Photo credit: Sean Kilpatrick For The Globe and Mail
'Don't just clean house and set fire to it'
Keep your hands off the panic button in rough times, financial advisers say. If retirement looms and you must sell, do it in chunks
By Jeff Buckstein
Danny Souaid has watched his investments take quite a hit during the recent market turmoil, but he isn't fazed.
"Patience is the key in most long-term investments, so I say to myself, 'Wait it out. It's going to be fine,'" says the 48-year old Ottawa pharmacist/owner, who hopes to retire within the next 10 years. "I'm not panicky at all."
"Don't panic" is what investment advisers are telling clients who plan to retire in five to 10 years but are wringing their hands over free-falling stock markets worldwide.
Panic never helps - ever - including under the extraordinary circumstances we now face, stresses Adrian Mastracci, a portfolio manager with KCM Wealth Management Inc. in Vancouver.
Panic selling could result in a self-fulfilling prophecy, says Norm MacDonald, a financial adviser with Edward Jones & Co. in Ottawa. "If you sell out of something when it's low you may be crystallizing that loss, or guaranteeing you're not going to get that money back," he warns.
Ride it out
Mr. MacDonald advises investors not to make rash decisions, especially if they don't need their money right away. Experts suggest that a well diversified, consistently applied portfolio, both inside and outside of a registered retirement savings plan, should allow investors - even those whose retirement date is within a decade - to ride out turbulent market swings.
The contents of that portfolio should take into account the expected rates of return; the investor's current age and expected retirement date; and risk tolerance for volatility.
Furthermore, this type of long-term planning should have take place well in advance of your expected retirement date. Edward Jones, for example, starts shifting clients to "a more bulletproof portfolio" as they near retirement, incorporating good-quality government or corporate bonds or bond funds that are less risky and less subject to price fluctuations, Mr. MacDonald says.
This can provide comfort in times of a market crisis, because investors who possess such quality instruments can usually expect to see those investments bounce back over the longer term, he adds. Moreover, better growth opportunities can result from "buying low and letting things ride."
Recover in five years?
Long-term investors with at least a portion of their portfolio in equities should be holding steady if they are within five to 10 years of retirement, says James Kraemer, a certified financial planner with TFI Financial Services Ltd., a Winnipeg-based independent consulting firm that provides financial and estate planning.
"Within a five-year period, I expect these markets would recover. Changing your philosophy midstream and selling in a down market is not a good thing to do," Mr. Kraemer says. "I always point out to my clients that every bear market has been followed by a bull market."
Investors with less than five years until retirement might want to consider changing the ratio of their portfolio so it is less heavily weighted in growth equities, but that would be part of their normal investment strategy, independent of market performance, says Mr. Kraemer.
Investment planning should also take into account sources of retirement income. For example, potential retirees who are relying entirely on an RRSP might have to be "a little bit more conservative" with their savings plan than someone who has an RRSP but will draw about 70 per cent of his or her retirement income from a fixed-payment registered pension plan, Mr. Kraemer suggests.
Some financial advisers are not averse to minor tweaking in times of crisis but emphasize it must be done on a calculated basis, in conjunction with your overall long-term strategy.
"It's never too late to either do a little bit of selling, or going on the sidelines if you can't stand the heat," Mr. Mastracci says. "People sometimes tend to make a lot of big decisions all at once - like turf out everything [old and] bring in the new. If you've done your homework, you don't need a wholesale change," he adds. "Don't just clean house and set fire to it."
Mr. Mastracci recommends an incremental strategy for investors who decide to sell. If, for example, a stock purchased at $100 declines to $80 and that 20-per-cent drop represents a predetermined sale trigger point, he suggests selling only a portion - say one-quarter to one-half - of the holding, with further sales scheduled if the market continues to drop.
Mr. Mastracci also recommends incorporating this technique into a capital gains strategy. If equities or mutual funds appreciate to, say, $150 from $100, and the same 20-per-cent threshold is applied, the new sales trigger would be at 80 per cent of $150, or $120, at which time a portion of the instrument would be sold. This locks in some of the profit, he says.
Buy in chunks, too
The same incremental strategy should be applied to the purchase of equities for an investment portfolio, Mr. Mastracci says. It might be wise to buy shares every couple of months or so over the course of six months to a year.
That way you can take advantage of dollar-cost averaging, buying when markets and prices are at both highs and lows. "I think you would get a reasonably good average price on whatever you're buying," he says.
It is also important, experts say - particularly when markets are in flux - for people to focus on the things they can control in their portfolio, rather than trying to predict where markets are heading over the short term.
All a financial adviser can do is to "prepare the client," Mr. MacDonald emphasizes, "so they're able to weather that storm."
Special to The Globe and Mail