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Opportunity of a lifetime

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INVESTING STRATEGY

Opportunity of a lifetime

It's not surprising that investors are clinging to GICs and low-return bonds this RRSP season. But experts say it's time they conquer their fears and dive into equities

Rob Carrick

Rob Carrick

Financial professionals don't typically offer highly enthusiastic, totally unambiguous advice to investors, so pay close attention to what a top guy at the fund firm Fidelity Investments Canada had to say recently.

"We are of the view that current market conditions represent the buying opportunity of a lifetime for investors in Canadian equities," Bob Haber, Fidelity's chief investment officer, said in a recent investment outlook for 2009.

Got that, RRSP investors?

Though we're coming off a historically bad year for the stock market, it's time to consider an aggressive approach.

"We believe that 2009 is a time to invest in risk," Mr. Haber continued. "While we acknowledge that this may be extremely hard for investors to do at this point, the hard thing to do is the right thing to do."

The current RRSP season is shaping up as one dominated by conservative investing themes. As early as last fall, banks and investment dealers were reporting big increases in sales of guaranteed investment certificates.

In the mutual fund world, only the safe stuff is selling. In 2008, gross sales of bond mutual funds rose 6.5 per cent while money market funds rose 32.2 per cent. Sales of equity funds fell 28 per cent.

Bond funds were certainly a refuge in 2008, provided they held all or mostly government bonds.

The average Canadian bond fund made almost 3 per cent, and some of the larger funds in the category made 4 per cent to 6 per cent. Money market funds averaged 2 per cent last year.

Here's the problem with putting more of your money into bonds funds and GICs: returns are low, and getting lower.

Take money market funds, for example. The current yield, an annualized return based on current holdings, is less than 1 per cent for some of the bigger names in the category.

Bond funds continue to make money because many investors still prefer the security of a government-backed bond to stocks. That won't last, however. An improving economic outlook will drive money out of bonds, which means trouble for bond funds.

"If bond funds return anything in 2009, it's going to be negligible," said Frank Hracs, chief economist with Toronto-based Credo Consulting Inc. "Now is the time for equity funds, generally. Over the next couple of years, equity funds are pretty well the only category that is going to make money."

Balanced funds - a mix of stocks and bonds - are perennial favourites of investors, but Mr. Hracs isn't high on them right now. He sees the bond component being a drag on the stock side of the portfolio.

Fidelity's Mr. Haber believes the Canadian stock market is as oversold as it has ever been, and that it ranks among the world's most oversold markets. "Over the coming months, investors with the fortitude to move out of cash and government bonds face the buying opportunity of a generation."

Everyone into the stock market, then? Not quite.

According to Andrew Pyle, a wealth adviser with Scotia McLeod, your move into stocks should be governed by your asset allocation plan, or personalized mix of stocks and bonds.

Of course, the fact that stocks plunged last year while bonds did okay means your portfolio is probably light on stocks. The solution: a rebalancing in which you sell some of your bond holdings and move the money into equity funds or stocks.

Before you do this, Mr. Pyle suggests you reconsider your tolerance for the kind of risk that is unavoidable when investing in stocks. "Ask yourself, am I as tolerant of risk as I was 12 months ago?" If the answer is no, then you'll want to limit the weighting that stocks have in your portfolio.

Tempted to give up on stocks altogether? It's worth noting that even after last year's huge market losses, the 20-year compound average annual return of the S&P/TSX composite index to Dec. 31 was 7.5 per cent, with dividends included.

If you do buy equity funds or stocks this RRSP season, do it with the understanding that a sustained market rebound may not occur in 2009. Remember what happened to the momentum the stock markets seemed to gain as the past year ended? It evaporated earlier this month.

Stocks will mount a sustained rally eventually, though, and people who buy sooner rather than later will get the full benefit. Those who wait to buy into a rising market won't make out as well.

That's an outcome Mr. Hracs foresaw in his 2009 outlook: "People are going to want to stay conservative and let the first 50 per cent of the equity market rebound slip away. Then, they'll start inching in."

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