If you feel like you’ve been wrong about every prediction you made this year, you can take some solace in the fact that you’re far from alone. Just think of some of the zigzags that have come our way: when the pandemic started, global stock markets collapsed, triggering fears of a multi-year recession that could rival the Great Depression.
Then stocks bounced to record highs.
Real estate, too, looked like it was headed for a major slump. Then lockdowns took most spending options off the table, except basic staples and real estate.
The housing market took off.
It’s enough to make anyone dizzy. You can be forgiven if you’ve taken the summer to unplug from the financial news and your investment portfolio. But with fall on the horizon, it’s a good time to make a few moves to help grow your nest egg and protect yourself from further volatility. Here are six.
1. Use summer’s remaining days to your advantage
“The summer typically brings pullbacks in stock markets because trading volumes are light, so it doesn’t take as much selling to trigger a decline,” says Graham Priest, Investment Advisor Credential Securities with BlueShore Financial. “If you have stocks* or funds* you’re interested in, you could get a chance to do so on a dip in the markets.”
Priest expects Canadian stocks to end the year higher than they are now, however, and he’s particularly enthusiastic about the utilities sector: “You see less volatility in utilities, and we’ve seen steady appreciation in them through the pandemic,” he says. “Plus you’re getting a more attractive dividend yield than you’d get from many other kinds of stocks.”
The iShares S&P/TSX Capped Utilities ETF (XUT), whose holdings are broadly representative of the Canadian utility space, bears that out: it yields 3.1% as of this writing, compared to 2.5% for the iShares S&P/TSX 60 Index ETF (XIU), which holds the 60 biggest companies in the exchange by market capitalization.
2. Don’t let rising stock markets tempt you to be too aggressive
One acronym you may have heard lately is TINA: “there is no alternative.” It stems from the fact that yields on fixed-income investments, such as government bonds* and GICs, are low, which has pushed investors to invest mainly in the only “alternative”: stocks.*
But caution is still warranted, says Priest: “Many people haven’t experienced a prolonged bear market. The pullbacks in 2008-2009 and March 2020 were relatively brief, by historical standards, and that may lead some investors to think it always works this way. That, in turn, could leave them overly exposed to stocks.”
The solution: pay close attention to your asset allocation and don’t go too lightly on fixed-income investments. In the next pullback, you’ll need them to provide ballast to your portfolio. A BlueShore Investment Advisor can help you build an investment plan that suits your age, goals and risk tolerance.
3. Ease stress—and get better value—by averaging in
Another strategy that’s well-suited to times like these (and Priest regularly recommends) is to “average in” to stocks or funds using a dollar-cost averaging approach. In other words, instead of putting your money in the market at once, do so over time in fixed amounts.
Because you’re always investing the same amount of money, this strategy naturally cuts the number of shares you buy when prices are elevated and raises it when they’re lower. It can also ease stress if you have a significant sum of money (saved during pandemic restriction periods, for example) you’d like to invest but are uncomfortable doing so right away.
For a quick example of how it works, let’s say you decide to buy $2,000 of Stock A at the end of every month for 12 months. And let’s say the prices ranges from $70 (at which price your $2,000 would buy 28 full shares (not including commissions) at the beginning to a high of $110 (at which your $2,000 would buy 18 shares) at the end.
Once all your purchases were made, you’d have bought at an average price much lower than the peak of $110. And you would have cut your portfolio’s volatility, too, because you held more cash than you would have if you’d invested all at once.
4. Worried about inflation? Consider real-return bonds
If you’re worried about a long-term rise in consumer prices, one option to consider is real-return bonds, which are government bonds that increase your principal and interest payment in line with the consumer price index (CPI).
The easiest way to invest in real-return bonds is through a mutual fund* and you’ll want to hold it in a registered account, such as a TFSA or RRSP. That’s because the yearly increase in your principal that’s tied to the CPI must be reported to the Canada Revenue Agency as taxable income in the year the increase occurs, even though you don’t get these funds until your principal is returned at maturity. Your interest payments are also taxed as income.
One thing to bear in mind, however, is that prices of real-return bond funds fluctuate and can be vulnerable to a rise in interest rates (as bond prices and rates move in opposition to one another). Your advisor can help you decide if they’re right for you.
Consider also that the spike in inflation we’ve seen could be temporary. That’s the view of US Federal Reserve Chair Jerome Powell, who has said that he sees the current bout of rising prices in the US as “transitory.”
Priest agrees: “Supply bottlenecks, along with strong demand, have put upward pressure on prices,” he says. “But those disruptions should work themselves out in the near future.”
The situation may already be starting to right itself: after soaring during the pandemic, the price of lumber has dropped 70% from its all-time high, which it hit in May, according to a recent BNN Bloomberg article.
5. Prioritize investments for tax-loss selling
Tax-loss selling involves selling an investment that’s worth less than what you paid for it with an eye to claiming the loss against gains elsewhere in your portfolio. Most investors don’t think of this strategy until year-end (if they do at all), but it’s always worth keeping in mind, as it can significantly cut your payable capital-gains tax. (Note that this only applies to investments you don’t hold in tax-sheltered accounts, such as TFSAs, RRSPs and RESPs.)
Besides, it’s never a bad time to scan your portfolio for investments you may want to sell, whether or not you’re in a losing position.
You’ll want to be careful with tax-loss selling, though, as there are a couple points that could trip you up. One is the settlement date, or when the sale becomes final. According to the TSX, this falls two days after the date you enter the sale in your brokerage account. So this year, you’ll have to sell the stock no later than December 29 if you want to claim the loss in the 2021 tax year.
The other is the superficial-loss rule, which, according to the Canada Revenue Agency (CRA), states that you or a person affiliated with you (a spouse, for example) can’t buy the same security for 30 days before or 30 days after the sale.
Doing so would disallow your claim in the current year. Instead, you’d add it to the value of your (newly repurchased) security’s adjusted cost base (or the total amount you invested, plus trading commissions) and could only be claimed when you sell the stock in the future. Speak to a tax expert for more clarity on the matter and how your tax situation could be impacted.
6. Get a jump on charitable giving
As with tax-loss selling, most investors leave charitable donations until the end of the year, often squeezing them in just before December 31. But donating now leaves you with one less thing to do over the holiday season.
If you plan to donate shares of a stock or mutual fund—especially those that have appreciated—Priest recommends making an “in kind,” rather than an “in cash” donation.
This simply means that you donate the shares “as is,” as opposed to selling them first. It’s an easy move that lets you avoid paying tax on any gain in the investment’s value (as you would on a sold position). Plus you’ll get a tax receipt for the asset’s fair market value.
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