Security and predictability are a great source of emotional comfort when the markets seem erratic and volatile. But how much security and predictability are too much? And what’s the price for short-term comfort?
Many Canadian investors are sharing the sentiment that the ups and downs of the markets are stressful. This is motivating them to think about moving money to less-risky, and more predictable, fixed-income investments. The logic is sound; any port in a storm, as they say. But not all fixed-income investments are equal. And the ones you choose should be a reflection of your age, your goals, and your overall tolerance for risk, not a reaction to the markets.
Imagine how you might feel if you had one million dollars in 1996 and by 2019 it was only worth $375,413. That’s what’s at stake when you ignore inflation.
What’s at stake?
A well-balanced investment portfolio will have a combination of equity and fixed-income investments based on your age, tolerance for risk, and the goals identified in your IG Living Plan. Generally, portfolios shift to a greater percentage of fixed income investments the older you get to reflect less appetite for risk. But if the mix of equity and fixed-income investments in your portfolio gets reset because of anxiety or uncertainty, your long-term success can come under attack from inflation and lost opportunity.
Consider the chart below. Over 24 years, with even a modest rate of inflation (just 2%), the purchasing power of one million dollars drops by almost 40%. At 4% inflation, that increases to over 60%. So, keeping pace with inflation ought to be your minimum investment goal because your investments could actually go down in value relative to the cost good and services.