Canadians are renowned for their conservative approach to their finances, but a recent survey from CIBC suggests our collective risk aversion might be putting our retirement dreams at risk.
The survey found that 57% of respondents were most interested in low risk, guaranteed or no-risk investment options.
"For those invested in low risk instruments, such as GICs or T-bills, the challenge at this particular time is that those instruments have never been lower-yielding," says Steve Geist, president of CIBC Asset Management. "There is a true cost to individuals in that low risk approach in that they are not really being rewarded."
Looking back to the 1970s and 1980s, investors could have earned a decent retirement income using Canada Savings Bonds, but those days are long gone.
"It really is important that they focus on the returns they expect to earn on the investments in their portfolio."
He expects investors will return to equity investments as the macro-economic risks of Europe's debt woes and the sluggish U.S. recovery are behind us.
"The cycle definitely does reverse. Often individuals chase returns, but the problem is that once they see a 20% return on equity markets, they've missed that 20% return."
Part of the problem could be the language the financial industry uses when speaking with clients. Outside of the industry, the term "risk" has an almost exclusively negative connotation.
"Any time you're attempting to have a great conversation with a client and provide advice, you need to speak in terms and concepts that are right for them," he says.
For example, a client with a $100,000 portfolio might not bat an eye at the idea of a 5% loss. Asked if they could stomach losing $5,000, they may have a different reaction altogether.
"That's something that does hit home, and is a little easier to grasp." Geist says. "We really do need to speak more in terms of that client's account, and not just in percentages. We need to be practical in talking about risk and ensure that individuals know what it means to them."
While we are avoiding risk, 45% don't even know what kind of investment returns they need to achieve their retirement goals.
Broken down by age, it's hardly surprising that 66% of 18 to 24 year olds don't know what returns they need. But among those aged 55 and up, more than 35% still don't know what they need to earn.
"It's striking that among people aged 55 and up, that a third of them don't know what return they need." Geist says. "The boomer s are getting older every year and they're running out of time. They are certainly under the gun.
"That is a definite opportunity for advice to be provided. Advisors have a fabulous impact and are able to answer these questions about returns."
He says its "a tragedy" that 44% of survey respondents who planned to make an RRSP contribution were not planning to seek professional advice on how to invest the capital.
The survey found 28% expect their 2012 rate of return to be less than in past years.
Geist offers some soft targets for what investors can expect. The consensus expectation among industry professionals is for North American equities to earn "high single digits" in 2012, while emerging markets are widely expected to earn low double-digit returns.
On the fixed income side, investors should expect bond yields of 2% or 3%. He suggests that investors sweeten their fixed income portfolios with investment grade corporate bonds, which may be as safe as government debt, but offer a higher yield.
"That's where the opportunity to have a strong, well-managed corporate portfolio will add a little more yield than just investing in governments," he says. Depending on the client's risk profile, corporates should make up anywhere from 40% to 60% of the fixed income portfolio.
Cash will earn 1% to 1.25% in a high interest savings account, not a great return he says, but better than a standard interest account.
"The theme of diversification hasn't changed, but how an advisor recommends their clients achieve that does change from time to time."