As I’m writing this, the 30-year U.S. government bond is yielding 1.40% and the 30-year Canadian equivalent is yielding 1.09%. Who would ever have expected that? And who can live on that?
The Baby Boom generation reached adulthood just as a long decline in interest rates began. As rates and inflation fell, bond yields were good and bond prices rose as rates continued to drop. But things have changed.
This generation of retirees looking forward to “go go” years are potentially facing “no go” years with little cash to spare and continuous rounds of belt tightening flow if bonds are their main source of income. If they can eke out a return of 1-2% it means a loss of purchasing power after inflation. That means eating into principal and running the risk of outliving your savings.
At Harvest ETFs, we think there is an alternative.
As in your working life, you need your investments to grow in retirement. A good way to do that is a mix of assets, including stocks, bonds, and cash with a higher portion of stocks than has previously been the case. You don’t abandon bonds and other fixed income options. They will always have a place in your portfolio. But you adjust your mix to reflect our new low rate world. This will help generate the cash you need.
At Harvest, we achieve this through a family of ETFs that invest in great global companies with strong business models. While their share prices move with market conditions, they generally fall least and recover first. They can withstand downturns and uncertain conditions while continuing to pay dividends. They have deep pockets and the financial resources to acquire competitors and so emerge from downturns even stronger. It would seem to me this approach presents a solid strategy.
We enhance our returns with our covered call strategy which reduces risk. It is something I have written about before. You sell a portion of the potential rise in stock price in exchange for a fee. The fee limits the gain a bit, but it also acts as a cushion if share prices fall. Covered call options are a Harvest specialty.
Some retirees wonder if a strategy that weights stocks in retirement more heavily than traditionally thought increases their risk. Another way of looking at that is to turn it around. If you don’t adjust your mix, are you possibly taking a bigger risk? If your main objective is to have enough cash coming in to live comfortably, it may be risky investing in a five-year GIC or a government bond. True, it preserves capital which reduces one risk, but it introduces the risk of not having enough cash to be comfortable.
Retirees also worry about share prices falling. This happens periodically even with the best companies losing some ground. But if the companies you own are the best of the best, they will generally rebound and keep paying dividends. Of course, any loss is not realized until you sell.
Some types of fixed income are riskier than stocks. That is because in order to generate cash in today’s climate, you must go down the corporate credit quality scale. That means companies with higher business risks and likely depressed industry conditions. Their potential for default is something to consider.
Stock markets have historically grown at an average 6% to 8% compounded annual rate over time. There are up years and down years, but the longer the horizon, the more likely that average comes into play. If your horizon is short, say five years or less, the risk of a down market is higher as it takes time to recover from sharp market sell offs. If you are looking at 5-10 or more years, time will smooth out the volatility and lower your risk.
Harvest Equity Income ETFs focus on growing industries and sectors, looking for the best companies. The dividends and call options create long term returns that on average match the long run stock market returns.
Fixed income has a role in various portfolios, but we believe the call to equity income is growing in these times of low interest rates and longer retirements.
Our approach is simple: We believe in long term growth opportunities through the ownership of great businesses, while generating steady income along the way. Our mandate is simple, transparent and growth oriented. Our ETFs own: quality, quality, quality.
President & CEO
Published by Harvest ETFs
(Managed by Harvest Portfolios Group Inc.)