Ahead of the 2024 deadline for Retirement Savings Plan Contributions, Michael Craig and Anna Castro connect with Ingrid on the importance of having a disciplined path.
How Diversification and Consistency Build a Path to Financial Health
During this critical time of the year when Canadians are making their Registered Retirement Savings Plan contributions and investment selections, Ingrid Macintosh, VP Wealth, Head of Global Sales Enablement, Marketing and Digital Strategy, TD Asset Management Inc. (TDAM), welcomes Michael Craig, Managing Director, Head of the Asset Allocation and Derivatives Team, TDAM, and Anna Castro, Managing Director, TDAM. Together they discuss the power of consistency and diversification, why it's important to have a disciplined path to building wealth and financial health in retirement, and how portfolios can be positioned to help meet long-term retirement goals.
Highlights include:
INGRID MACINTOSH: Good day, everyone. My name is Ingrid Macintosh here at TD Asset Management, or TDM for short. We're recording this podcast early in February, that critical time of year when Canadians are making their RRSP contributions and investment selections. But more importantly, I like to think about it, they're taking those critical steps that can have a meaningful impact in their future financial health.
So on the podcast today, I'm thrilled to be joined by Michael Craig, head of asset allocation here at TD Asset Management, and Anna Castro, managing director and also a senior portfolio manager on our asset allocation team. Michael and Anna and their teams are collectively responsible for over $100 billion in asset allocation strategies and decisions here at our organization.
So as we are heading to this RRSP deadline here in Canada, we want to have a conversation today about retirement and how we think about those long-term savings goals. So welcome, Michael and Anna.
MICHAEL CRAIG: Hey, Ingrid. Thanks for joining us.
ANNA CASTRO: Hi, there.
INGRID MACINTOSH: OK, so I teed you up for a nice conversation about long-term investing, Michael. But our investors, first of all, are going to want to know, what's happening here in this first part of 2024? What's going on in the markets?
MICHAEL CRAIG: Year to date, in many ways, it's been a continuation of where 2023 left off. Certainly the large-cap US growth companies have led returns. Things are a bit soggy to start the year, but since then, broad stock markets are in the green. Bond markets, again, started a little slow but have started to rally and somewhat unchanged. So it's been, pretty much, a continuation.
And our expectations for this year have been high single digits for both bonds and equities. It's not going to be without a bit of heartburn. There's always a bit of volatility in the market, but it's a year where, I think, base case, we're setting up to have reasonably strong investment performance.
INGRID MACINTOSH: And for our listeners you know who might have been watching the markets through 2023, and it didn't feel great, it actually turned out to be a pretty great year.
MICHAEL CRAIG: Yeah, so when you look at the long-term market returns, it tends to be somewhat benign, high single-digit numbers. But, unfortunately, those returns don't come in a unison manner. There are years when it can be quite challenging. Returns don't come. And then there's years where you post 10%, 20%, 30% in equities, in some cases.
So it's important to be invested through that whole period because to get that average 7%, 8%, 9% return, you do need to be invested in periods where returns are quite a bit hotter. Last year was a perfect example where last March, it didn't feel very good. There was a couple of bank failures, but the year ended very, very strong.
And broadly speaking, global equity markets did double-digit returns. And so a year that wasn't easy. It never is, but ultimately it is. And the end result was very strong for equities and also very, very strong for fixed income, which, for much of the year, was negative and, again, finished at 6% to 7% positive. So a great year all around, but definitely, you had to work for it to get it.
INGRID MACINTOSH: And for our listeners, we recently did a podcast on our fixed-income strategies, and we talked, really, about that resetting of fixed-income rates. But let's pivot a little bit here. And Anna, we've heard this Yogi Berra quote often in some of the presentations we do with clients. "You can observe a lot just by watching." So maybe talk a little bit about what we mean by that and, specifically, what's on everyone's mind, these concepts of inflation and growth.
ANNA CASTRO: Thanks, Ingrid. And it's as simple as being students of history, so going back to through time, many decades prior to us. And if you look at what has gone through history, it's really in buckets, this tug-of-war, seesaw of levels of-- [AUDIO OUT] --inflation.
So if you look back from the early 2000, to 2010, 2020, we've had, looking back, a less complex type of situation because it was mostly about the levels of economic growth and a concern on economic growth not being high enough. And inflation was kind of benign.
And then in the past few years, especially after the onslaught of the pandemic and the response of governments and regulators and also with that, unfortunately, geopolitical tensions around the world. All these dynamics led that seesaw or tug-of-war of levels of growth and inflation, a focus on a higher level of inflation, velocity, and stickiness that we haven't seen in many, many decades.
And so, this is the dynamic we've had, which has also introduced the value of having different types of investment strategies, as you put your portfolios together, to manage through the path. And so, when we think through that moving out in the next few years, as in this new decade that we have, we have a continuation of belief that this will be a continuous tug-of-war of levels of growth and inflation. It's important to have a broader set of toolkit to help manage that path to build your wealth.
And the good thing, is in the past few months and entering this year, is we're seeing a shift down in the level of inflation. And the focus, again, is on the level of growth moving forward. And this is also the reason why, as Mike has started off in this call, why equities and fixed income started to do better.
INGRID MACINTOSH: Mm-hmm. Really, that punishing low-rate environment that we had for savers for so long, it was painful while it was correcting. But now, we're actually in a much better place going forward.
And I love the way you frame that, Anna, because when we're having a conversation today about retirement and building for your financial future and the variables that individuals have or what they save and what they invest in because you can't control the markets, but you can really just do your best to make sure you're positioned for the long run.
So Mike, because we're on this retirement theme-- and this is something when people think about retirement, they don't think about market returns. They think about, will I have enough? And we recently had Tarek on a podcast. And he was speaking about the advancements in health care.
And at the end of the day, people are just living longer, which means our retirement savings might have to go a little bit longer. How do we think about that? And how does that impact the investment making, the investment decision making process?
MICHAEL CRAIG: Yeah, quite often, people look at markets in a very "where are we now?" perspective, and they worry about what might happen in the next three months, six months, et cetera.
INGRID MACINTOSH: Should I invest now or yesterday, tomorrow, right?
MICHAEL CRAIG: Right, exactly. And ultimately, the biggest risk to investors is they don't have what they need when they need it. And we look at a mortality table if we're going to talk about longevity. If you live to 60, the likelihood of making it to 80 is actually quite high. And if you make it to 80, getting to 90-- and you can see that as you age and you pass critical points in time when you're more susceptible to disease, the likelihood of living longer is much higher.
And I think most people don't envision themselves working into their 80s. And so, as soon as you stop working and you start drawing down your savings, drawing down your pension, the investment dynamics become much more complicated because you aren't constantly buying. You're not averaging into the market, so the investment strategies do need to evolve and are, actually, more complex.
And for us, when we think about retirement, it's about providing a return stream where the volatility is managed because understanding people are drawing down but can give higher returns that would otherwise get from GICs, if you will.
So it's a challenging problem, but I think quite often the issue is, the biggest risk to investors, particularly when they're thinking about retirement, is longevity. It is critical because you don't want to outlive your wealth. It doesn't lead to great outcomes.
INGRID MACINTOSH: And I think that's a really important point because we always say to folks, invest in alignment with your risk appetite and your time horizon. That really affects your investment decision. But don't worry about the short term and the noise because if you're not drawing that money out of your portfolio, it doesn't matter. If the market goes down, it doesn't matter. It comes back.
But what you're saying is, it's a fundamentally different story once you get to retirement, and you're not really topping up the pot anymore. You're drawing it down. And you sure don't want to have a bad market event when you have to start drawing it down at the beginning, right?
MICHAEL CRAIG: Simple example. Imagine you have $100. You're spending $5 a year. You're trying to earn a little bit more just to stay even. If you have an event where you have a drawdown of $20, you're down to $80. You're still pulling down $5. Now, as a percentage of your wealth, you've gone from 5% to 7%. And as an example. And it's very, very hard to make back that deficit.
And if you start looking at the math, down 20, up 20, you're actually, net-net, behind where you started. And so the compounding doesn't work in your favor when you start drawing down. So, again, it's really critical to manage not only portfolios that can earn capital gains but are managed in such a way that that path is a bit more stable than, otherwise, it would be in outright equities.
INGRID MACINTOSH: Yeah, and I think we're going to talk a bit more about that in a moment and how we actually do that. But Anna, you and I, we always talk about the difference between time in the market and timing in the market. And for our listeners, can you talk a little bit more about that importance of the investment plan and maybe even working with an advisor to keep you on that disciplined path?
ANNA CASTRO: Sure. And even tying it off to how Mike started off talking about how GIC levels right now are more attractive than they were before because of higher rates, but this is the short term, someplace to park your money, but really not to think through investment in the long term.
And to your point, Ingrid, you had a question. It's almost like, I think, when we think through it's new year, new year's resolution, everyone's thinking about their health. And I'd like to use this analogy, thinking about financial wellness and health wellness and having a plan.
And it's so important to think about the long-term goal of being healthier and sustaining that level of health and building towards that, which means that it's not about what you ate or how you exercise or how you-- and knowing that there are so many temptations along the way and bad days and good days. And that's almost similar to how it is in the market and timing in the market.
The key thing here is thinking through, what do you need? And what is your own goal that resonates with you in terms of the value in purpose of building that wealth? Because markets can go up and down. And unless you think you need that money tomorrow or the world is totally changing or ending, and you need that cash immediately, the key thing is thinking about how do you invest for the future.
And I think people will relate to what Warren Buffett has done through the years. And he's gone through difficult market cycles. And he's had companies that have talked about difficult operating environments and crises, but he never sold everything and went to cash.
So I think it's all about perspective, and it's important to have a trusted an advisor to guide you through that for a different perspective because it can be very emotionally draining, being so plugged into the markets, especially with all the social media and immediate news that's around you.
INGRID MACINTOSH: Well, it's interesting because I think if people don't understand investing or they think it's complex and they have concerns about it, they'll, well, I'll just put that off. And I think the longer that people either don't invest or don't invest enough or take enough risk, they're really giving up on two of the most powerful tools, like diversification and time. Those are the magic secret weapons.
And if folks aren't thinking about that or thinking about deferring, they're really giving something up. And as you've often said, Warren Buffett made most of his wealth quite late in life, but it is that power of consistency and compounding over time.
MICHAEL CRAIG: And for retirees, when you are out of the market, you are increasing the likelihood that you're going to run out of money. So there is a real-world cost here, where if you aren't proactive, you end up increasing that longevity risk. And that's what has to be managed.
And it's actually not-- when you have time on your side, and you start thinking about these things in advance, it can be managed. We can actually engineer ways where that risk is minimized if not. And ultimately, we start talking then about legacy and what you're maybe going to pass on or donate to. And that's a much more enjoyable conversation.
So these are things that I think we talk about it, but the critical thing to do is to get on top of it right now. You don't want to wait on these things because time is your greatest ally.
INGRID MACINTOSH: Well, I'm going to pivot a little bit further on that one. I want to double down on this one, Michael, because as we talked about, the last couple of years, up until the last half quarter of last year have been quite painful. It's been a lot of volatility. There's been negative return in fixed income as we've reset to a more normalized interest rate environment.
And people have a natural fear, and they have a pain threshold that they can't sustain. And what we've seen, like I haven't seen in my 35-year career, has been this huge rush to cash. We've looked at negative returns, backward looking in markets. And we've looked at appealing yields on short-term cash instruments, like GICs. And we've seen a tremendous taking cover, if you will, in GICs. So can we talk a little bit about this? Because this is the one that keeps me up at night in terms of people being able to reach their financial futures.
MICHAEL CRAIG: Well, just to start off, last year, as GIC rates started to go higher, when we think across the strategies around conservative-aggressive retirement, everything we managed outperformed cash last year, outperformed GICs.
And 2022 was really the first year that GICs outperformed broad markets, but remember, at the beginning of 2022, GICs were earning you the minimis interest rates, so no one was positioned for it. Now, as they earn higher rates, they've become more attractive. But that also was reflected in financial assets.
And you actually have to really work at it, to go back in time to look for periods where GICs actually provide higher returns than fixed income or equities or a combination of the two. And I think it's critical to think back. It's almost like batting averages. You're looking at north of 90%, in terms of years, where GICs actually provide a better return than capital market returns, whether it be fixed-income alternatives or equity.
And then to top it all off, the tax implications of GICs, outside of a RRIF or RRSP, if you're in a taxable account in GIS, you are paying the highest marginal rate on that return. So right away, a 4% GIC at 30% tax rate, now you knock it down to sub 3%, so there's also a tax implication. So there's a place for GICs, but in terms of long-term investment returns, it's a pretty small piece, if you will. It's really there for liquidity and cash needs.
INGRID MACINTOSH: And, again, I'll ask you the question. But the markets move so much now in 2023, shouldn't I wait for a pullback?
MICHAEL CRAIG: Yeah, so this is where it all depends on your horizon. Yes, over the last three months, there's been a pretty strong rally. But in the Q3 of 2023, stocks sold off 10%, and bonds are off 6%. So in many ways, we just made back what we lost in Q3 plus some.
And then, on a longer-term view, the stock markets are only now recouping losses from the original drawdown of 2022, so seventh-longest period of time where stocks hadn't made new highs. And so we're really just getting back to where we were two years ago, except valuations are far more attractive on equities.
In fixed income, yields are materially higher than implied levels of inflation going forward. So when we look at what the market thinks inflation is going to average over five years, the market's giving you 2%, 2 and 1/2% more yield than what those are.
This is as high as it's been-- outside of a few moments in October where bonds got really cheap, this is as high as it's been since Anna and I have been working, and we've been doing this for a while. So again, on both markets, short term, yeah, maybe it's moved a lot, but on a medium-term basis, it's ho hum. It's not the cheapest market I've ever seen, but it's, by no means, expensive.
INGRID MACINTOSH: And the point is moot because you're in it for the long game. And 10 years from now, it'll be higher.
MICHAEL CRAIG: Yeah. Actually, I was thinking about your-- we talking today, Ingrid, and I was thinking about this. So I actually just ran this little test. If I actually invested-- over the last 10 years, if I just invested what I earn-- and say I earn $10 a week-- and just picked the low points along the way, every sell-off and then I compare that with just investing that $10 every week, I'm kind of indifferent.
INGRID MACINTOSH: Yup.
MICHAEL CRAIG: So even if you were perfectly timing--
INGRID MACINTOSH: And you were a professional.
MICHAEL CRAIG: Yeah, even if you perfectly timed every market sell-off and, as you saved your money, you invested at that point, it doesn't really get you that farther ahead at the end, anyway. So it's questionable whether-- as much as we think about that everyone wants to buy the best price ever, it's questionable whether that strategy even works versus just the mechanical, average in, et cetera, and go that route.
And this is over the last 10 years. I thought it was kind of interesting, but it's something to consider. Sometimes, again, we're focused on the wrong things. And it's really about time and time in the market versus trying to catch the lows.
INGRID MACINTOSH: Yeah, and I think I want to pivot the conversation a little bit because we've been talking about longevity. We've been talking about the markets. We've been talking about the importance of being invested and investing for the long term.
But earlier in the podcast, you had talked about this concept of longevity and a differentiated investment experience once you hit that moment where you go from accumulating in your savings and investing to decumulating.
And TD offers a strategy-- we've just had our 10-year anniversary-- the TD Retirement Portfolios. And for our listeners-- and typically, when you're on your investing journey, your advisor might ask you, what's your time horizon? What's your risk profile? And that will help indicate what a mix of income and growth that you want in your portfolio.
And generally speaking, as investors get closer to retirement, they reduce that equity or growth part of their portfolio, and they start de-risking a little bit. But now we're talking about, what do you do when you actually hit that retirement moment? Can you, Anna, explain what's different about the retirement portfolios from a traditional asset allocation strategy?
ANNA CASTRO: So typically, as people enter the retirement stage, the traditional setup would be adding more fixed income into their asset mix.
INGRID MACINTOSH: Mm-hmm, de-risking.
ANNA CASTRO: De-risking, yes. And the goal of the retirement portfolios, the retirement solutions, is really to look for different sources of income growth, stability, and diversification, while offering a similar volatility to fixed income.
INGRID MACINTOSH: Right.
ANNA CASTRO: So what's different with retirement solutions are these portfolios are multi-asset class. So it has fixed income and protected equities as well as real assets, so different sources of return, wherein our goal is to have growing sources of income at different types of market cycles as well as lower downside or lower loss than equities and a smoother path as you work towards and shift from accumulating assets to decumulating our retirement because we understand that retirees are more sensitive to market sell-offs.
INGRID MACINTOSH: Right. And as you say, you could have two portfolios with a similar overall return, let's say, over 10 years. But as a retiree, when you're drawing out of that portfolio, those moments of drawdown hurt you because you can't recover that money you've taken out.
And I think that's the magic message that you're saying here, when you focus a little bit more here on the minimizing the downside because people are taking their money out. So that's a great discussion. Thank you.
ANNA CASTRO: And also being very nimble and thoughtful through our asset allocation team and looking for sources of that income growth. So 10 years ago, the concern was that GICs, the level-- because we talked about lower rates.
INGRID MACINTOSH: Forever, yeah.
ANNA CASTRO: Yes. There were lower sources of-- there were less source of income from fixed income, so the goal was, how do you improve your sources of income when fixed income was not enough but still not take too much equity type of risk or pain?
INGRID MACINTOSH: Volatility, yeah.
ANNA CASTRO: Exactly, volatility. But now, here, where we are right now, we can have both. There are growing sources of returns from equity, from dividends, for high-quality stocks, through protected equities, us using innovative strategies such as derivatives.
But more importantly, as we enter into a stage wherein we've had higher rates, which felt painful in the short term last year, it sets up an opportunity set, also, for investors to participate and lock in those higher-income returns from fixed income. And these solutions are able to nimbly adjust to where those opportunities arise.
INGRID MACINTOSH: And I really do think it's such an important message when you think about, as an asset allocation team, not just what you do but the types of solutions that you offer. They're designed for people at different stages of the accumulation journey and, really, engineered for managing, the retirement portfolios in particular, that accumulation stage of the journey. Thank you so much for sharing that.
Typically, at this point, I always love to pivot to a rapid fire and put you on the spot with some big macro theme, but I think in the spirit of where we are in our RRSP season. Could each of you share a story that you experienced in your life, in your family, with a client or an advisor you spoke to that really speaks to the power of thinking about your retirement?
MICHAEL CRAIG: Yeah. I mean, a few years ago-- part of what we do, Anna and I are fixated on the markets every day, are trying to make best decisions we can, thinking about where the opportunities and risks lie. And we want to always do that on behalf of our clients. We don't want our clients worrying about these things. We want them to live their lives and deal with whether their jobs, work, family, et cetera.
And a few years ago, we had a really nice note from a client. They were going through cancer treatment, and they worked it out. They recovered, and it was good. But they said, I'm going through a really hard time in my life right now, and I'm just really happy I don't have to worry about my finances and was able to really focus on getting better versus having to go through this and also worry about their financial well-being.
So those are the kinds of things that-- this is where it gets us really excited in the morning, when we know that we're making a positive impact and that our clients are in different parts of life and are dealing with different things, but ideally, they're not having to worry or be upset about what's going on in the markets because we're able to deliver on those principles that Anna mentioned, stability, growth, and diversification. So those are the things that I think, for Anna and I, really make it really worthwhile in what we do.
ANNA CASTRO: And so for me, it's not just the intellectual challenge but a personal passion because when I shifted into and joined investment management, I really felt strongly about the fiduciary, managing other people's money. And I saw that very clearly in the lives of my relatives.
So this was during the Asian financial crisis, going back decades ago and the tech bubble. And you really saw across, all over the world, asset prices getting crushed and why it matters to really think through having a plan and sticking to that plan and managing through that emotional moment to stay invested because I saw that impact on people's lives. That's why we talk about financial health. It's also physical and mental health and has a multigenerational impact on the quality of people's lives.
So I think that's why it's so important to have that perspective, have that plan and that knowledge and the tools to help manage through market cycles, which are normal, which can happen. But how can you be ready with that future you wanted for yourselves and your family?
INGRID MACINTOSH: Yeah. We're not really money managers. We're the stewards of people's futures, to the ability that we're given the privilege of doing so. And I think through presentations we do recently to our advisors and our planners is, they're really ramping up for our RRSP season and helping them understand you're not just offering an investment product. You're offering a better financial future.
MICHAEL CRAIG: Absolutely.
INGRID MACINTOSH: Anna, Michael, thank you so much for joining me today. And to our listeners, thanks so much for joining us. You can get our podcast now on Apple, Spotify, Google, and Amazon. Have a terrific February. Have a terrific RRSP season. And if you're listening today, think about your future self, and make those investments. Thanks so much.
ANNA CASTRO: Thank you.
MICHAEL CRAIG: Thanks for having us.