By Trevor Anzai, Senior Client Administrator
CrossPoint Financial | iA Private Wealth

Brent Vandermeer, Portfolio Manager
CrossPoint Financial | iA Private Wealth
Managing Partner of CrossPoint Financial

My family participated in fun activities when we visited Costa Rica 2009. We hiked, surfed, and travelled. Everyone went ziplining one day, but I stayed behind. I have a fear of heights, so instead, I went frog watching. My family returned from ziplining and raved about the adventure. They saw a couple of sloths from the treetops. I missed a great opportunity. I’ve always wanted to see a sloth with my own eyes. I played it safe by frog watching. I missed out on what could’ve been—sloth sightseeing and a fun time.

What do my family trip, feelings of missing out, frogs and sloths have to do with anything financial? Well, there’s a parallel I would like to draw with the financial markets.

This year in North America, we see that equity markets are down about 20%, and fixed income markets are down by about 10%. And then we hear about GIC’s returning a positive 4%…is that not attractive? As we will see, playing it safe also means we might miss what could’ve been.

Risk aversion can be a threat for long-term investors.

We can play it safe by frog-watching or investing in GICs. But taking a risk to zipline, or investing in the markets, could yield a greater reward. Assuming we are considering someone with a long-term horizon, the truth is being in the market is usually better than being out of the market, which holds true even during tough economic periods.

Example:

Say we have $10,000 right now to invest.

We look at the financial markets and see that markets are down. By playing it safe, we decide to invest in a 1-year GIC at 4%. Good news: one year from now, we will receive the interest and receive $400 on our investment. Good job. We high-five each other and celebrate. However, GICs miss out on potential gains and increased income in the long run.

GIC rates fluctuate. Remember, it’s not always at 4% because inflation isn’t normally this high. For this example, let’s say inflation cools down in the next year or so, and in the long run, we can expect an average yearly GIC rate of 1.5%. Say we initially invested this $10,000 in a GIC at 1.5%. We then reinvest every year for twenty years, and the investment would grow to roughly $13,500. (note: is a 1.5% average rate pretty accurate given your experience?)

Yet, things could look rosier if we invested the same $10,000 in the bond market. Let’s say the average return for 10-year Canadian government bonds is 3.5%. If we assume that will be the rate of return for the next twenty years, we would expect the investment to grow around $20,000! Ahem, that is a 50% increase compared to a GIC. Current 10-year treasury yield is ~3.5%.

And if we invested $10,000 today in the equity market, we might see even more rewards. If stocks returned an average of 5% over the last two decades, we then expect the investment to grow around $26,000 over the next twenty years. Well, this is almost a 100% increase compared to a GIC.

To recap, $10,000 investment twenty years from now:

GIC— $13,500
Bonds— $20,000
Stocks— $26,000
Higher risk = higher reward

In the short term, we might be tempted to keep it safe. There might be a good reason to invest in a GIC if we need the money soon. But otherwise, it might be better to stay in the market. And it could be even better by buying low.

Sure, the economy has ups and downs, just like ziplining. If we play it safe, we could miss rewarding opportunities.

Trevor Anzai is a Senior Client Administrator with CrossPoint Financial | iA Private Wealth