Dear Nancy,
With the stock market the way it is right now and may become with the U.S. debt crisis, would it be wise to take our money out of stocks and put it in GIC's for a year or two?
It's a low return, yes, but at least you can't lose your money if it's in a GIC. What would your advice be? Thank you, Colleen
Dear Colleen,
There are a number of factors that someone giving you advice on this would need to look at. First off, at what stage of your life are you at? Are you retired? Are you in your prime earning years? Are you just starting to save? Secondly, what is your tolerance to risk like? Are you really afraid of losing money and taking any risks? Will you lose sleep if your portfolio declines by 10 per cent? I consider this sleep factor a really good indication of your risk tolerance.
"Everything in moderation" is an applicable saying in this case. Diversification has been proven to reduce risk, but asset mix is just as important. If you sell all your equity holdings and buy fixed income be it bonds, stripped coupons, GICs or bond funds you still need to diversify the maturity dates. If you are buying individual holdings the best strategy is to "ladder" the maturities. That means to have something maturing each year.
I recently looked up the performance results as of July 31, 2011 and found out that for the comparison of five- and 10-year returns, the saying of "stocks outperform bonds" no longer holds true. It was true for the 10-year return up until July 1, 2010. Mind you, the difference was only marginal that the Canadian stock index performed better than the bond index.
But bonds now have had a better return than stocks for the five-year return - a result of the recent economic crisis.
With all that being said, making a dramatic portfolio change that you are suggesting requires either an objective look, either by yourself or an independent. You should also consider having a financial plan done up for you. You can have this done by fee-for-service financial planners, or many full-service brokerages have wealth management specialists that can help you.
If you have more than enough assets to satisfy your future needs, then switching everything into GICs for capital preservation may not be a bad route to explore.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment advisor with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com or visit her web site at nancywoods.com
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