There were many mistakes made in people's RRSPs when the market was crashing in 2008, and it is crucial that we don't make them again now that 2016 has started of so poorly.
The stock market can be more about emotions than economics, and you can make bigger mistakes by going with your gut than with your head. Going with the herd and selling in times like this is never the right decision. A herd of buffalo is known for going over cliffs all together when a simple right turn can avoid that headache.
Below I've made a game plan for the two biggest demographics. Boomers need to secure their gains and Millennials need to buy more when opportunities show themselves -- the complete opposite of what happened in 2008.
Many investors who were close to retirement in 2008 blew up their portfolios in overly risky stocks and then sold at the worse time. When you are getting close to your retirement, look to preserve your capital versus making even more. There are many products out there that can serve your risk profile, and being smart with your money will save you from the doom and gloom of 2008 and let you enjoy your golden years.
The market has gone up for many years now, and many investors have been reaching for yield in more risky stocks. Make sure that if you are close to the golden years you protect your goose. Look at products like:
- Annuities - a guaranteed income for a set period of time or for the rest of your life. This is a great way to reduce your stress, knowing that a chunk of money will pay you forever.
- Bond ETFs - There are some very affordable bond ETFs that charge you as little as a .12 per cent fee to secure some money against stock market drops. Interest rates are super low right now, so saving on fees can get you some more bang for your yield.
- Dividend Stocks - Dividends make up for 70 per cent of the stock market returns over history. Buy them and live off of the yield, whether they go up or go down.
If you are saving for retirement, make sure you have automatic savings that are going to buy stocks as they go up and back down for the long run (dollar cost averaging). Corrections like the one we are having right now are times when millennials need to buy up cheap, good quality stocks for the long run.
- Automate your retirement savings now and treat it like rent or your mortgage payment. Buy dividend stocks and let their dividends pay you while you wait for the market to go back up. Don't skip it!
- Get involved and buy stocks or funds you understand and see a big future in. You are a savvy person; buy things that you like and use everyday. Buy what you know with the help of a great advisor.
- Work with an advisor when you are young to understand the market and products like robo-advisors that might meet your values and saving goals.
Buying low and then selling high is the name of the game. Buying throughout your accumulation years can start now and in time the market has always moved up. Being nervous about the market and staying out of it is the worst decision for a happy retirement.
Learn from the 2008 mistakes and treat your RRSP with more care this year.
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The experts CBC News spoke to were unanimous on the need for a plan that takes volatility into account. "I meet so many people who don't have an investment plan - who won't have an intentional allocation to bonds, stocks, cash," says Edmonton-based financial educator Jim Yih. Having a plan is one of the best ways to increase your probability of investment success in the long run, he says. "It's hard not to pay attention to the swings," Yih acknowledges. But having an overall investment strategy and target asset mix makes it easier to avoid being caught up in the emotions of a plunging market. Sticking to that plan, of course, is a critical part of coping during the big slides.
Yih also says investors would be well advised to figure out their risk capacity - how much risk they need to take to reach their goals. This is not the same as the usual risk tolerance measures financial companies use, which he says "test how much risk you want to take." In addition to a financial plan, some advisers we talked to mentioned the importance of having an investment policy statement (IPS). This document determines how investment decisions are made. "The IPS gives you your rules for managing your investments, and when you believe in your rules, you will be better able to manage your response to wild market swings," says Warren MacKenzie, CEO of Weigh House Investor Services. But he notes that an IPS still isn't offered by many financial advisers, so you may have to hunt around. David Chilton, author of The Wealthy Barber Returns, points out that people often think they can handle a lot of volatility - in other words, a lot of risk. That is, until the market actually undergoes a severe correction. "Figuring out how much volatility you can stomach ahead of actually experiencing that volatility is an inexact process," he writes. "For most of us, it's less than we think."
Is the investing concept of "buy and hold" through thick and thin really dead? Some advisers think it's time to at least revisit this familiar maxim. "Buy and hold is a great strategy if you are in a bull market," Warren MacKenzie says. "But if we're in a secular bear market - and I believe we are - buy and hold is the worst strategy." Now is the time to hire a professional manager who can buy and sell to take advantage of that volatility, MacKenzie says. "You must realize that to be a successful investor, you have to buy when the news is bad and when other investors are selling," he adds. Look at volatility as an opportunity to make money, MacKenzie says, because most people sell when the market drops and buy when it's near the top. Hiring someone to carry out your buying and selling also allows that third party to be the sober second thought your first impulse to panic needs - someone who isn't as emotionally involved with your money as you are.
Some advisers aren't quite willing to entirely write off the buy and hold philosophy, but do agree that market dips can uncover good quality stocks that have gone on sale. "Volatility can represent a buying opportunity if the fundamentals are sound and the price has dropped," says Cherith Cayford, a principal with Victoria-based CMG Financial Education. Cayford isn't ready to declare buy and hold dead just yet. "It still makes sense for quality blue chip investments." But she adds that it's vital to have cash available for those market opportunities that dips can produce. The buying doesn't have to be an all-or-nothing process, either. Instead of biting off more than you may be able to chew, you can nibble - investing a portion of your cash when the investment drops to an attractive level.
There are plenty of other investments that historically don't tend to move as dramatically as the stock market as a whole. So don't be surprised if your adviser suggests an increased allocation to alternative products or asset classes to reduce the riskiness of your portfolio. Government bonds, for instance, tend to be much less volatile than equities. But be aware that even long-term government bonds aren't yielding much these days. Utilities, telecoms and real estate investment trusts (REITs) are all less volatile than the dominant TSX sectors of energy companies and financials, while still paying reasonably high dividends. Preferred shares also fall into this category.
For some investors who can't escape the daily litany of depressing economic stories, some advisers suggest that turning a blind eye to the latest swings may be the best coping strategy. "Headlines can certainly be disconcerting," admits Marc Lamontagne. "You have to focus on your long-term goals." "In some cases, I have recommended clients stop opening their quarterly statements." This is, he points out, not a good long-term strategy for people who don't have a professional managing their investments. These days, the do-it-yourselfers need to pay even more attention.
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