The way it was
The choice used to be obvious. If you wanted to protect your principal, or generate a regular cash flow, you were probably an income investor. If you wanted to see your fortune expand, and had no need for the additional income, you were a growth investor.
Income investors looked to fixed income vehicles to provide them with security and cash flow: Bonds, GICs, savings accounts, term deposits, and preferred shares. Growth investors turned to stocks for their returns, looking for increases in the prices of their securities to fuel their return objectives.
As mutual funds grew in popularity, and, in turn, ETFs, investors were able to mix the two objectives and own what were called balanced funds. These were portfolios that were allocated across both equity (stocks) and fixed income (GICs, bonds, preferred shares) assets. Buzzwords often used with these investments were words like ‘asset allocation’ and ‘efficient frontier’ - fancy terms for not putting all your eggs in the same basket.
And the way it is
The financial crises of 2008 came along after that, and things changed. Interest rates now seem to be hovering at permanent lows, as central bankers (think Janet Yellen or Stephen Poloz) continue to fight to keep challenged economies on track. Stock markets have been increasingly volatile with S&P/TSX composite still well below the dizzying heights of 2008.
So what’s an investor to do?
Low interest rates may be good for borrowers, but for those who rely on the income from investments, it means either accepting rates of return below 3% if they want principal guarantees, or venturing into different investment arenas. These may offer better income distributions, but also increase the level of risk your principal is exposed to.
For growth investors, the lack of momentum in Canadian share prices has pushed many to dividend and income paying securities to supplement the lack of price appreciation. If one is going to wait for markets to move, getting paid to wait is better than just waiting.
Be flexible
The answer is, then, to be flexible. Don’t rule out opportunities simply because of past convention.
Bicycles today come with a set of gears, not because they’re fun to shift, but because the grade of the landscape is always changing. It is easier and more efficient to change gears than to get off your bike and push it up a long hill. It is similar in the markets: The appearance of change is not a sign to stop or give up, it is simply an opportunity to use something better suited to the challenge.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.