refocus for the longer term.
If you have managed to get through the pandemic so far in good financial shape with a secure job, now might be a good time to start to refocus on longer-term financial goals like retirement.
This can be an intimidating topic. We tend to be bombarded with a lot of conflicting information in the media about how much we need to save for retirement and what we need to do to get there.
Often we’re told we need a million dollars or more to retire, but it’s normal for middle-class couples and singles to live comfortable retirements on half that amount or less. That doesn’t mean you’ll necessarily have the money to do everything you wish for on such lesser amounts, but you should still be able to afford an active and fulfilling lifestyle. The key is being flexible and creative about finding the best retirement lifestyle for you that fits within whatever means that you have.
We’re also often told that to reach our financial goals, we need to accumulate savings at a specific rate starting early in our careers. For example, one financial website I recently visited says at age 40 you should have three times your annual salary in savings to be financially “on track” for retirement. In fact, there is no single right “track” to retirement. It is true that you’re in good shape if you’ve managed to hit that milestone. But, say, if you’re a couple who has just started a family and bought a home in an expensive real estate market like Toronto, then that kind of savings goal at age 40 isn’t usually realistic. The good news is that in most cases you should still have plenty of opportunity to achieve a great retirement by making a focused effort to save later as mortgage and child-rearing costs diminish. You still have to put in the diligent effort to save the necessary amount at some point — there’s no getting around that — but there is plenty of flexibility about when and how you do it.