Your Asset Mix and Retirement Goals
Money Managers will often refer to risk as being the level of uncertainty about the returns expected from an investment. In most cases risk can simply be defined as the amount of volatility compared to a projected market return. You might also define risk as the amount of money you think you could lose and still sleep through the night.
In my opinion, being able to understand what you are invested in, and why, is very important when considering taking financial risks. A good test is to ask, “Could I explain to a 12 year old in less than a minute why I hold a particular asset in my investment portfolio?” It should be that simple.
Some years ago two researchers, Martin Leibowitz and Terence Langetieg of Salomon Brothers Inc., issued a report to the pension fund industry called, “Shortfall Risks and the Asset Allocation Decision”. In this report they used widely accepted historical return data compiled by the firm Ibotson Associates. The report found that there was a 36% chance that stocks would underperform bonds in any five year period. They also found that there was a 24% chance that stocks will underperform bonds in any 20 year period. Of course, that also means that there was a 76% chance that stocks would outperform bonds in any 20 year period.
As many Canadians are now starting to look at retirement, over the coming years it will become prudent to rebalance RRSP investment portfolios to decrease future investment risk. Using standard return and risk assumptions and a five year time horizon, Leibowitz and Langetieg concluded that an asset allocation of 30% stock and 70% bonds would result in a higher probability that an investor would meet their goals.
When constructing a fixed income bond portfolio the Money Manager will consider interest rates, maturities, redemption options and the credit rating of the bond issuer. The Managers would normally structure the portfolio with a mix of government, provincial, municipal and corporate bonds. In order for an Investor to reduce investment risk they might consider replacing the corporate bonds in the fixed income/bond portion of their investment portfolio with quality Canadian first mortgages. In addition to increasing the interest yield on your portfolio, an investment in first mortgages can offer substantially increased security when compared to corporate bonds as an asset class.
First Accredit Mortgage Corp., a Mortgage Investment Corporation (MIC) managed by Great Pacific Mortgage & Investment Ltd., invests exclusively in first mortgages. Since 2002, this MIC has offered both large and small investors easy access to investment in Canadian first mortgages while producing an annual historic yield in the range of 7.95% to 10.95%.
Paul E. Croy
Video: Why Do You Work at Great Pacific?
Paul E. Croy explains why he likes to work at Great Pacific Mortgage & Investments. He also talks about balancing investment portfolios and mentions MICs are suitable for replacing bonds or fixed income portions of a portfolio.
