ARTICLES & REVIEWS
WHAT SHOULD YOU BE DOING NOW?
London Free Press
At the time of writing this article, barring any near-term recoveries, 2008 will likely go down as one of the worst years for stocks, domestic and foreign, since the Great Depression. Unfortunately, other asset classes such as real estate, commodities and even bonds have also performed poorly. None of this is news to you - the question is what do you do now, given the near-term uncertainty around when the market will bottom-out.
Rest assured, the market will recover. The longest recession since World War II has been about 16 months. Assuming the present recession started early in 2008 and exceeds the longest postwar recession, it might be 2010 before economic recovery begins.
Since the stock market rebound typically preceeds economic recovery by about 3-6 months, the market could rebound in 2009. That's not much help, considering 2007 resulted in anemic returns and 2008, so far, has resulted in losses on balanced portfolios of anywhere from 15%-25% year-to-date to Nov 2008.
So What Does This All Mean To You?
Do not lose sight of your time horizon and your investment needs. If you're less leveraged, less affected by recessions (i.e. stable income) and have a longer time-line horizon then average, it makes sense to buy now. If you're more leveraged, (i.e. in debt), more affected by the recession, or have a shorter horizon, it might be the time to sell, even if you might be cashing out at the bottom. If you're about the same as everyone else, do nothing, and relax.
We know “relax” sounds trite, but we do advocate patience, as tough as that can be during this time. Before you commit any more money to the market, you need to have adequate reserves set aside for emergencies and financial commitments. The ideal investment time horizon should really be 7-10 years, or even better, the rest of your life, your spouse’s life and since your inheritance is likely going to your children, why not their lives. Why does your time horizon need to be so short in your mind?
If your financial situation is secure, then let's talk about your emotional comfort, asking two questions:
- Has this downturn made you realize that you are not as risk-tolerant as you thought?
- If so, should you change your portfolio mix now?
Generally, if you can wait financially and emotionally, we suggest not making any drastic changes.
What We're Doing Now
For many clients, we'll hold off on any further re-balancing. Thus, a 50/50 stock-to-bond portfolio that may have drifted to 45/55 or 40/60 due to stock declines, will be left as is.
Tax-Loss Selling
Look at your accounts for opportunities to harvest unrealized tax losses. Losses can be used to offset any gains for the past 3 years, and then carried forward indefinitely.
Reviewing Client Withdrawal Rates
Clients most impacted by this economy and stock market decline are those that are retired. To the extent that client’s withdrawal rates exceed a prudent level of 4%-6% plus inflation, depending on age, this will be a challenging time. We have been reviewing client withdrawal rates where we have control in open accounts.
Clients who are withdrawing funds either periodically or sporadically, should consider how the market decline has increased the rate of withdrawal. If they are taking out more than 4%-6% before the market decline, that rate as a percent of the current value is now higher. We strongly recommend that they look for ways to cut back on expenses, particularly any discretionary spending. For example, if they were taking out 6% and the portfolio has declined 25%, the current withdrawal rate is now more than 8%. This could be unsustainable for your portfolio.
For RRIF accounts, which have a forced minimum withdrawal beginning at age 72, some relief was given last week. The Economic and Fiscal Statement acknowledged the impact the current environment is having on Canadians and their retirement savings. In response a one time 25% reduction in the minimum withdrawal from a RRIF is available to all RRIF plan holders. RRIF plan holders will have up to March 1,2009 or 30 days after this proposal is enacted to re-contribute. Re-contributions will be deductible for the 2008 taxation year.
We spend a lot of time discussing risk-tolerance and time horizons with our clients. We try to anticipate potential downside risks so the clients aren't shocked when market declines occur, which they inevitably will. By keeping your portfolio re-balanced, watching your tax exposure, reducing your withdrawal rates, you can, and will, get through this current price collapse.
Interestingly, we have found with the current price collapse, the balanced portfolios have still provided more RIF income and a higher balance of account than pure fixed income or GIC’s since 2002.
So, check your portfolio balance, tax opportunities, and withdrawal rates to stay on track.
