Where to take your portfolio next

January 23, 2008

After five good years, the stock markets are crumbling in 2008 and talk of bear markets is in the air. Conditions seemed to steady Tuesday on a surprise rate cut by the U.S. Federal Reserve, but the future still looks uncertain.

Whereas all news was good news when the markets were rising, today investors are confronting the possibility of a U.S. recession and the possibility that a slowdown in global growth will cool the long rally in the commodity stocks that Canada is known for.

Meanwhile, there are continuing repercussions from the U.S. subprime mortgage crises. Complicating matters for investors is the fact that RRSP season is at hand, a time when many people make all their investing decisions for the year.

The temptation will to invest conservatively this year, but is that the right move in a market where interest rates are low and heading lower?

Or, is now the time to get aggressive and start buying the stocks that have plunged in price?

Globe and Mail personal finance columnist Rob Carrick will answer these and other questions today from1-2 p.m. EST. Join us with your questions, or get a jump on the queue by submitting your questions here.

Editor's Note: globeandmail.com editors will read and allow or reject each question/comment. Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Cathryn Motherwell, deputy editor, Report on Business: Welcome Rob. We have many, many questions from readers today. So let's dive right in.

Rae Vandenburg asks: What do you suggest youngish people do with large sums of money they've saved to buy a house within the next five years? Is a savings account the way to go? Won't they be hit with high taxes from interest taxes?

Rob Carrick: Rae, my personal take on saving for a home is that safety rules. Houses are so expensive these days (a thought….will they soon be getting cheaper?...mark this question down for further study) that I don't think you can afford to risk any of your savings in the stock market. Five years is a pretty good time horizon and normally you should expect decent gains from stocks over that period. But I can recall many big name global equity funds sporting five-year compound average annual losses not too long ago, before better times arrived. This brings us to high-rate savings accounts, which are available today with rates in the 3.8 to 4 per cent range. Yes, your interest gains are taxed at your highest rate. And yes, you could end up paying less in taxes if your gains came from dividends and capital gains. But, again, safety rules, and the price of safety is sometimes high. One other benefit to savings accounts: your money is liquid and you can cash out if you want to buy a house in two years (maybe housing prices have come down nicely by then). If you're in stocks, you could face the prospect of wanting to sell at a point when the market has eaten a big hole in your capital.

Dennis Harris from Ottawa asks: Hi Rob; I am considering preferred shares as an option for long term income. TD bank and BNS are advertising preferred shares at 5.6%, which is very tempting. However, a yield that high suggests to me that there must be some risk involved. I would greatly appreciate it if you would explain the downside to owning preferred shares.

Thank you.

Rob Carrick: Dennis, this is a savvy question. Preferreds, to my mind, are one of the more interesting corners of the stock market right now. For those who aren't hip to preferreds, these are shares that are primarily designed to pay quarterly dividends. They don't generally move up and down in price as much as common shares, which are what people mean when they talk about stocks, and they offer a higher degree of security than common shares. A company in trouble would suspend its dividend payments to common shareholders before looking at the preferred share dividend. Despite their almost bond-like conservative nature, preferreds have been in the doghouse lately. Bigtime. Think of this as being yet more fallout from the U.S. subprime mortgage crisis. Investors are worried about the security of all kinds of investments, and preferreds are getting lumped in. Is that deserved? I'd say no in many cases. TD and BNS are among the more highly regarded banks right now and they're only paying 5.6 per cent on their new preferred share issues because in a tough market, you have to offer premium rates to get a deal done. To me, getting a yield of 5.6 per cent from tax-advantaged dividends paid by two stable banks is attractive.

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