With the current volatility of today’s market, I have seen my LIRA investment bounce up to almost $90,000 earlier this year, to almost $20,000 less today. That said, it is in a medium- to high-risk portfolio at the moment.
With any luck, I probably still have approximately 18 more years I could potentially be working, however I cannot contribute anything to this LIRA. I am interested in knowing the following:
- Should I move it to GIC investments?
- I am interested in investing in a mortgage fund, but can I, and how?
—Sharon
How to handle market volatility as a long-term investor
This year has been a difficult one for many investors: equities, bonds and real estate have all experienced notable declines, leaving few safe havens. If your locked-in retirement account (LIRA) moved from roughly $90,000 down to a little over $70,000, you’ve experienced about a 20% decline in 2022, which understandably feels alarming.
When markets fall sharply, it’s common to worry that losses will continue indefinitely. That reaction is an example of recency bias—the tendency to overweight recent events and assume they will persist. The inverse is also true: when markets rise, investors often take on more risk. Historically, however, large declines have often been followed by significant recoveries.
Long-term perspective in bear markets
Looking at long-term market history can be reassuring. Since 1950 the S&P 500 has declined by 25% or more on nine occasions, which over a typical lifetime works out to an event roughly every eight years. Those bear markets varied in severity; the average decline among those events was about 39%.
Importantly, recoveries after market bottoms have been meaningful. The average one-year return following the market trough was around 22%, and five- and ten-year annualized returns across most of those periods were strong—typically in the low double digits. While past performance isn’t a guarantee, history shows that patient investors who remain invested through severe downturns have often been rewarded over multi-year horizons.
Stocks versus GICs
You asked whether you should move your LIRA holdings into guaranteed investment certificates (GICs). GIC rates have improved recently and are paying in the neighborhood of 4.5% to 5% for multi-year terms. That return is predictable and safe compared with equities, and it can be tempting to lock in a guaranteed yield after taking losses.
However, by selling stocks now to buy a five-year GIC paying 5%, your expected annualized return over the next five years would be the GIC rate—nothing more. Historically, the five-year returns following significant stock market downturns have typically exceeded that level. While future returns are uncertain, a diversified stock allocation has tended to outperform fixed-rate investments over multi-year periods.
Given your roughly 18-year time horizon until retirement, stocks are more likely to earn a substantially higher return than GICs by the time you need the money. That said, the decision should reflect your personal risk tolerance and the degree of short-term volatility you can accept without selling in a downturn.
When it makes sense to keep stocks
Short-term market moves are effectively unpredictable. Day to day, price changes are like a coin toss. Year to year, stocks have historically risen more often than they’ve fallen. For long-horizon investors, the key is to maintain a level of risk exposure that you can tolerate emotionally and financially so you don’t sell after a large drop and lock in losses.
Your LIRA is locked in and cannot accept new contributions, which limits some flexibility. If you also have a defined benefit pension providing guaranteed income in retirement, that pension functions similarly to a fixed-income allocation in your overall financial picture. In that case, preserving growth exposure inside your LIRA makes sense because the pension already provides a degree of income certainty.
Investing a LIRA in mortgage funds
Yes—your LIRA can hold mortgage funds. Both publicly traded and certain private mortgage funds are eligible for registered accounts. Mortgage funds typically offer higher returns than GICs but come with greater risk and lower liquidity. They may provide attractive income, yet they also carry credit, interest-rate and liquidity risks that differ from equities.
If you’re considering moving money from stocks into a mortgage fund, treat it cautiously. Mortgage funds should generally represent only a small portion of a diversified retirement portfolio, aligned with your risk tolerance and investment time frame. Selling equities at a loss to buy a mortgage fund reduces potential upside if markets recover and concentrates different risks in your portfolio.
In short, while GICs and mortgage funds both have roles—GICs for capital preservation and predictable income, mortgage funds for higher income with added risk—your long time horizon and any guaranteed pension income argue in favor of maintaining meaningful exposure to diversified equities in your LIRA. If you do add mortgage or fixed-income products, do so in modest amounts and as part of a balanced plan that matches your comfort with volatility.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell financial products.
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