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Plan like a pension fund manager when it comes to your investment portfolio

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GICs, bonds or stocks? What would you have rather held for the last two years?

GICs, bonds or stocks? What would you have rather held for the last two years?

Employees have paid more attention to their pension plans in the last few years due to the financial crisis and volatility in markets. However, volatility made even the brave flinch during 2009. So, just what’s the situation in Canada? And what’s an employee to think these days?

Think sound planning

Careful planning is what drives investments and pension plans forward. When the market dropped in 2009, it rattled a lot of investors, and, of course, we’re all pension holders whether it is through the company we work for or the Canada Pension Plan.

Make volatility your friend

Volatility works for you in the markets if you have a plan. It’s part of investing. Ask any fund manager.

Equity and bond markets can’t go up in a straight line because there are too many interconnected parts to the economy, business and world events. News, especially in an increasingly digitized society moves at light speed, and news impacts on investments. In order to achieve the goals we set for retirement, exposure to the equity markets is necessary. Equities provide the added growth and performance few other assets do. After all, if you held a lot of cash since March 2009 or invested new cash into GICs rather than equities, you’d have gotten simply anemic returns.

Have a look at historical charts

If you pulled your money out of the markets in May 2009 and kept it out, you would have missed out on a 40 per cent return on the S&P TSX 60 Index at its recent peak. On the other hand, pension managers, as markets stabilized, began reinvesting new money into equities at bargain prices. Meanwhile, bond holdings that should be part of every balanced portfolio, accelerated through the market turmoil providing a buffer. The DEX Universe Bond Index returned about 16 per cent from the time the equity markets began correcting to now. Compare that to the average 1-Year GIC returns shown in the chart above – they’re barely recognizable during that time.

The picture I’m painting is your pension’s doing what it should be as the manager sticks to his plan.

What lesson can the average investor learn?

  •  Get a plan
  • Stick to your plan
  • Remember to reallocate investments

Remember to diversify

Proper asset reallocation on the part of managers forces them to buy assets when they are cheaper, rather than when prices are steep. The average diversified fund manager measures himself against a benchmark that is 55 per cent equity and 45 per cent fixed income. These percentages are reallocated as the portfolio weightings and market conditions change.

The average investor would do well to remember the fixed income component of their plan. A short while ago nobody had anything good to say about bonds but since commodities and the markets have started backing up recently, fixed income is showing us, once again, why it belongs in our portfolios. There’s nothing like some income and fixed income investments that generally rise when equities go down to stabilize a portfolio.

The bottom line is that performance has been excellent since 2009 and in the first quarter of 2011. How would you feel right now if your pension fund manager had been holding a portfolio of GICs exclusively during that period?

Probably, a little sick …

Contrast the 1-Year Average GIC Index return of slightly more than 1 per cent with the above returns on the iShares S&P/TSX 60 Index and the iShares DEX Universe Bond Index since May 09.

While returns are never guaranteed for any asset class, you can bet that over the long-term, stocks and bonds will beat out GICs.

*Note iShares S&P/TSX 60 Index and iShares DEX Universe Bond Index used only for illustrative purposes

Update: The Canada Pension Plan has hit a record, largely by scooping up bargains in the equity markets after the financial crisis and resulting market correction. For more details.

Update: I was gratified to see that a connection of mine, Adrian Mastracci was thinking similarly about investing like a pension fund manager! See article here.


2 Responses

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  1. Very nice post. I just stumbled upon your blog and wished to say that I’ve truly enjoyed browsing your blog posts. In any case I will be subscribing to your feed and I hope you write again soon!

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    October 22, 2011 at 3:43 pm

    • Thanks for subscribing and your gracious comment. Hope you enjoyed my latest.


      November 17, 2011 at 7:19 pm

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