Stocks vs GICs
So, you asked, Sharon, if you should move your money into guaranteed investment certificates (GICs). GIC rates are great right now, paying 4.5% to 5%. Those rates could move higher still. After losing money in stocks, if you were to sell and buy a 5-year GIC paying 5%, your annualized return over the next five years would be 5%. Based on historic stock market downturns, the subsequent 5-year stock market returns have been more than double that.
My guess is—because that is all it is—that stocks will provide a better return over the next five years than a GIC. And if you have a globally diversified portfolio, it is more likely your returns will be strong compared to owning a portfolio of a few stocks in a few sectors with more company or sector risk.
Sharon, I can say, with a high degree of likelihood, by the time you need your money in 18 years, when you plan to retire, that stocks will provide a much higher return than GICs.
When it makes sense to hold onto stocks
Day to day, whether stocks will be up or down is basically a coin toss. Year to year, they have been up historically more than two-thirds of the time. An investor with a long time horizon like you should invest based on their risk tolerance to avoid panicking and selling at a low point, ideally holding as much exposure to risk assets as they can handle.
You mention that you cannot contribute to your LIRA account, and that is true. It is locked-in and does not allow new contributions. I can only assume if you are not contributing to a regular registered retirement plan (RRSP) account that you are a defined benefit pension plan member. That would wipe out nearly all of your annual RRSP room. If you have a guaranteed monthly income in retirement from your pension, that is kind of like a GIC or fixed income investment to begin with, so I would be even more inclined to maintain stock market exposure in your LIRA.
Using a LIRA to invest in mortgage funds
You ask about investing in a mortgage fund, Sharon. That is possible within a LIRA. There are publicly traded as well as private mortgage funds that are eligible to purchase in registered accounts. There is no magic to a mortgage fund. The expected returns are generally higher than GICs but so too is the risk. The upside potential is also limited if you are thinking of selling your stocks at a loss today to buy a mortgage fund.
Arguably, stock market returns may be higher over the medium term. If you decide to buy a mortgage fund with your LIRA, Sharon, it should be a small percentage of your account with a well diversified exposure to other types of investments that fit with your risk tolerance.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
