The March stock market decline was especially hard on seniors.
I’ve had a steady flow of e-mails since the beginning of March from seniors aghast at how their retirement savings were hit by the COVID-19-driven stock market plunge. One reader is worried about a repeat performance.
“From what I can tell, and pundits/economists are all over the place, I think the market is due for another correction downward,” this 66-year-old wrote. “Am I better off to sell and preserve my capital?”
A bit of background: She owns a home, and has no debt and no pension. Her retirement assets are in blue-chip stocks held in a tax-free savings account, a registered retirement income fund and a cash account. “Given all that’s going on in the stock market and general economy I am (along with thousands of people) in a quandary regarding whether or not I should sell off all my equities and put my hard-earned money in GICs.”
GICs would solve the problem of stock market volatility for the investor, while raising these questions:
- Tax: Would selling stocks in the cash account generate taxable capital gains that leave her already depleted portfolio even smaller on an after-tax basis? Also, GICs held in the cash account would pay interest, which is taxed like regular income (unlike dividends, which benefit from the dividend tax credit in non-registered accounts).
- Income: GIC yields range from 2.3 per cent to 2.45 per cent at best these days for terms of one through five years. A diversified portfolio of dividend stocks bought years ago would almost certainly yield more than that, probably a full percentage point at least. By the way, the yield on the S&P/TSX Canadian Dividend Aristocrats Index – let’s use it as a benchmark for dividend stocks – was close to 6 per cent in early May.
- Growth potential: GICs have none – they just pay a modest amount of interest. Canadian stocks can be expected to produce average long-term total returns (share price gains plus dividends) of 6 per cent a year over the next 10-plus years before fees.
The one area where GICs clearly beat stocks is in downside risk. GICs have none if you stay within deposit insurance limits, while stock markets are risky. Given all the uncertainty about the economy, this reader is quite legitimately worried about another leg downward for stocks.
But a 66-year-old woman can reasonably expect to draw on her investments for another two decades or more. Blue-chip dividend stocks sound like the sturdier portfolio holding in this eventuality. GICs sound like a case of buyer’s regret in the making.
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