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To maximize your retirement capital
To offset inflation
To maximize your retirement capital
Have you already considered the possibility that your retirement could last 25 or even 30 years? Indeed, you might stop working in your mid-fifties and according to statistics live until 80 years of age or more!
So, you can spend as many years in retirement as in the workplace.
Is your capital sufficient for ensuring that such a long retirement will live up to your expectations?
If you have any doubts, you should think about including equity funds in your RRSP.
Why so? Because, of all the investment categories, equities offer the best growth prospects for the long term. Experts are unanimous in this respect.
Indeed, although equities do sometimes fluctuate sharply in the short term, they rise over long periods of time, as shown in the table below.
Annual returns of three investment categories over 12 years (1991 - 2002)
Treasury bills
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4.85%
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Bonds
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9.26%
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Canadian equities
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8.96%
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U.S. equities
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12.02%
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Since you are investing for retirement, your investment horizon could be assumed to be at least five years. Experts agree on the fact that stocks should be held for at least five years in order to benefit from their potential.
With time on your side, take advantage of it!
To offset inflation
Moreover, since they generate higher returns, equity funds protect you against the negative effects of inflation.
If you want your investments to provide you with the means to maintain a comfortable standard of living at retirement, the absolute returns of your investments need to exceed the inflation rate.
For example, if you have a fixed-income security earning 2% and the rate of inflation is 3%, your investment is generating losses since its return (2%) is not sufficient to offset your lower purchasing power (-3%).
Thus, the higher long-term returns logged by equity funds help you to stave off capital erosion due to inflation.
Do you recall the galloping inflation experienced in the 1970s and 80s? The table below shows what inflation did to a $1,000 investment made in 1950. As you can see, equities fared best since their real current value is the highest.
Value as at June 2002 of a $1,000 investment made on
January 1, 1950.
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Treasury bills
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Bonds
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Canadian equities
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U.S.equities
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Nominal value
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$24,180
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$42,350
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$175,680
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$587,390
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Real value, after taking into account inflation
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$3,135
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$5,499
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$23,525
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$83,756
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If you do not wish to be set back by inflation and if your investor profile allows you to do so, you should invest part of your RRSP portfolio in equity funds.
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