While we may have left 2020 behind us, the impacts of the global health pandemic linger. The year was marked by rounds of public health orders, business closures, and economic stagnation for many. As we enter into the new year, many (if not all) of us are looking for the silver lining, or any sliver of good news really.
As explained by Keith Reading, director of research at Morguard, investors are approaching 2021 with cautious optimism.
“Investors are looking for some degree of certainty in an uncertain environment. To some extent, investors are still concerned about the economic outlook, as we’ve been hearing we’re not out of the woods yet, so they’re looking for stability. They’re looking to maximize their return on investment. At the same time, investors have become more risk-averse with the unfolding of the pandemic and have looked to real estate as a relatively low-risk investment alternative.”
After a year of unyielding economic strain, it should come as no surprise that many investors are taking a conservative approach to investing. While the arrival of the vaccine in Canada signals the first step past the COVID-19 haze, there is still much work to be done and while industries rebuild, investors will be looking for stability.
“What are the most likely sources of stable returns? Blue chip or AAA rated companies offer a higher probability of stable performance. Investors will prefer investing in companies that are financially secure and those that are going to be around after the pandemic. Typically, investing in the most secure premium assets tends to be more expensive. Depending on an investor’s risk profile, however, they may also want to take a portion of their investment portfolio and take a position in some riskier investments,” Reading notes. “Perhaps in the past they had a portion in riskier or growth assets, but I think the share in those types of investments will be lower until the global economic picture improves significantly.”
Reading continues, “In 2021, I think a lot of investors will be somewhat hesitant initially, but toward the end of the year when the vaccine has been distributed to the masses and the global economy is on more solid footing, that’s when we will see investors take on more risk. There are opportunities that could be considered contrarian in 2021, but of course investing in these assets comes with higher levels of risk and I’m not sure investors are thrilled about taking on more risk at this time.”
The beginning of 2021 may be off to a sluggish start, but financial experts are forecasting more activity as we head toward the end of the year. Echoing Reading’s insights on the role the vaccine will play on national and international economies, Todd Coleman, vice president & market leader of BMO Private Wealth, shares a brighter outlook for the tail end of the year.
“While none of us will soon forget 2020, we’re cautiously optimistic about the prospects for economic recovery in 2021. COVID-19 vaccines are starting to be deployed across the country, we’ve learned more about the virus, and any ongoing restrictions will likely have less negative impact through more targeted economic shutdowns,” Coleman explains. “A lot of our optimism rests on a smooth global rollout of the COVID-19 vaccine, and this could have significant distribution challenges that may make the timing of mass vaccinations uncertain. That’s why we’re expecting brighter economic prospects in the second half of 2021 and into 2022 when we can return to normal activities like social gatherings, attending sporting events, travel, restaurant dining, and so on.”
With consideration to the global health pandemic’s unpredictable nature and long-term impacts on industries throughout the country, confidence in financial markets remains unsettled; however, within the turbulent landscape is also opportunity for those who seek it.
Coleman explains, “Downturns like we’ve experienced in 2020 may shake people’s confidence in the financial markets, but that volatility can also create tremendous opportunities for brave investors. Many of our successful clients recognize this as a great time to double down on their investment portfolios with smart moves, because a lot of solutions in the financial market are essentially ‘on sale’ at times like this.”
While there is no one-size-fits-all answer, Coleman shares a few key considerations for prospective investors looking to make the most of 2021.
“First, be patient because this recovery will take time. And speaking of that, don’t try to time the recovery. None of us have a crystal ball, and the best strategy is almost always to stay invested because you might miss out if your money is sitting on the sidelines while the markets are moving. The other thing I’d like to add is that even though the markets like the certainty of US government stability coming from the November election, Canadian oil and gas production could be challenged if President Joe Biden follows through on his campaign promises. Diversification is even more important for Albertans in this backdrop.”
After the year that was 2020, risky investments may not be enticing for investors but there are opportunities for those with the appetite. If there is anything we can take from last year and carry forward with us, it is a recognition of the importance of planning ahead and having a safety net in place.
Maximizing Savings with a TFSA
With 2020 being a year of unprecedented economic strain due to the global health pandemic, many Albertans have found themselves holding their wallets a little closer and a lot tighter. The economic impacts of COVID-19 have Albertans reassessing their personal savings and looking to banking opportunities such as the Tax Free Savings Account (TFSA).
According to BMO’s annual TFSA survey, approximately 68 per cent of Canadians have a TFSA, a figure on the rise across the country. As Nicole Ow, director & head, term investments, BMO Financial Group, explains, regional numbers tell a similar story unfolding in the prairies with 67 percent of Albertans utilizing TFSAs.
“Across the country, the findings stayed fairly consistent with the national average. The popularity speaks to the flexibility of the TFSA, as it provides a great option for both short and long-term savers,” Ow says. “The biggest advantage with a TFSA is that the money invested in it grows tax-free. Another nice perk is that, when withdrawing the money invested in the TFSA, you also don’t pay taxes – unlike with the RRSP.”
While more than half of Albertans have a TFSA in their financial portfolio, Ow notes not everyone is making the most out of their account when it comes to diversifying holdings. In addition to cash, TFSAs can also hold stocks, mutual funds, guaranteed investment certificates (GICs), bonds, and exchange traded funds (ETFs). One of the greatest qualities of a TFSA is its versatility.
Ow continues, “The flexibility of the TFSA makes it an ideal choice for more uncertain economic times. More than ever, 2020 has highlighted the importance of maintaining a savings plan to build rainy day funds or invest for longer-term goals, and a TFSA is the right vehicle for these scenarios – giving Canadians the flexibility to contribute and withdraw as needed.”
Albertans over the age of 18 not yet invested in a TFSA can start the process by contacting a financial institution, credit union, or insurance company (issuer). If planning out your savings seems intimidating, take solace in knowing there are financial advisors to help you navigate the process.
“COVID has put a lot of downward pressure on Canadians’ finances, but it’s encouraging to see the resiliency of Canadians when it comes to their savings. It’s important to remember saving isn’t something that has to be done on your own – lean on different resources to help. Financial planners are a great resource that can be tapped into to help with building a tailored financial plan, and there are a lot of great online resources as well – either available from your financial institution or from third parties.”