Protecting retirement savings in an uncertain economy

To protect investments from volatility, investors “should always have some level of diversification across asset classes,” says David Wong, group chief investment officer, CIBC Global Asset Management.

However, “as investors get closer and closer to retirement, there's a need to shift the portfolio's focus,” he adds. That means shifting away from growth-focused assets into more wealth-preservation type assets, “because you just can’t predict the short term.”

Markets have been strong in the past year, and Mr. Wong expects major markets such as Canada, U.S. and EAFE (Europe, Australasia and the Far East) to have earnings growth of 10 to 15 per cent this year. However, the impact of tariffs and geopolitical events could introduce uncertainty, especially as valuations are high. “Ultimately, we expect a little bit more volatility in the coming year, given those conditions that we see in place today,” he says.

To reduce the volatility in their portfolio, investors may want to boost the percentage of bonds and other sources of stable yield in their portfolios, including government bonds, high-quality corporate bonds and structured credit. 

“If you’ve got one to five years before you really need to tap into those retirement savings, the absorption of any downside risks becomes a little bit more challenging,” Mr. Wong says. 

However, just because someone has a shorter investment horizon doesn’t mean their investments should stop generating returns, he notes. Diversification should still include growth through equities and dividends. 

“We have other risks to worry about, including inflation, income [and] longevity,” he says. “They still need to get some balance of returns in the portfolio.”

People in Roger and Nicola’s situation may want to look for investments that are designed to lower volatility while being exposed to equity markets, says Mr. Wong. That way, they can “take the edge off the downside during economic declines, while still participating in that earnings growth potential and dividend yields over the long term.” 

Mr. Wong says that another way to protect a portfolio from a market dip is to consider alternative investments that can provide diversification regardless of how the economic cycle unfolds. He points to liquid alternative investments, such as mutual funds that offer access to more complex, hedge fund-like strategies with daily liquidity.

“Knowing which funds to use, and how much to allocate to these areas can be challenging,” he says. “The good news is that there are some professionally managed all-inclusive asset allocation offerings that combine traditional assets like stocks and bonds with these alternative strategies which helps individual investors simplify their decisions.”

Roger and Nicola should seek professional advice to set up and manage their investments, Mr. Wong adds. “As humans, we are universally prone to emotional biases that lead to bad investment decisions,” and have a trusted advisor helps us to “not overreact.”

In times of volatility, the first step towards a secure retirement is putting together a holistic plan with a financial professional, says Pierce Wang, financial planning consultant with CIBC Investor Services. That process involves figuring out how much a couple like Roger and Nicola will need to save to retire at their desired age with their goal retirement spending level. 

“Once we have a plan, we’ve got a roadmap to show how we can achieve our goals,” says Mr. Wang, who works alongside advisors to consult with clients on investment strategies and how they fit into their larger plan.

He points towards CIBC’s interactive GoalPlanner tool, which enables clients to see scenarios based on factors such as how much they save, how much investment risk they take, their overall rate of return and market performance. It can also factor in the impact of receiving an inheritance, helping an adult child purchase a property or downsizing a home. 

“Then we can adjust their lifestyle and budget to achieve their plan,” he says. That might mean retiring earlier, saving more or adjusting spending, depending on their needs. 

The tool can also be used to see how a client’s plan can withstand market volatility, adds Mr. Wang. It can show the effect on a portfolio if the market fell 20 per cent in the next few years or 10 years into retirement. That way, the plan — including savings amount, risk level and spending level — can be altered to ensure they don’t run out of money regardless of market volatility.

Mr. Wang gives the example of working with a 55-year-old client who was planning to retire at age 60. He wanted to shift his investments to conservative guaranteed investment certificates (GICs) because “he was afraid of market volatility,” Mr. Wang says. But the scenarios he modelled showed that “he cannot afford to make just 2.5 per cent return because he would run out of money in his early 80s.”

So, Mr. Wang and the client restructured his portfolio to be less conservative while still providing downside protection “so it gives him peace of mind and a higher return in order to achieve his retirement goals.”