Having watched the S&P TSX Composite Index lose more than a third of its value over the course of 2008, many investors are realizing that their risk tolerance is much lower than they had thought prior to the market crisis.

In February, Franklin Templeton Investments released the results of an Angus Reid survey that revealed high levels of anxiety and confusion among Canadian investors. 34% of respondents described themselves as "suspicious or timid," and another 32% said they were not sure how to define their own investment personality.

Western Canada was slightly more optimistic, where 39% of Alberta, Saskatchewan and Manitoba residents described themselves as "opportunistic, analytical and willing to take chances." The senior demographic was particularly cautious, with a mere 4% of those aged 55 and over identifying themselves as "risk-taking investors."

"Definitely, many investors' attitudes towards risk have changed," says Peter Ficek, a Certified Financial Planner in Calgary. It may be unpleasant to discover that one's risk tolerance is a moving target, but he warns that's no reason to abandon the basics of prudent investing. He's concerned that the market upheaval has been so extreme that it has sent some people looking for quick profits, or for a quick way out. Either way, they could end up doing themselves more harm than good.

Recently Mr. Ficek heard about one man whose only savings were held inside a locked in retirement account (LIRA). Faced with portfolio losses, he attempted to cash in these funds by way of a questionable loan. The Canada Revenue Agency has warned against theses kinds of unlocking schemes, as any loan made against registered funds is likely to result in a deemed disposition and could ultimately result in the entire LIRA balance being taxed as income in one year.

"Many others are being bombarded with various real estate investments where marketing language suggests guaranteed returns of up to 22%," says Mr. Ficek. When traditional investments are in a slump, "it is easier than ever to be swayed by too good to be true schemes."

Regulators concerned

Regulators appear to share Mr. Ficek's concern. At the beginning of February, Quebec's Autorité des Marchés Financiers (AMF) issued a press release warning the public to be especially careful when making this year's RRSP contribution. "In the current economic situation, some investors might be tempted by seemingly attractive investments. The AMF urges them to be vigilant, as anyone can fall victim to fraud." Anne-Marie Poitras, superintendent of client services and compensation at the AMF, lamented the fact that "people often take more time choosing a car than they do an RRSP investment."

"Clients always over estimate their risk tolerance and some have even fooled me," says
Terry Johnston, a Certified Financial Planner with J. C. Mitchell Financial Services in Barrie, Ontario. When he talks to clients about risk, he first asks them how they would feel if, over the course of a week, a $100 investment turned to $80. "Most people say no big deal," he says. "Then I change it to $100,000 reduced to $80,000."

Clients may claim to be long-term investors, and say they are prepared to leave money in the markets for twenty years or more, but Mr. Johnston asks them how they would react if they looked at their accounts and saw that it had declined by 20%. If they say they'd be upset, his response is "OK you are not long term, you are only looking out one year."

Mr. Johnston says he's noticed a reluctance to invest, not just for retirement, but in anything at all. This RRSP season, he has recommended that nervous investors put their contribution in money market funds "just in case there are some more nasty surprises, like $10 trillion in commercial real estate leverages that will default."

Where is the money going?

Mr. Johnston's clients appear to be typical. Statistics released by the Investment Funds Institute of Canada (IFIC) in March show that the Canadian money market category was the highest selling fund category for 14 of the last 18 months. In February of 2009, net mutual fund sales totalled just under $1.7 billion and $1.4 billion, or 82%, of all those sales went into money market funds.

IFIC also noted that there has been strong growth in bond funds, which attracted $870.4 million in net sales in the final month of the 2009 RRSP season. "There is definitely a segment of the market that has re-discovered bond funds and the benefits of this type of diversification on the overall volatility of a portfolio," said Pat Dunwoody, IFIC's Vice President of Member Services and Communications.

Staying in seg funds

Since most of his clients were already in segregated funds before the downturn, Mr. Johnston says he hasn't had many requests to transfer out of equity funds and into guaranteed investment certificates and bond funds. His clients are reluctant to make changes to their portfolios because it could have a negative effect on their maturity guarantees.

Mr. Ficek also has some clients in segregated fund contracts, one of whom was interested in moving assets into a guaranteed minimum withdrawal benefit (GMWB) product, but was unable to do so because of surrender charges. "Products need to change to accommodate client demand," he comments. "The carrier will lose the business at expiry of the seg penalties since I could not help the client to move. It would have made her confident for long term to stay in the long-term equity/fixed income mix. I bet there are many clients with similar views."

Mr. Johnston has set up a web site, www.blue-collar-financial-planning.com, to allow him to share more detailed information with clients and prospects. On it, he points out that there are alternatives to traditional wealth management products, and in his opinion the best alternative investment clients can make is in themselves. He suggests that those prepared to learn some new skills can generate retirement income by establishing a bed and breakfast, an online business, or by buying and operating their own apartment building.

Precious metals

Another section of his web site is devoted to precious metals, which he suggests clients consider because they tend to be uncorrelated to other asset classes, and have also been a good hedge against inflation. "There is very real possibility of massive increases in the value of precious metals as the possibility of dire declines in US dollar and its loss as a worldwide reserve currency become more and more likely," he writes.

And gold has certainly shone lately. While long-term equity funds have seen redemptions of more than $10 billion since the beginning of the year, the assets of the specialty funds like the BMG BullionFund have continued to grow. The BullionFund, which invests in physical gold, silver and platinum bullion, has grown its net assets from just over $185 million in the spring of 2008 to more than $265 million in 2009. Hoping to attract some of these newly hatched Canadian gold bugs, Toronto's Sprott Asset Management launched its own bullion fund in March.

Alternative investments may be available, but that doesn't mean Canadians are actually in a position to purchase them. People may have told pollsters that they intended to invest in RRSPs during late 2008 and early 2009, but according to research conducted by Léger Marketing on behalf of the Solidarity Fund QFL, a great many of them did not follow through. This is especially true in Quebec where, according to the province's Institut de la Statistique, the average savings rate in first three months of 2008 fell to just 1.4% disposable personal income - a ten year low.

"Quebecers should be commended for their intentions to save despite the economic downturn, but the truth is that reality is totally different. We know that Canadians' household income has stagnated for the last few years and that Quebecers' debt levels continue to grow, as does their spending, particularly among young people," said Christian Bourque, Vice President of Marketing at Léger.

And as RRSP contributions continue to shrink, so do the prospects of a comfortable old age. "We figure that middle class people will not be able to maintain their current standard of living once they retire because they simply won't have the means. The fact is that 36% of middle-class Québec households put no money aside in 2007, and those who did, saved just $1,800," notes Mr. Bourque. "The situation is even worse for those under 40, because the "cash flow generation" doesn't believe in budgets, doesn't prioritize saving, squanders its money, and doesn't think long term."