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Are you on the right track with your investments? Thumbnail

Are you on the right track with your investments?

When the market is going up, investors frequently develop unrealistic expectations about what kind of long-term yields they can expect from their investments. Before the stock market crash in 2008, investors often saw returns of 15 to 20 percent, and they thought those returns would go on forever.

Once the market hit a downturn, those returns were no longer realistic. Even though we’re now more than ten years after that crash, most fund managers don’t believe that investors will be able to get double-digit returns any time soon.

With lower returns generally being expected, you may be asking yourself if you still want to be exposed to a high level of risk. If you’re concerned about volatility in the stock market and are wondering if you’re on the right track with your investments, we can help. Below are four questions to ask yourself about your investment strategy.

What are your goals?

If you don’t know your target, it’s going to be challenging to hit it. Therefore it’s critical to understand what your investment goals are. Are you focussing on short-term goals like buying a house or saving for your children’s education? Or are you thinking long-term and saving for retirement? 

Like most investors, you’re probably saving for short-term and long-term goals at the same time.  Knowing why you are investing, and your accumulation time frame can help determine how much risk is acceptable.

What is your risk tolerance?

Your age will significantly influence your risk tolerance:

  • If you’re in your 20’s to mid-’30s, you can tolerate greater risk as you have more time to make up for any losses.
  • If you’re in your middle years and trying to save while raising and educating your children, steady growth with less risk is a good approach.
  • If you’re retired or approaching retirement, you’re likely risk averse as you want to turn your capital into income to replace your earnings.

What kind of income will you need during retirement?

A consistent income is key to having a comfortable retirement. You want to make sure you have enough income to cover your fixed expenses as well as fun stuff like travel and dining out. A GIC can help guarantee your capital, but it only guarantees the interest it pays up to its maturity date. 

Suppose you would like to be sure of your income. In that case, you may be interested in investing in a Guaranteed Minimum Withdrawal Benefit product (also known as variable annuities) from an insurance company.

Are your investments tax-efficient?

The tax efficiency of your investments depends on their type:

  •  Registered investments, such as RRSPs, offer tax efficiency for contributions but not for withdrawals. TFSAs are very tax efficient as all the growth is tax-free, and withdrawals are also tax-free.
  • For non-registered investments, tax efficiency depends on the type of investment. Capital gains are taxed at a low rate, guaranteed income such as interest at a high rate, and dividends at a medium rate.

A properly allocated portfolio can help ensure you are not unduly affected by equity volatility, fluctuating interest rates, or high rates of income tax.

Knowing the answer to these four questions can help you determine if you’re on the right track. Developing an investment strategy can be a daunting and confusing task but having an investment discussion and consultation with a professional can help give you guidance and answers!