Michael Popovich, a dentist, suffered a massive heart attack at age 52. His doctor, not surprisingly, told him that going back to work was a bad idea. Faced with the sudden prospect of losing several of his prime income-earning years, Popovich sold his dental practice in Thamesville, Ont., and began searching for a way to fund his unexpectedly long retirement.
Like many Canadians, he was attracted to the reliable monthly income stream that came with investing in income trusts (unlike corporations, trusts pay out most of their profits to investors). But he was forced to rethink his investing strategy after Ottawa said in 2006 that it would begin taxing the popular investment vehicles in four years, citing concerns about a loss of tax revenue. The value of Popovich’s holdings plummeted overnight.
Now, three years and one market crash later, he is one of millions of Canadians trying to retool their retirement portfolios. While some financial advisers are no doubt telling clients it’s a good time to get back into the stock market, you can’t blame people for being a little gun-shy. But playing it safe in an era of historically low interest rates isn’t a magic bullet either. “There are very few good options out there,” Popovich says. “Interest rates aren’t going to come back for a long time so you can’t count on that. Corporate investments are iffy because you don’t know where you’re going to go with those things.”
Financial institutions have taken notice of the dilemma and have rushed to devise a host of so-called “safe” investment products peppered with buzzwords like “protection,” “guaranteed” and “security,” but that still promise equity-like returns. Not surprisingly, though, the risk reduction comes at a price—often a steep one.
It’s a confusing landscape littered with hidden fees and potential ticking time bombs—all at a time when a do-it-yourself investing strategy is becoming more important than ever. The days when Canadians could depend on a company pension for a comfortable retirement are rapidly slipping away. “The demographics of our country, in terms of our aging population, and the status of our pension plans means [Canadians] have to save and invest for themselves,” says Alexander Irwin, the director of the Canadian Retired & Income Investors’ Association. “But as many come to live on their savings, they will discover they don’t have enough to live on.”
That is, of course, unless they manage to invest wisely, something that these days is often easier said than done.
A recent industry poll suggests that nearly a third of Canadians planning for retirement are now investing more cautiously, up from just 20 per cent a year ago. The trend doesn’t surprise Tom Hamza, president of the Investor Education Fund, a non-profit group established nearly a decade ago by the Ontario Securities Commission. Hamza says there has been a noticeable increase in the number of people seeking information about guaranteed investment certiﬁcates, or GICs, on the group’s website.
With caution the new buzzword, financial institutions have stepped in with an increasingly wide array of products that promise investors exposure to market gains while guaranteeing they won’t lose their principal. The advertisements sound like the perfect blend of minimal risk and maximum return. But experts warn such products aren’t always what they are cracked up to be.
On the GIC front, the trend in recent years has been toward so-called market-linked GICs. CIBC’s Stock Market Advantage GIC is a typical example. For a minimum investment of $500, it offers the chance “to take advantage of the growth potential of investing in Canadian stock markets, but with full protection of your principal.” The trade-off is that investors aren’t exposed to the market’s full upside potential, but are instead offered a “participation rate” of 35 per cent for a three-year term. They only enjoy a portion of the market’s gains each year. That’s potentially better than a plain vanilla GIC if the markets do well, but if the markets stay flat or fall, as they did last year, investors risk earning no interest at all on their investments after parking their cash for 36 months. While some market-linked GICs do offer guaranteed minimum returns, the minimums are generally less than what a regular GIC would guarantee over the same period.