When financial markets become a little uncertain – some investors get nervous.
Uncertainty and nervousness can cause some investors to flee equities and jump into fixed income investments that they feel will provide more certainty and protection from investment losses. But, there may be a price for playing it too safe financially, like the loss of buying power from ignoring opportunities to keep your investments growing.
The GIC refugees – Canadians have $500 billion in Guaranteed Investment Certificates (GICs). Safe, yes, but so-called safe investments earn low income. GICs are actually a no-interest option, especially when you factor in taxes and inflation. So, by parking too much of your non-registered portfolio in locked, fixed income investments, you could lock yourself out of the opportunity for growth.
Look at it this way – the real return on an average one-year GIC was actually negative every single year over the last decade while, during the same timeframe, the 10-year return for Canadian equities on the S&P/TSX Index was 7.97 per cent.
The savings account sideliners – In fluctuating markets, some investors choose to sit on the savings account sidelines, which at least partially contributes to the fact that there is currently $670 billion sitting dormant in Canadian savings accounts. That is roughly $200 billion more than average. By sitting it out on the financial sidelines, these investors missed out when the market began its steady climb while those who stayed invested capitalized on the upside of the market and reduced the impact of short-term volatility.
The market moves fast and often with no warning. Strong gains can easily be missed by sitting on the sidelines.
Buying power erosion – Often, the price of play-safe investment options can be the erosion of your money over time due to inflation. On the other hand, by choosing the right investments and sticking with your investment plan, you will be positioned to capitalize on growth opportunities as they arise.
Including equities in your portfolio can be the best way to protect your purchasing power and grow your wealth over time. But always remember, it is a range of asset classes (yes, even fixed-income investments) working together that is the vital key to increasing future income, offsetting rising costs and reaching all your financial goals.
Andy Erickson is the division director with Investors Group, Vernon. This article is provided for information purposes only. Please consult with a professional advisor before implementing a strategy.