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Vancouver, BC (January 02, 2009): 2008 turned out to be a wrecking ball on the precious nest eggs.
Equities cratered all over the globe. It felt like watching a sinkhole. Almost everything lost value – particularly stocks and real estate. Some commodities, like oil, experienced both a steep rise and a steep decline. The positive standouts were in the boring fixed income like T-Bills and GICs.
Very few were spared the painful outcome. Balance sheets were carved to the bone. Taxable accounts, registered accounts and pension plans were all affected. The good news is that it’s never too late to reshape the nest egg. Even after the many unforgiving financial storms.
For example, portfolios exceeding 75% equity are bets far too risky for the majority. Most investors don’t know their risk tolerances. Those who can’t stand risks can find safer harbours on the sidelines.
Although many don’t, every portfolio ought to have a reasonable amount of fixed income. For most investors, protecting the remaining capital is top priority. Nobody wants to start over again.
Task perspective
These continue to be extraordinary times. Much turmoil and uncertainty is yet to be dealt with. Especially in the banking sector and the jobs outlook.
Wise investors care deeply about risks. Novice investors shop for returns. Returns will eventually reward investors who focus on risks. Risks will eventually catch up to investors who focus on returns.
Rebuilding the nest eggs won’t be easy after sustaining losses, say in the 30% to 50% ballparks. Even defensive stocks got caught up in the fray. Some planned retirements may have to be reshaped.
So, what should investors do now to turn their ships around? The short answer is first asses the damages then rebuild within the slow, steady, methodical way. Some may need time in dry dock.
Look past what is happening today. Preferably, where the portfolio ought to be in 5 to 10 years. Not in 6 to 12 months. I’m reminded of Aesop's children’s fable titled “The Tortoise and the Hare”. It’s classic message of “slow but steady wins the race” definitely applies to portfolio reconstruction.
It took a while to get to where investors are today. It may take as long, or longer, to overcome market losses. Try not to repeat things that did not work in 2008. A portfolio loss of 30% requires a 43% gain to get even. A 50% clipping requires a 100% gain. Those upsides are hard to come by.
Assessing the damages
It’s very possible that the nest egg may suffer more losses before it shows signs of recovery.
Start by concentrating on what the nest egg is expected to provide. Refresh the desired retirement incomes. Confirm that the financial goals are still realistic. Have a close up look at the portfolio risks.
Revisiting the analysis of how much retirement capital is required, along with the rate of return being sought, provide important guidance. Don’t forget the tax friendliness of the plan. Professional advisors should also go over these matters with clients, especially their risk capacities and tolerances.
Rebuilding the nest egg may require bigger contributions from savings. Some may have to adjust spending levels. Retirees should pay close attention to the steadiness of the income. Consistent investment returns are preferred to erratic hot performance.
Rebuilding the chips
Skip the fancy dancing. Stick to disciplined approaches. Make risk management a best friend forever.
Coordinate the financial goals with the investing tactics. Always think portfolio and avoid making hasty decisions. Invest within the personal risk tolerances, time horizon and prudent asset mix.
Follow consistent strategies to manage gains and losses. Focus on investment quality, tax implications and costs. Working a little longer may help. Simple things, like whether to hold equities in the personal account versus the RRSP/RRIF, can make positive impacts without taking more risks.
Nobody wants to repeat 2008. When it’s time to buy ask three important questions:
1. Why am I buying it?
2. How does it fit in my portfolio?
3. What risks am I taking?
These strategies help investors during the uncertainty of reconstruction. They are all within the investors’ control. They are also straightforward and deliver plenty of values.
Simply said, revisit the design and appropriateness of the personal game plan. Tweak it as required, then execute that game plan slowly but surely.
Happy rebuilding.
Your comments are welcome.
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