(As published in LifesStyles55 January 2013)

Now the turkey is done and the lights put away, it is time to get serious about your investments. It has been a rough ten years for the markets, and for current retirees looking for income, and for baby boomers looking at their last chance for some serious compounding to make retirement as comfortable as possible.

Recent performance indices are down, or flat at best. If you have your money professionally managed you may well be in a negative position in your retirement portfolio after their fees are deducted. It is too bad, though it is not unlike other professional advisors from legal to accounting, that fees are based on services and not on investment performance. In the meantime, interest rates remain at historical lows with continuing “price controls” by central banks. After taxes and inflation the value of your retirement portfolio is going down even in “safe” products like GICs. If you are already retired, you may be revisiting your budget. If you were anticipating retirement, you may be postponing the date. So what can a 55+ reader do with their money, with the best hope for enhancing their quality of life in retirement?

First the disclaimer: I am not your financial advisor, though if you like my views in this column, I would be happy to talk with you about your particular challenges between you and your goals. The views expressed here are a general “opinion” and not to be taken as advice. Further, I should qualify the context of this opinion. I am assuming that the reader has taken the trouble to become financially literate. Besides reading the financial press, you might have attended the seminar I presented in November, with some different ideas on RRSP withdrawals and risk management of alternative investments. My other message was in the context of financial literacy month where everyone must invest at least as much effort into the purchase of financial products as they would in buying a vehicle or a household improvement. To put this another way, the strategic choices should remain yours. But you recognize that you do not have the expertise, time or interest in doing this yourself so you also appreciate you will need to pay for the tactical services. Your objective is to make at least the index return, after all fees are deducted. Now we have that out of the way, back to the subject – wither the markets?

You may recall in my October column I quoted my friend Don Ford, author of “Don’t Sell Yourself Short” (a great guide for do-it-yourselfers):

“You have many alternative forms of investment available to you, most of which come down to a choice between lending to others and owning a piece of the business. Lending tends to be more predictable in terms of income and therefore less risky (i.e. volatile) than owning, but over the long term owning a piece of a business tends to generate better returns. It’s that simple. But investment advisors and many journalists and commentators make it a bit more complicated.”

So your first strategic choice is between lending your money (e.g. bonds & real estate funds) or owning a piece of the business, typically in common stocks managed within a mutual fund. This decision is mostly based on the direction you expect interest rates and stock prices to go over the next year or two – or five. Governments and central bankers have made it pretty clear that they are going to control basic rates at a very low level at least until strong economic growth is restored – which is not expected in the near term. Funds based on quality corporate bonds issued by major corporations and utilities and real estate trusts or mortgage funds are still making money even in this flat economy and paying reasonable rates in the 5 to 7% range. Active management is simpler and fees cheaper so you can still expect to net 4 to 5% in such “fixed income” investments, still twice as good as GICs, at very minimal additional risk.

Another “standard” I like is the Canada Pension Plan which has over 50% of its portfolio in equities. While 2012 has been flat for everyone, CPP made almost 12% on its well diversified portfolio in 2011. Even after 2 to 3% MER (management expense ratio) fees that still nets 8 to 9%, which will still double your money in 8 to 9 years with the magic of compounding. So my first “opinion” is that a senior cautious investor, who at the same time is trying to make up for lost time in the past decade, should be looking at putting at least 50% of her portfolio in ownership positions through equities.

The second strategic choice is “when”. An investor wants to catch the upturn in stock prices by buying low. In my opinion, the time is now, or at least very soon in 2013. The major cause of the current flat markets is uncertainty. With the U.S. election out of the way (and I hope the fiscal cliff by the time you read this), Europe muddling along , China stabilizing with its growing domestic market, the rising middle class of Latin America and new emerging markets in Africa, I believe uncertainty will reduce and some confidence return, even at the new normal. The $500 billion that U.S. investors have taken out of equity investments (and into bonds) over the past five years will start coming back, driving up stock prices. But here is the best part. Despite slow growth in the GDP, companies continue to make money. Besides building cash for growth (when it returns), they are paying it out to shareholders as dividends. There are many “value” based investment funds (a la Warren Buffet’s Berkshire Hathaway) which are generating yields as good as or better than bonds. So equity investments in the blue chip companies (banks, utilities, entertainment) will generate medium returns now while positioning you to catch the capital gains when the market turns up.

Lastly, how should you choose your money managers? This is a two part question. First you develop a relationship with one or more financial planners that help you fit your overall financial plan together. Then for your retirement investments, I would stick with a major company which has a wide choice of investment funds, without extra fees when you want to rebalance between fund offerings. There are all kinds of get rich quick “alternative” investments being touted but, again, there is no free lunch. The big companies can afford to hire and partner with the best money managers and they are in the game for the long term – hopefully, they are less likely to do anything foolish.

So think about moving at least half your retirement portfolio into equity investments, and soon, in funds that are stable and well diversified within major leading firms. Interest rates are not going anywhere, at least not soon. The markets have got to go up eventually, and in the meantime you get decent returns from dividends.