A look ahead: Where should people put their money in 2015?

Despite what’s happened over the past month, it’s generally been a good year for Canadian markets. Oil prices may have fallen to sub-$70 levels, but the S&P/TSX Composite Index is still up nearly 7.5% since January. After a tepid start, the U.S. market has done well too — the S&P 500 has climbed about 12% this year.

So will we see more good growth in 2015? Anything’s possible, but don’t bet on the double-digit returns that we saw earlier in the year, says Allan Small, senior investment advisor with HollisWealth’s Allan Small Financial Group. “The TSX will only grind higher,” he says.

There are a few reasons why our country won’t see gangbuster growth as it did in 2013, where the market climbed more than 10%. Two big factors are oil and gold. Energy and materials make up about a third of our market, so when those two sectors struggle, the entire TSX takes a hit. So far this year, the S&P/TSX Capped Energy Index has fallen by 16%, while the S&P/TSX Capped Materials Index is down about 4%.

Small doesn’t see either of these two industries improving anytime soon. There’s an oversupply of oil, mostly coming out of the U.S., which could keep prices low for a while. China and other emerging markets are still slowing down and that keeps demand for commodities low. And, with inflation staying relatively tame and the U.S. dollar rising, it’s hard to make a case for owning gold, he says.

Still, the Canadian market should see mid-single digit growth. That’s partly because other sectors have picked up some of the slack. Financials, which account for about 36% of the market, have been strong this year — they’re up 10% year-to-date — and will likely continue to do well next year, he says. Money is flowing into other parts of the market too.

It also helps that the U.S. recovery is still going strong, he says. Canada’s now starting to benefit from exports, in part thanks to a lower loonie. That will help balance out some of the negative impacts that a lower oil price will have on our economy.

There’s another big question that people are hoping to get an answer for next year: will interest rates start to rise? Most experts have been saying for a couple of years now that the overnight rate will climb sometime in 2015, but with a weaker-than-expected global economy, many investment professionals now think a hike could be delayed.

However, Small’s still expecting a change. It will be small — the rate may increase by .25%, but it’s been too low for too long. “You can only keep rates that depressed for so long,” he says. “They have to rise at some point.” Saying that, it is one of those things that he’ll believe when he sees it. He, along with many others, had thought long-term rates would rise this year, but they actually fell.

In today’s environment, and in next year’s too, retirees need to have a more balanced portfolio than they may have in the past, says Small. The days of putting your aging client’s money in fixed income is over. Now, people need a good mix of stocks and bonds.

While you still want older clients to play it relatively safe, a portfolio that’s mostly in bonds could actually be a detriment, even if it is less subject to market volatility. Right now, inflation is at about 2%, which is about what a 10-year Government of Canada bond pays. Corporates pay a bit higher, but if you take into account after-tax income you’re not making any money. “Subtract inflation and you’ve got nothing left,” says Small. Plus, if rates rise, bond prices will fall.

In theory, equities in general should do well next year. Rising rates are a sign that North America’s economy is getting healthier. That bodes well for stocks, says Small. But don’t expect a smooth ride upward. The market will likely drop when the overnight rate climbs. If rates don’t rise at all, which is possible, then that means the fixed income market thinks there’s something amiss in the economy and that could lead to an equity market correction.

The bottom line: A well-diversified portfolio that includes a good mix of stocks and bonds will help keep your retired clients happy in 2015. Forget the old 60% in equities and 40% in bonds rule or the 100 minus your age strategy. Clients have to be safe, but they need stocks to grow, since bonds won’t be providing much of a return.

Most important, though, your clients should feel comfortable with whatever awaits. “At the end of the day, the person’s head and heart and emotion will dictate what they feel comfortable doing,” says Small. “Do what it takes to help them sleep at night.”