Your 20s and 30s are usually the age to max out investing risk, but now’s a time to cool it.
The latest interest rate cut by the Bank of Canada opens the way for de-risking an investment portfolio without the usual sacrifice in returns. Cutting stock market risk is one of several investing and saving moves Gen Z and millennials should consider as the financial world adjusts to lower rates. What worked in the past 12 months may not cut it in 2025.
Investing entirely in stocks or close to it is fine for twenty and thirtysomethings, but it takes a certain calm and poise to pull it off. When stocks tank, as they most certainly will at some point, you have to accept deep losses and, ideally, be ready to add new money. Some people can do this, but lots can’t.
You only find out the hard way that you’re in the “can’t” group. The usual pattern is stressing for a while about market losses, deciding you have to stop the bleeding and then selling and thereby locking in losses. People in this position usually buy back into the market after the best of the inevitable rebound has happened.
Going heavy on stocks has worked well over the past five years, a period in which the S&P/TSX Composite Index averaged an excellent 10.6 per cent on a total return basis of dividends and share price gains. The S&P 500 produced compound average annual total returns of 14.6 per cent over this period, and the Nasdaq 100 about 20 per cent.
The rate cut Wednesday by the Bank of Canada can be read as a sign that gains like this won’t continue indefinitely. Central banks lower rates when economies weaken. Markets are optimistic we’ll avoid recession, but corporate profits will come under pressure in some sectors. Stock markets won’t like that.
Bonds, on the other hand, should thrive. Since the Bank of Canada began cutting its trendsetting overnight rate in June, bond prices have moved nicely higher. That means you’re making money two ways if you own bonds directly or through funds – interest payments plus capital gains.
Bonds were a garbage asset in recent years because rates were rising. Whatever direction interest rates head, bond prices go in the opposite direction. Today, bonds offer a potentially strong-performing diversifier for stocks.
Technology stocks have been consistently huge for investors, but a sharp dip for the sector earlier in the summer offered a preview of what would happen in a sustained downturn. For a couple of reasons, a special warning to young investors about tech seems appropriate.
Older investors know there’s a boom-bust aspect to tech, and they may be more skeptical about the promise of AI and other developments. Young people have an ease with technology that can open their minds to ideas that aren’t yet generating the profits that investors demand.
Where should you put your money if you’re paring back on tech as a young investor? Ask your grandparents. The boring dividend stocks they have relied on for decades are coming on strong now after a lengthy slump.
The Bank of Canada’s rate cut helps explain why dividend stocks in sectors such as utilities, pipelines and telecom are in revival mode. If you can get a decent rate from a minimal-risk savings product, guaranteed investment certificate or bond, why put up with the comparative uncertainty of a dividend stock? Now, with rates falling, investors are turning back to those stocks and their yields in the 4 to 8 per cent range.
It seems counterintuitive to talk up savings accounts now that rates are falling, but young people in particular should add money to them now to prepare for a potential economic slowdown or recession. Newcomers to the work force could be most vulnerable to layoffs, or reductions in hours worked.
Having a savings account at a big bank is a fail. Find a challenger bank with accounts offering rates of at least 2.5 per cent, zero fees and full functionality to make debit purchases, pay bills and send e-transfers.
These accounts are also the right place to save for a down payment on a home you expect to buy in the next few years. Another trickle-down effect of lower interest rates is that homes get more affordable.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
