Inflation-proof your Portfolio
Think your short-term GICs or treasury bills will ensure a secure retirement lifestyle down the road? Ironically, these so-called "risk-free" investments are not as safe as they seem. While they may guarantee your principal and returns, they also expose you to a different, more insidious kind of risk - inflation risk.
Inflation risk is the risk that your investments will buy you less in the future because of the rising cost of living. Using the historical inflation rate of 3.41%* a year, one dollar today would buy you only 50 cents of goods and services in 21 years.
To make matters worse, interest on investments held outside RRSPs is fully taxed. Within taxable accounts, you could even end up with negative returns after tax and inflation on what you may be thinking is a safe bet. In the example below, the investor actually lost purchasing power during the year, and will fall further and further behind as time goes by. This is no way to save for retirement.
That's why investors with long-term goals need to hold equities in their portfolio. Though their market values fluctuate and they generate losses in some years, over time equities deliver stronger returns that will help keep you well ahead of inflation. By combining equities with fixed income and other complementary investments in your portfolio, you can smooth out fluctuations year to year and protect against losses. In effect, adding equities to your portfolio makes it less risky over long periods than cash alone.
If that weren't enough of a case, equities held in taxable accounts are also taxed less than cash investments.
Don't get us wrong: everyone should have some liquid investments for emergencies and near-term needs. But for long-term goals like retirement, you need to protect yourself against inflation.
Give us a call to set up a meeting to inflation-proof your portfolio.
*Source for 3.41% historical average: http://inflationdata.com/inflation/Inflation/AnnualInflation.asp
For the numbers: Rule of 72: divide 72 by 3.41% to get number of years to double
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This Report is written by Investment Planning Counsel, a fully integrated Wealth Management Company. Mutual funds available through IPC Investment Corporation and IPC Securities Corporation. Securities available through IPC Securities Corporation, a member of CIPF. Insurance products available through IPC Estate Services Inc. Mortgage broker services provided by IPC Save Inc. (ON Lic. #10227).