New Investment Approaches For Risk-Averse Canadians

Some income-seeking investors focus on value stocks of big, established companies that tend to pay higher dividends. Historically, value stocks have generally outperformed growth stocks. However, over the past 10 years, the S&P 500 Growth Index has outperformed the S&P 500 Value Index in eight out of 10 years, returning 16.2% versus 11.2% annualized (as of March 31, 2021). Investors who focused on value stocks over the past decade may have underperformed growth investors or total stock market investors as a result.

Rising interest rates may have a negative impact on dividend stocks, as investors who have opted for dividends over bond interest reduce their risk level once again.

Investors who have a long time horizon for their savings, with many years to retirement, should probably have a healthy exposure to stocks in their portfolio. For conservative investors who are in their 60s, one of the best options for preserving capital in retirement is not an investment at all. It is an application (two, in fact).

Applicants for the Canada Pension Plan (CPP) and Old Age Security (OAS) pensions often apply as early as possible. For CPP applicants, that is age 60 and for OAS applicants, age 65. There may be a fear of missing out mentality that leads to early pension application. Some seniors apply simply because the application comes in the mail.

Deferring CPP or OAS pensions leads to an increase in pension income. After age 65, the increased pension is 7.2% for OAS pensioners and 8.4% for CPP pensioners. Recipients who live into their 80s, especially those with a lower risk tolerance, may benefit from deferring their pensions and instead drawing down their low-risk, low-return investments early.

As interest rates have fallen, the expected future return from fixed-income investments has also fallen. The formula for CPP and OAS pensions has not changed and, therefore, the relative benefit of deferring CPP and OAS has increased.

The most important thing for an investor to understand is what rate of return they need to earn. What is the impact of earning a 2% return compared to 4% or 6%? If someone can retire at a reasonable age or fund their desired retirement objectives based on a low rate of return, maybe today’s low rates are just a nuisance. But if conservative investing may inhibit someone from achieving their financial goals, they may need to consider forgoing capital preservation for higher returns.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.