Finance Risk #2: inflation Inflation has been something of a non-issue for many years now (last year, it was a whopping 0.6%). But most of us are old enough to remember when this wasn’t the case. Think back to the late 70s and early 80s, when inflation soared to more than 12% a year which, in turn, led to interest rates going sky-high too. Remember how fun that was? (Spoiler alert: it wasn’t.) Are we going back to those days? Probably not. But, as governments have spent an enormous amount of money attempting to support out-of-work Canadians and pull the economy out of a COVID-related recession, there are some very good reasons to believe that inflation will rise from its historic lows. Add to that the pent-up demand for all of those things that we haven’t been able to spend money on for the past 18 months or so (think airfare, or hotels, or even restaurant meals), and you can certainly make a reasonable case that prices of basic goods and services are likely to rise as demand goes up. That’s just basic economics. For snowbirds, rapidly rising inflation can be a real risk, particularly for those on a fixed income, with limited ability to give themselves a “raise” to keep up with the rising cost of everything during retirement. WHAT TO DO ABOUT IT: take steps to protect your portfolio now There are a lot of different opinions about what investors should do about inflation: some experts are absolutely sure that rising inflation is in the cards, while others suggest that the structure of the economy is vastly different in 2021 than it was in, say, 1981 for example, and that inflation won’t be much of an issue going forward. Until we know which side is correct, it makes sense to take some simple steps to protect your portfolio now. If you haven’t done so already, it’s probably a good idea to shift at least a portion of your portfolio toward inflationary scenarios. Depending on your tolerance for volatility, that could mean starting a small position in traditional inflation hedges such as commodities and gold, which have performed well during inflation in the past. Real estate is another option − property owners can typically pass on rising costs to tenants by raising lease prices − as can be dividend-producing stock in typically defensive sectors such as consumer staples or healthcare. Such companies will likely have the ability to pass on price increases to customers, regardless of what inflation does in the future. Risk #3: climate change By now, you’ve heard plenty about the threats of climate change. The scientific consensus is pretty clear that the climate is indeed changing. And thepolitical consensus seems to be getting equally clear that we will all have to adapt and change along with it. After the world puts the pandemic behind it, climate change will probably be the most significant economic challenge that the world will face. You can probably think of plenty of examples of how climate change will completely disrupt the way in which the economy works, and how business is currently conducted. Car manufacturers are shifting their product mix to electric vehicles, for example. Some jurisdictions are prohibiting the installation of natural gas appliances, for example. The price of home insurance in climate-vulnerable areas (flood zones; forest fire zones; hurricane zones) is already going up. And on and on. For investors, the risk of climate change isn’t so much that businesses will have to adapt and change (change is nothing new in business). Rather, it’s the continued disruption of standard investment strategies and portfolio risk models while businesses go through the process of adaptation and change. Will high-dividend-paying oil companies or pipelines be viable income investments for retirees going forward?What about the many resource companies that are the backbone of the Canadian economy − should Canadians start diversifying more of their portfolio because of the potential risks posed tominers, forestry companies and the like? Are retirees taking on too much if they put their money into companies that rely too heavily on the “carbon economy”? WHAT TO DO ABOUT IT: consider risks and opportunities Unlike many other risks on this list, climate change is not an imminent risk: adaptation and change will happen slowly (in some cases, painfully slowly) over many years. But, if you’re going to be relying on your portfolio for income for several decades during retirement, it makes sense to think about these risks, and come up with a way of adapting and changing your portfolio as the world adapts and changes around you. Of course, you should keep inmind that climate change isn’t only about risks. There will be opportunities too. Electric vehicles are an obvious example. Or, the explosive growth of renewable energy. Looking further out, there may be opportunities in the management of water, or lithium mining (lithium is a major component of electric batteries), or “cellular agriculture” (plant-based proteins, for example). When thinking of adapting your portfolio, it makes sense to think of these new “green” investment opportunities as much as it does some of the risks. 28 | www.snowbirds.org
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