The Rising Cost of Inaction
1 Canadian Mortgage & Housing Corporation
2 Government of Canada based on 4-Year program living away from home
3 Natural Resources Canada 4 Cash is measured using the DEX 91-Day T-Bill TR Index, Stocks is measured using the S&P®/TSX® Composite Index (Total Return) and Bonds is measured using the DEX Universe Bond Index. Data is for period from 12/31/96 to 08/31/12.
It has been a challenging decade for investors around the world, one that many refer to as the lost decade. After a 10-year period that delivered two severe recessions and two of the worst bear markets since the Great Depression, many investors have fled to the sidelines to await the elusive "right time" to re-enter the stock market, or re-position their investment portfolios. But the reality is, by waiting on the sidelines, you may be missing out.
Whether your clients are sitting in cash or still seeking solace in the bond market, afraid to move back into equities, one certainty remains: the future is coming. It’s no longer enough to simply preserve what you have today; you have to start building what you need for tomorrow, and you can’t wait until tomorrow to do so. It’s time to be an investor again.
Below are three strategies to help get you off the sidelines and start participating in market opportunities again.
As we are crawling out of the lost decade, many investors remain haunted by equity bear markets and the extreme ups and downs in their investments.
Cash averages a negative return after taxes and inflation¹
For a lot of investors, that has meant switching into what many people view as a riskless trade: cash. Cash investments are typically thought of as "safe" because their goal is, first and foremost, to preserve capital. In terms of investment risk, cash is probably the safest way to go. But safety and comfort come at a price. There’s a strong possibility you may not meet your long-term investment goals if you are "stuck" in cash.
So where do you go from here? Making the leap from cash to equities may be too much for you, but a model portfolio of fixed income ETFs that is lower risk, liquid and fully transparent may give you the comfort you need to start participating in the markets again – with the potential to increase returns.
iShares Fixed Income Model Portfolios are diversified, tactically managed portfolios with a range of potential yield and risk levels. They are comprised of iShares ETFs and optimized quarterly.
As an alternative, consider iShares Diversified Monthly Income Fund (XTR). Gives you access to a diversified ETF income solution comprised of both equity and fixed income securities that seeks a consistent monthly cash distribution, with the potential for modest long-term capital growth.
1 BlackRock; Morningstar; Tax Foundation. Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs. This is for illustrative purposes only and not indicative of any investment. Federal income tax is calculated using the historical marginal and capital gains tax rates for a single taxpayer earning $110,000 in 2011 dollars every year. This annual income is adjusted using the Consumer Price Index in order to obtain the corresponding income level for each year. Income is taxed at the appropriate federal income tax rate as it occurs. Capital gains for stocks are assessed every five years when there is a cumulative gain from the last high and assume a five-year holding period to determine the long-term capital gains rate. Bonds are assumed to be held to maturity. No state income taxes are included. Stocks are represented by the S&P 500 Index. Bonds are represented by the Morningstar/Ibbotson Intermediate-Term Government Bond Index. Cash is represented by the Morningstar/Ibbotson 30-Day US Treasury Bill Index. Inflation is represented by the Consumer Price Index. It is not possible to invest directly in an index.
370,000 Canadians retire every year. This number is projected to hit 475,000 by the year 2020.* The reality is that after weathering a very difficult, near-returnless decade, many of these investors are in desperate need of total return and income growth from their portfolios – and we believe equities offer the greatest potential for providing both in the current environment.
Furthermore, Canadians are living longer than ever before. In fact, once a couple reaches age 65, studies show that there is a 50% chance that one of them will live to be at least 92². Assuming retirement at 65, their savings will have to provide income for at least 27 years. So, retirees need to construct a portfolio that can stay ahead of inflation. Unfortunately, most bonds offer no income growth at all (hence the term "fixed" income). Given enough time, even with moderate inflation, you may risk outliving your retirement. For this reason, investors planning for retirement need to find an income source that has the ability to grow, and in this low yield environment, the traditional sources are coming up short. It’s time for you to consider dividends.
Equity Yields Are Outpacing Fixed Income¹
Dividends pay, but not all are created equal. iShares has a full suite of high-quality equity funds that can help ease you back into the market by focusing on quality companies with historically² consistent dividends and the potential to grow dividends over time.
*National union research, November 2011
1 Source: Bloomberg, L.P. and BlackRock Asset Management Canada Limited. Data as of 08/31/12.
2 Source: BlackRock Asset Management Canada Limited
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|Access to a concentrated portfolio of the highest yielding, dividend-paying companies in Canada||XDV||The Fund is comprised of 30 of the highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index, as selected by Dow Jones using a rules-based methodology including an analysis of dividend growth, yield and average payout ratio.|
|A portfolio of high quality companies that have consistently increased dividends over the long-term||CUD||The Fund tracks the S&P High Yield Dividend Aristocrats CAD Hedged Index which is comprised of the highest dividend-yielding securities of the S&P Composite 1500 Index that have increased dividends every year for at least 20 consecutive years.|
|Access to dividend growers through companies that have consistently increased cash dividends for at least 5 years||CDZ||Under the Funds screening process, to qualify, securities must: a) be common stock or income trust listed on the TSE and in the S&P Canada Broad Market Index (BMI); b) have increased ordinary cash dividends for at least 5 consecutive years; c) have a minimum C$ 300 million market cap.|
|Access to 75 U.S. High-Dividend stocks in a single trade||XHD||The Fund tracks high-yielding, dividend-paying, U.S.-based securities and is a focused benchmark comprising “qualified income” paying securities screened for superior company quality and financial health, hedged to Canadian dollars.|
Investors today are nervous. Global economic uncertainty, faltering confidence in financial institutions and volatility in the stock market has remained since the economic crash of 2008-2009 and inevitably pushed investors towards the sidelines to await the elusive "right time" to re-enter the stock market. The problem is, they may be missing out on the potential upside of the market.
The truth is, Canadian’s are living longer than ever before and this longer view of retirement requires investors to consider higher-yielding assets such as equities, corporate debt and commodities, still while managing risk and volatility over the long-term. To do this, investors should consider low-beta stocks which typically don’t exhibit excessive volatility relative to the broader market. Diversified products like minimum volatility ETFs can mitigate risk in a portfolio by smoothing out its performance, especially on the downside.
What are the benefits of investing in Minimum Volatility Funds?
|Low portfolio beta||Downside protection||Diversify across asset class, sector and style|
Beta helps measure how a portfolio reacts to movements in the market.
Historically, Minimum Volatility products generally exhibit low portfolio beta, in the order of 0.7 to 0.8, relative to a capitalization weighted market index.
|Minimum Volatility products generally have approximately 20% to 30%² less portfolio volatility than the capitalization weighted market index.||Minimum volatility products capture broad equity market exposure without significant bias in countries, sectors and styles.|
Home is where the heart is, but returns can come from anywhere
Did you know that the top performing market in the global economy this year was Turkey, with a return of 46%¹? Not many people did. The reality is that while investors continue to seek comfort at home, in domestic fixed income and equities, the world is literally passing them by. Canada is still just 5% of global market capitalization. Although many investors know this, they remain stuck at home to avoid unnecessary risk in international markets.
The case for global investing
iShares Minimum Volatility Funds can help investors insulate their portfolios from wild market swings while they participate in the market. These funds can provide approximately 20% to 30%² less portfolio volatility than the capitalization weighted market index, helping investors access global, international and emerging markets with less risk.
Select one of the tickers below or click here to learn more on iShares Minimum Volatility Funds.
1 Source: Bloomberg as at of December 31, 2012
2 Source: MSCI Inc. as of March 2012