Portfolio manager shares how current challenges are weighing on asset-allocation priorities and retirement planning
The past two years have been a wild roller-coaster ride for the economy and financial markets, which has created new challenges for clients’ financial planning, according to one investment professional.
“We are in the aftermath of a global pandemic and entering into an inflationary period with rising interest rates, something we haven't seen in quite some time," said Bill Richardson, Portfolio Manager at Harbourfront Wealth Management. "For the time being, investors should proceed with caution."
Richardson cited various factors that contributed to the unpredictability of the markets. In the depths of the pandemic-driven recession, demand for goods and services collapsed. Fast forward to today, and economies around the world are seeing decade-high rates of inflation.
Vladimir Putin’s fateful decision to wage war on Ukraine triggered a backlash against the Russian government, putting upward pressure on the price of oil. Food prices also surged as retailers scrambled to meet increased demand from consumers, Richardson said.
“Increases in the cost of living has been hard on everyone including our clients,” he said. “They have had to adjust their budgets drastically and many are now struggling to make ends meet.”
The resulting stress weighing on clients is reflecting in their financial planning. With less money to spend and save, he said clients who used to be so focused and driven to achieve long-term financial goals are now more worried about the day-to-day.
From a portfolio management standpoint, he said the current economic conditions have made bonds an even harder sell than in the years immediately before the pandemic. Bond prices topped out when inflation started to accelerate in 2020, he said, and the current low and rising-rate environment is a challenging one from a fixed-income perspective.
“Bonds are good investments when interest rates are high or falling. That’s not the case today,” Richardson said. “Investors should not be trying to lock in interest rates at current levels but borrowers should.”
While Richardson said his team has always put maximum emphasis on earnings growth rates for stocks, present conditions are making them more focused on value. With higher interest rates on the horizon, there’s a good chance of adding great companies to portfolios at reasonable or potentially bargain-basement valuations.
It’s a page straight out of the value investors’ playbook. As rates rise and stocks fall, many investors are likely to succumb to fear. The ones who can afford to be greedy while others run for the doors, therefore, have a chance to snap up companies with long records of consistent and predictable earnings growth, as well as reasonable expectations of continuing to do so.
“Higher interest rates may lead to lower valuations,” Richardson said. “With many companies delivering strong earnings, this may lead to better prices for entry into the shares of great companies.”
One area of alternative investment Harbourfront has its eye on is private debt, including private mortgages and commercial loans. Most private lenders offer loans with relatively short terms and relatively high rates, Richardson said. Most of the mortgages they issue are floating-rate loans, he added, which means investors get higher returns if interest rates rise.
With inflation proving to be less transitory than central bank policymakers might have initially believed, he said it’s an opportune time for investors to revisit their financial plans. Assuming inflation continues, it would spell an increase in the costs of retirement and the costs of living. For pre-retirees, it’s less money for their nest egg, and possibly a one- to two-year delay in their retirement.
In a rising-rate environment, interest rates on bonds and GICs will also increase; for lower-risk investors who have not yet locked in their money toward those investments, Richardson said they could make sense in helping to offset the higher costs of living. Stock investors, he added, may also want to decrease their expectations of returns.
“I also think investors should be revisiting their risk profiles,” Richardson said. “If we are going through a period of higher interest rates, equity risks increase and so more elderly investors may want to get a little more defensive.”