Retirement lessons from the bear

The long bear market created a financial crunch for many people and has left some very deep scars. A recent survey conducted for the Royal Bank by Ipsos-Reid found that 67 per cent of Canadians nearing retirement say the bear market has upset their plans. Of those, 60 per cent said they now plan to work longer.

In short, retirement has been postponed for tens of thousands of people in this country. That could have a significant impact on employment patterns for the next decade as older workers hang on to their jobs, blocking the progress of those coming up behind. The recent announcement by the Ontario Government that it will outlaw mandatory retirement at 65 will facilitate this.

Retirement savings fall in value
The new retirement crisis is being felt in two ways. One is the impact on personal savings. Most RRSPs have fallen in value. Those that were heavily weighted towards equities may have lost between 25 per cent and 50 per cent of their capital.

The second area of concern is the effect on pension plans. Some lost money for the first time ever as the bear market deepened. In March, Claude Lamoureux, CEO of the Ontario Teachers Pensn Plan Board, warned that unless stock markets stage a dramatic recovery, “which is not expected to happen”, teachers face the prospect of increased contributions or reduced benefits in future. Many other pension plans are saying the same thing.

Even younger people have been affected. I have received correspondence from many Canadians in their 20s and 30s, expressing dismay over what has happened to their RRSPs and questioning whether they should continue making contributions. By all accounts, the RRSP season just finished was one of the worst in years and that’s undoubtedly a manifestation of this new skepticism about the whole idea of investing for the future. There is a greater focus on using money to pay down debt, including mortgages, than I have seen in a long time.

Don’t abandon retirement plans – adjust them
Paying down debt is always a good idea. But abandoning a retirement program because you’re disenchanted with the idea of investing is not. Instead, learn from what’s happened so that you don’t make the same mistakes in future. Here are some questions to ask yourself. Be brutally frank when answering them. Playing ostrich serves no purpose.

Next page: Four lessons from the bear

Did I have a coherent plan? Personal retirement plans tend to be put together in a hap-hazard way, with more focus on tax breaks than on investing strategy. This makes them vulnerable to losses when markets dive. If you did not have a clear plan in mind when you started out, this is the time to rectify that.
Did I have the right asset allocation? Asset mix is the most important single determinant in the performance of any investment portfolio. It needs to be aligned to a person’s time horizon and risk tolerance level. If the asset allocation is very aggressive, a portfolio will perform well when markets are rising but is likely to be hard-hit when they fall. An ultra-conservative asset mix will produce below-average returns when economic conditions are strong, but will protect capital in bad times.

There is no perfect asset allocation. The right mix is the one that best matches your goals and temperament. Many people discovered in the bear market that their asset mix was far too aggressive for their nature. Based on this experience, it’s time to decide on an allocation that you’ll be comfortable with going forward, in good times and bad.

How did I select securities? Often, securities are chosen almost on a whim. Someone tells you about a stock or you see an ad promoting a mutual fund that catches your eye. Perhaps you go into a bank and an advisor there suggests some in-house funds for your account. Unless they have a financial advisor, people often fail to use a disciplined method of deciding which securities to hold in their retirement portfolios. The result is a hodge-podge.

How often did I review my portfolio? I know that some people are tossing their monthly statements into a wastebasket because they can’t face the latest bad news. It would be much smarter to do a careful analysis and make whatever changes are appropriate. You should review your total portfolio, including RRSPs, at least once a quarter and preferably once a month. Be thorough and be decisive. If changes need to be made, pick up the phone and make them.

We all make mistakes. The smart ones among us learn from them.

Adapted from an article that originally appeared in The MoneyLetter, published by MPL Communications.