Sunday, May 1, 2011

Fixed-income fixation

Conservative investors typically gravitate toward ‘safe’ investments, usually fixed-income investments. But with interest rates still hovering at historic lows, conservative investors may be concerned about whether their fixed-income investments will keep up with rising inflation levels or unexpected life events and adequately fund their retirement years.

Those are valid concerns. Let’s look into and beyond fixed-income investments to see what can be done to alleviate them.
  • Conservative investors like fixed-income securities such as bonds, GICs, and savings accounts because they have a reputation for reliability, stability, and security – and they do have an important place in a well-diversified portfolio. The suitability of fixed-income investments really depends on each investor’s objectives. If you’re looking to generate a steady income over many years, long-term bonds and GICs can make sense. If you are seeking capital preservation and liquidity, money market investments may be for you. If you need growth in a rising interest/inflation rate environment, short-term bonds may be the answer. As well, equity investments can be a good way to further diversify the portfolio while potentially improving the return, even for a conservative investor.
  • The key is to always have a well-balanced portfolio tailored precisely to your expectations for growth, tolerance for risk, and life/retirement objectives. But well-balanced today doesn’t necessarily mean well-balanced tomorrow.
    • Interest and inflation rates go up and down
    • Markets and the economy go up and down
    • Your life changes – maybe you are now taking care of an adult child or have additional health care costs
    • You revise your retirement dreams – adding more travel or deciding to downsize earlier rather than later
  • That’s why reassessing your financial life and plans are critical to ensuring a well-funded retirement. Your initial plan provided guidance on your goals at that time and how to invest to achieve them. But, as time goes by, the actual returns on your investments may be different than anticipated, or your retirement objectives may have changed – so you need to re-evaluate … and the best way to do that is through an annual review of your current portfolio and retirement plans to ensure your investment plan and retirement income measure up to your expectations.
By consistently evaluating your investments based on the potential for changes in the economy and your personal life, you can help ensure you are prepared to cope with the challenges while continuing to financially prepare to achieve your retirement dreams. Your professional advisor can work with you to determine the right diversification based on both personal and external factors.

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