7 Ways to Invest Your Retirement Savings

Recently, we have received several questions that revolve around how to invest for your retirement.  In a continuing effort to assist you in the process of building a significant nest egg, we recently detailed How to Create a Couch Potato Portfolio. If you are looking to actively invest your retirement savings, this article is designed to help you.  We have put together information on 7 Ways to Invest Your Retirement Savings, from safe to speculative.

1- Cash & Near-Cash

Now I can hear it already, cash is not a place to invest your savings!  What you want to think about is where your savings are while waiting to invest for the long term.  Near-cash include term deposits with less than 12 months before its maturity date.  These days, cash deposits are yielding next to nothing as financial institutions can borrow from the Government near 0% anyways.

2- Guaranteed Deposits

Depending on where you live and what institution you choose to do business with, guaranteed deposits are also known as Certificates of Deposit (CDs), Guaranteed Investment Certificates (GICs) or Term Deposits.  The paramount question to ask when making comparisons is not How Much but By Who?  Yes, the interest rate is important but let’s make sure we learn from the Commercial Paper disaster of not so long ago.  The most important factor to consider is who is guaranteeing the security of your capital and the interest rate for the term.  Next to consider is the term to maturity, how many years will you forego access to your money.  Last but not least, make sure you can beat inflation with the interest rate you accept.

3- Bonds

Bonds are debt instruments used by different levels of government; federal, state/provincial and municipal as well as by corporations. The seller promises to pay interest, normally on a semi-annual basis, and return the capital at the maturity date.  Again, the safety of your investment depends heavily on the continued operation of the issuer.  Potential bankruptcy or financial restructuring is BAD!  During 2010, overall bond yields (measured by the DEX Universe Bond index yields), started the year at 3.32%, reaching a high of 3.62% in April and fell to a low of 2.72% in October before settling at 3.11% for the year.

But beware, investors face the risk of losing money on fixed income securities in 2011, and should be shifting their funds into equities and commodities. Fixed income investments are not risk-free.

4- Preferred Shares – Dividends

If you are wary of bonds, and you should be, here is an interesting alternative, high quality, dividend-paying stocks.  If you are more conservative, stick with preferred shares that are prioritized when it comes to paying dividends.  If you want access to capital gains as well, stick with common shares in more secure names with clear historical track records.

5- Value Stocks

Traditionally, stocks are broken down into value versus growth.  Value companies tend to grow in a sure & steady fashion, with an emphasis on return for the investor.  Large cap stocks (S&P/TSX 60 index) which returned 13.8% and value stocks outperformed growth stocks as shown by the S&P Canada BMI value and growth indices, which returned 20.6% and 16.5% respectively.

6- Growth Stocks

As opposed to value stocks, growth-oriented businesses pour cash back into their projects in order to fuel potential increases in sales, revenues and, hopefully, profits.  Canadian equities was the best performing asset class in 2010 with a return of 17.6%. Small cap stocks returned 35.1% (S&P/TSX SmallCap Index) in 2011.

7- Speculation

Rather than add the multitude of other asset classes to the list, I would rather just lump them together under the heading: Speculation.  Depending on your investing experience, the advice you are following, there may be room to dedicate 5-10% of your savings to speculation.  You might like commodities like gold or oil, maybe emerging markets like the BRIC countries (Brazil, Russia, India & China) or maybe you are betting on currencies, CAD, AUS, EUR, YEN or the Yuan.

International equities, as measured by the MSCI EAFE (CAD) index, provided a return of 2.6% in 2010. Emerging markets, as measured by the MSCI Emerging Markets (CAD) index, returned 13.0% in 2010.

Having said all this, use these 7 Ways to implement Your Ideal Asset Allocation to Invest Your Retirement Savings.  Investors should maintain a well-diversified portfolio of stocks, bonds and commodities, with plenty of international diversification. You should understand that with economic cycles having become increasingly short and volatile, it’s critical to have a portfolio designed to weather any type of economic storm.

Do you feel better prepared to move forward?  What else can we share to support you in your quest for success?  We look forward to your comments.

Author: Robert

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