I was asked to write a short financial article that would be of interest to pensioners and the elderly. The first idea that crossed my mind was to discuss the effect of low interest rates on risk-free investments, a subject which immediately struck me as very relevant.
When the bank offers you barely 1% on your term deposits and taxes take away half of this, it’s easy to see that when you factor in inflation, there’s hardly any return left to cover your cost of living, and you have no choice but to eat into your capital. Term deposits may seem safe, but the end result is that your capital will most certainly decrease, because risk-free investments are no longer sufficient to maintain your lifestyle.
Protecting your capital must therefore be considered from a different angle. Rather than seeking absolute protection against variations in your return, you should try to protect your purchasing power. In this regard, there are other solutions which, while entailing some volatility, offer medium- and long-term returns that are more tax efficient and that will enable you to maintain your purchasing power and, consequently, your wealth.
A distinction must be made between risk and volatility. Risk is the possibility that you will permanently lose part or all of your capital. A good example is Nortel, whose value completely disappeared. Volatility, on the other hand, is a temporary loss in value which will eventually be recovered. So one can easily accept a certain degree of volatility in exchange for a higher investment income.
Among the numerous mutual funds on the market, many saw their value plummet during the 2008-2009 financial crisis, but gradually rise afterwards to ultimately offer a very good medium- and long-term return. Obviously, past performance is never a guarantee of future success, but the 2008-2009 crisis is probably very representative of what an investor may have to deal with in the future.
This is just one example of many, and a good investment advisor should be able to help you find investment solutions that meet your needs. Moreover, in addition to seeking a yield, you should consider broadening your investment portfolio.
A message from Martin-Guy Bernier from Desjardins Securities, 514-281-7312
Note: Desjardins Wealth Management Securities is a trade name used by Desjardins Securities Inc. Desjardins Securities Inc. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF).