What to do about 10% loss in RRIF and TFSA investments (Canada)?
June 12, 2022 4:23 PM Subscribe
Should someone in their 70s keep their money in these investments or put it somewhere else? If so, where?
I know tragically little about personal finance (not proud of it), so go easy please…
This person’s entire retirement savings are bound up in these kinds of investments. As mentioned, they’re in their 70s, so obviously real estate would be a bad place to put money. Where would be a good place to put it, given [war, supply chain problems, etc etc]?
The loss was a decent sum, the concern is obviously losing more of it.
Is there an impartial finance professional who can advise, or how does that work? I think their current advisor is affiliated with a bank.
I know tragically little about personal finance (not proud of it), so go easy please…
This person’s entire retirement savings are bound up in these kinds of investments. As mentioned, they’re in their 70s, so obviously real estate would be a bad place to put money. Where would be a good place to put it, given [war, supply chain problems, etc etc]?
The loss was a decent sum, the concern is obviously losing more of it.
Is there an impartial finance professional who can advise, or how does that work? I think their current advisor is affiliated with a bank.
Response by poster: Thank you, ssg! I feel that at some point, I knew marginally more about this - eg what a TFSA and RRIF roughly are :/ - than I do on this day :/ which has been long. But today I needed every word, thank you, really! So, coming slightly to now, and not intending to have a back and forth after this, wouldn’t bonds or GICs offer less return than inflation (so wouldn’t that also be a loss)?
Apparently yes, they’re all “equities” (stocks an investment advisor with a brokerage chose, so [I was just explained] not an index fund?). I guess they’re companies most people would probably know?
The brokerage is affiliated with a bank. The person I’m asking about just said they didn’t trust fee-for-service advisors because they think they’re motivated to “churn” (?). Is there a way of finding one who won’t, or what’s a good resource for finding someone appropriate?
posted by cotton dress sock at 5:54 PM on June 12, 2022
Apparently yes, they’re all “equities” (stocks an investment advisor with a brokerage chose, so [I was just explained] not an index fund?). I guess they’re companies most people would probably know?
The brokerage is affiliated with a bank. The person I’m asking about just said they didn’t trust fee-for-service advisors because they think they’re motivated to “churn” (?). Is there a way of finding one who won’t, or what’s a good resource for finding someone appropriate?
posted by cotton dress sock at 5:54 PM on June 12, 2022
Best answer: Consider that the market hops up and down all the time. If your friend's investments are in the market it's a bumpy ride right now. But not a time to make snap decisions. As an advisor once said to me, "It's a loss on paper at the moment, but sell now and you will lose the money for real". It can be very frightening, and maybe now is the time for your friend to assess how much risk -ie stress, they can handle with their investments. Keep in mind that as mentioned, higher risk usually means more reward.
The feds have a great resource for finding advisors Once settled with a new advisor, and if still risk averse, have the advisor change the investment mix to something more "defensive".
As to investing in real estate there are many REITs (Real Estate Investment Trusts) that follow the real estate market. Some are broad and mirror all sectors, others are specific to commercial, or industrial, or residential, or even rentals. REITs are traded via ETFs (a lot initials, I know, but bear with me) Here's how it works. REIT ETF's can be held in RIFFs and TFSAs.
posted by Zedcaster at 5:57 PM on June 12, 2022 [2 favorites]
The feds have a great resource for finding advisors Once settled with a new advisor, and if still risk averse, have the advisor change the investment mix to something more "defensive".
As to investing in real estate there are many REITs (Real Estate Investment Trusts) that follow the real estate market. Some are broad and mirror all sectors, others are specific to commercial, or industrial, or residential, or even rentals. REITs are traded via ETFs (a lot initials, I know, but bear with me) Here's how it works. REIT ETF's can be held in RIFFs and TFSAs.
posted by Zedcaster at 5:57 PM on June 12, 2022 [2 favorites]
Best answer: The stock market had a sudden sharp drop, but if you look at what it did over the past five years you will see the way that it bounced around but was trending up until COVID made it take a sharp drop in 2020. It then immediately starting heading up until it was sooner higher than it had been pre-COVID. Despite the current drop, money in the stock market for the past few years has provided a very good return (unless you just bought your shares in early 2022).
Also notice that if you sold stock after the huge drop in early 2020 and then stayed out of the market until you were sure it had recovered, you would have taken a huge loss and then not gotten back into the market until the biggest recovery had already happened. That's the classic mistake of emotional investors - they sell after it's gone down and don't buy until after it has already made its big move back up. This is why people recommend a buy and hold strategy and to avoid market timing.
It's typical that the stock market does go up and down (not just up) but on average, over time (say a decade) it will do better than almost any investment. That said, sometimes the drops are scary and it can take a few years to recover.
My general advice for your friend is to think about how soon he needs his money. Money that will cover his expenses for the next year or two should be in cash or something very close to cash. Money that he will need in the medium term (maybe 3-7 years out) should be in something less volitile than the stock market - certificates of deposit, government securities, bonds. Money set aside for his long term future should be in the stock market since that has the best bet of giving him the strongest return.
Also, a fee for service advisor gets paid for the service of making the plan. (In other words, the service is the plan, not the trades) A commission based broker is one who gets paid based on the transactions (or mix of fixed fee plus commission).If your friend uses a fee for service advisor, he can then use a low cost broker to implement the plan.
posted by metahawk at 7:00 PM on June 12, 2022 [2 favorites]
Also notice that if you sold stock after the huge drop in early 2020 and then stayed out of the market until you were sure it had recovered, you would have taken a huge loss and then not gotten back into the market until the biggest recovery had already happened. That's the classic mistake of emotional investors - they sell after it's gone down and don't buy until after it has already made its big move back up. This is why people recommend a buy and hold strategy and to avoid market timing.
It's typical that the stock market does go up and down (not just up) but on average, over time (say a decade) it will do better than almost any investment. That said, sometimes the drops are scary and it can take a few years to recover.
My general advice for your friend is to think about how soon he needs his money. Money that will cover his expenses for the next year or two should be in cash or something very close to cash. Money that he will need in the medium term (maybe 3-7 years out) should be in something less volitile than the stock market - certificates of deposit, government securities, bonds. Money set aside for his long term future should be in the stock market since that has the best bet of giving him the strongest return.
Also, a fee for service advisor gets paid for the service of making the plan. (In other words, the service is the plan, not the trades) A commission based broker is one who gets paid based on the transactions (or mix of fixed fee plus commission).If your friend uses a fee for service advisor, he can then use a low cost broker to implement the plan.
posted by metahawk at 7:00 PM on June 12, 2022 [2 favorites]
Best answer: wouldn’t bonds or GICs offer less return than inflation (so wouldn’t that also be a loss)?
Yes, if you're talking about something with near-zero risk like a GIC, the return is currently significantly less than inflation. Hard to know how long that situation will last. Overall, historically, you'll do better in the stock market in the long term (as long as your time horizon is more than say six years or so, based on the last 40 years), but there is always a risk of a prolonged downturn. That's why it depends on how much this person has, how much they need, etc.
If they need every penny, then a lower-risk strategy might be better even if the real return is currently negative (because it may be more important to definitely have $X per year than possibly to have 30%, i.e. your first dollar is worth more to you than your hundred-thousandth dollar). If they can afford to lose some, then keeping it in stocks might be fine. There are also, of course, more conservative stock investing approaches that focus on companies that are less volatile (utilities, banks, etc), so there's a spectrum here.
One thing I'd advise is not investing too much in fossil fuels and fossil fuel infrastructure, which are unfortunately a significant part of the Canadian market. This isn't just for ethical reasons (though those are important), but also because I think it is likely that these assets will lose value as we switch to alternatives. But that's just my opinion.
The person I’m asking about just said they didn’t trust fee-for-service advisors because they think they’re motivated to “churn” (?).
They can be clear that they are looking for a set-it-and-forget-it approach or are only willing to look at updating once per year or whatever they are comfortable with. A fee-for-service advisor can't force you to hire them again to churn anything.
posted by ssg at 7:01 PM on June 12, 2022 [2 favorites]
Yes, if you're talking about something with near-zero risk like a GIC, the return is currently significantly less than inflation. Hard to know how long that situation will last. Overall, historically, you'll do better in the stock market in the long term (as long as your time horizon is more than say six years or so, based on the last 40 years), but there is always a risk of a prolonged downturn. That's why it depends on how much this person has, how much they need, etc.
If they need every penny, then a lower-risk strategy might be better even if the real return is currently negative (because it may be more important to definitely have $X per year than possibly to have 30%, i.e. your first dollar is worth more to you than your hundred-thousandth dollar). If they can afford to lose some, then keeping it in stocks might be fine. There are also, of course, more conservative stock investing approaches that focus on companies that are less volatile (utilities, banks, etc), so there's a spectrum here.
One thing I'd advise is not investing too much in fossil fuels and fossil fuel infrastructure, which are unfortunately a significant part of the Canadian market. This isn't just for ethical reasons (though those are important), but also because I think it is likely that these assets will lose value as we switch to alternatives. But that's just my opinion.
The person I’m asking about just said they didn’t trust fee-for-service advisors because they think they’re motivated to “churn” (?).
They can be clear that they are looking for a set-it-and-forget-it approach or are only willing to look at updating once per year or whatever they are comfortable with. A fee-for-service advisor can't force you to hire them again to churn anything.
posted by ssg at 7:01 PM on June 12, 2022 [2 favorites]
Best answer: ssg's advice is spot-on, and seeking second or third opinions is never a bad thing.
The person I’m asking about just said they didn’t trust fee-for-service advisors because they think they’re motivated to “churn” (?).
In general, "fee-based" advisors are a good thing, in that they're not working on commission for pushing particular products (e.g., a particular brand of mutual funds).
In Canada, "fee-based" can mean a few different things. Ideally for a client, it means that the fee charged by the advisor is just a percentage of the assets they manage for the client, full stop.
In other words, there's no incentive for them to "churn" a client's portfolio by making more trades on it, and having more assets under management is the incentive for the advisor to make sure they are maximizing a client's returns (and therefore the assets they get a percentage fee for managing). Source: I've worked for the investment advisory arm of a large Canadian bank.
Certain fee structures can be an incentive for an advisor to engage in "churn," so your friend's concern is not entirely misplaced. It's just a question of being clear on what the advisor's fee structure is, what it's for, etc. A bit more on types of fees here.
It's still a thing that happens, but it's less common now than it used to be because there is way more sensitivity to fees charged by advisors and people (rightly) asking what they're for. There are also plenty of low-fee/discount brokerage self-directed options out there than there were even 20 years ago that advisors have to compete with.
posted by mandolin conspiracy at 7:26 PM on June 12, 2022 [1 favorite]
The person I’m asking about just said they didn’t trust fee-for-service advisors because they think they’re motivated to “churn” (?).
In general, "fee-based" advisors are a good thing, in that they're not working on commission for pushing particular products (e.g., a particular brand of mutual funds).
In Canada, "fee-based" can mean a few different things. Ideally for a client, it means that the fee charged by the advisor is just a percentage of the assets they manage for the client, full stop.
In other words, there's no incentive for them to "churn" a client's portfolio by making more trades on it, and having more assets under management is the incentive for the advisor to make sure they are maximizing a client's returns (and therefore the assets they get a percentage fee for managing). Source: I've worked for the investment advisory arm of a large Canadian bank.
Certain fee structures can be an incentive for an advisor to engage in "churn," so your friend's concern is not entirely misplaced. It's just a question of being clear on what the advisor's fee structure is, what it's for, etc. A bit more on types of fees here.
It's still a thing that happens, but it's less common now than it used to be because there is way more sensitivity to fees charged by advisors and people (rightly) asking what they're for. There are also plenty of low-fee/discount brokerage self-directed options out there than there were even 20 years ago that advisors have to compete with.
posted by mandolin conspiracy at 7:26 PM on June 12, 2022 [1 favorite]
Best answer: In addition to the fee-for-service advisors that mandolin conspiracy is talking about who charge a percentage, you can also hire a fee-for-service advisor or planner who charges a flat rate for a plan or an hourly rate and then you take their advice and implement it yourself - i.e. open accounts at a discount brokerage if required, transfer all or part of the TFSA and RRIF there, and adjust the holdings in line with the plan yourself. It depends how much you're willing to pay for someone to take care of it for you.
posted by ssg at 7:42 PM on June 12, 2022 [2 favorites]
posted by ssg at 7:42 PM on June 12, 2022 [2 favorites]
I know someone who had to start learning about investments, from scratch, at about the age your person is now.
My person found a fee-based advisor - one who charged by the hour, NOT by the value of the account - and my person was very happy with this advisor, ended up feeling like they had a much better understanding of their accounts and that they were getting good advice. (This advisor leaned toward index funds, and had a good handle on how conservatively to invest during retirement years - the advisor suggested some stock market index funds to get higher returns over time, but also a hefty chunk of bond index funds to cut the risk.)
If you or your person would like to learn more about this stuff from non-scammy sources, I highly recommend the Bogleheads forum and especially the Bogleheads wiki. Here's the wiki page on inflation and retirement spending, for example. Unfortunately, the info does tend to skew toward US situations, but the wiki is pretty good about marking US-specific advice, and if you ask a question in the forums and are specific about your situation, you should get relevant advice. ... and indeed, looking up your topics in the wiki, I found the Seeking Advice page and learned that they recommend the Financial Wisdom Forum, which they describe as their sister forum, so I bet it's great. Here's an example search for RRIF TFSA retired .
I hope this is helpful, to you and your person. Please don't feel bad about not knowing this stuff - it's not something any of us is born knowing. But you CAN learn, if you want, and the very basics are actually not that hard.
Good luck - you can do this, and so can your person!
posted by kristi at 6:24 PM on June 14, 2022 [2 favorites]
My person found a fee-based advisor - one who charged by the hour, NOT by the value of the account - and my person was very happy with this advisor, ended up feeling like they had a much better understanding of their accounts and that they were getting good advice. (This advisor leaned toward index funds, and had a good handle on how conservatively to invest during retirement years - the advisor suggested some stock market index funds to get higher returns over time, but also a hefty chunk of bond index funds to cut the risk.)
If you or your person would like to learn more about this stuff from non-scammy sources, I highly recommend the Bogleheads forum and especially the Bogleheads wiki. Here's the wiki page on inflation and retirement spending, for example. Unfortunately, the info does tend to skew toward US situations, but the wiki is pretty good about marking US-specific advice, and if you ask a question in the forums and are specific about your situation, you should get relevant advice. ... and indeed, looking up your topics in the wiki, I found the Seeking Advice page and learned that they recommend the Financial Wisdom Forum, which they describe as their sister forum, so I bet it's great. Here's an example search for RRIF TFSA retired .
I hope this is helpful, to you and your person. Please don't feel bad about not knowing this stuff - it's not something any of us is born knowing. But you CAN learn, if you want, and the very basics are actually not that hard.
Good luck - you can do this, and so can your person!
posted by kristi at 6:24 PM on June 14, 2022 [2 favorites]
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In the case of RRIFs, you pay taxes on withdrawals, so it's generally not a good idea to withdraw any more than is needed (or the minimum required withdrawal) as that will increase your tax bill and you will have to pay tax on future interest, dividends and capital gains. For TFSAs, you can withdraw without penalty, but you would then pay tax on future earnings (and you can't re-deposit until the next year if you don't have additional contribution room).
So the question here is really about what kind of holdings are in the TFSA and RRIF. If these are index funds or similar a recent 10% loss is not surprising. The TSX index in general is down just under 10% from its peak in April (but is neither up or down from a year ago).
Will it continue to fall? No one really knows. It might go down, it might go up. Investing in stocks or mutual funds that own stocks has inherent risk.
It is often recommended for people in their retirement years to transfer their investments over time to less volatile options, like bonds or GICs, so they are less at risk of a loss when the market goes down (but likely to earn a little less on average). Whether that's a good idea here probably depends on how much the investments are worth, how much money the person expects to need in the rest of their life and how long they expect to live, and their tolerance for risk. Switching at least some of their investments to something less volatile is probably a good move if everything is in stock or mutual funds that own stock right now.
A fee-for-service financial advisor can help sort out the options without the conflict of interest that commission-based advisors have.
posted by ssg at 5:10 PM on June 12, 2022 [9 favorites]