Using the cash wedge strategy for protection
If you are fortunate enough to have a sufficient amount of money to be invested in GICs (guaranteed investment certificates) at current interest rates, and that will:
1) ensure that you have enough money to last the rest of your life, plus;
2) leave a legacy behind, you are probably not too familiar with market volatility.
One strategy that will allow you to survive or out-last periods of volatile markets is to utlilize a cash wedge. Periods of market downturns can significantly erode your capital if you have to draw income from these funds during this time.
The cash wedge strategy involves keeping one year funds in a short term money market type of investment not prone to large market flucutations, such as GICs or certain bond funds. Two and three year funds are also invested in similar investments to cover a prolonged declining market, this allows for your other funds to be invested for growth, such as in dividend funds or other income producing investments.
One important part of the annual portfolio review process is to rebalance asset classes, this involves taking profits and some of these profits can be used to replenish your cash wedge.
It is also an opportunity to replenish your cash wedge when GICs mature if markets are down.
You may have heard that one should reduce equity exposure as one gets older, but with GIC interest rates at historic lows for a few years, you may have also heard that GIC yields hardly keep up with inflation thus the purchasing power of your dollar is less at maturity.
The market conditions since 2008 have made some investors more risk-averse, unfortunately it has also made some investors reduce or close out their equity positions, a decision that may cost them investment income during retirement.
Generating and maintaining enough retirement income can be a balancing act especially combining market volatility and current low interest rates. Your portfolio has to keep working for you.
Yes, stock market risk is really your only protection against inflation!