Category: Investment Planning

During periods of extreme market volatility, and decline in particular, the sage advice to investors is to “hold on.”  That’s true because within a year or two, markets will recover and continue their upward path.  Getting out of your investment (i.e., selling) will have the effect of locking in the loss.  But what if you can’t hold on?  If your portfolio is your registered pension income, or will soon become one, then periodic withdrawals are going to happen regardless of market behaviour.  And avoiding the markets altogether will lead to a shorter lifespan for your pension income.

The answer is a portfolio that can do two things at once:  let you hold on to your investments during market declines but still provide income without selling any of those investments while they are down in value.  It just takes a bit of planning ahead.

The principle behind an income portfolio that can withstand market volatility is known as the “Cash Wedge”, which includes a measure of guaranteed investment certificates (GICs) with laddered maturity dates.  Click thumbnail at right to open a pdf in new window.

The current market environment can be worrisome.  If you are a young investor with a lengthy time horizon (several years before any withdrawals), then the best thing is to not fret over the markets and ride out the volatility.

If your time horizon is much shorter (withdrawals within 3 to 5 years), then let this current market uncertainty be a signal that your portfolio may require some design changes.

After each calendar year, we can look back and observe which investment asset class performed the best.  Was it International Equities?  Was it High Yield bonds?  Or was it US Small Caps?  Good to know, but there is a danger of concluding that the year’s winner is the best place to invest your savings.

Take a look at this matrix of annual rankings of key asset classes over the last decade (click the chart to open a pdf in a new page):

You will see that the asset class rankings shift all over the place from year to year.  In some cases, the worst performer one year becomes the best performer in the very next year.  No one can predict with consistent accuracy, the future rankings of these asset classes.

So, while the returns of these individual asset classes swing widely, a portfolio built with a balance of all these asset classes will smooth out the variation.  And no need to predict the winner if you have all the bases covered.