What seniors should remember when playing the stock market
Dear Money Lady Readers: I had no idea so many seniors were invested in the stock market.
Today’s seniors are part of the fastest growing population group in Canada, but those now over 85 are the fastest growing segment within the senior population. In 2006, there were 492,000 Canadians aged 85 or older and it is now projected that by 2041, we will have 1.6 million Canadians over the age of 85 years old.
And if you don’t think that is amazing – just wait, according to Stats Canada, we will have 2.5 million Canadians aged 85 and over by 2056.
The old way of aging was to save your money so that you could pass on an inheritance to future generations; however, with this increased longevity, we now have the concern of long-term care, which will impact retirement savings.
According to an Ipsos Reid survey, aging Canadians allocate 25 per cent of their assets to their primary residence and hold 37 per cent of their portfolios in equities, which was quite surprising since this is higher than elsewhere in the world.
It seems I must have misjudged you – thinking most of you are in GICs and bonds. So, since you all seem to be more invested in securities, I wanted to address two types of risks that you will encounter when investing in the stock market.
Some of you who are very knowledgeable about the market will already know this, but for those that don’t, there are two types of stock market investment risks: 1) systematic risk and 2) unsystematic risk.
Systematic risk cannot be mitigated when you invest and is considered to be the true market or volatility risk. This is the risk that the overall market has over your stock portfolio.
The measure of your systematic risk is known as the beta. This will compare the risk relative to the return on a benchmark index. For example, when you are choosing a mutual fund to invest in, you may want to ask for the beta of the mutual fund. The beta
score always measures the risk of a security relative to an index. A beta greater than one (+1) means it has a higher risk and a beta less than one (-1) means it has a lower risk than the market.
Unsystematic risk is more specific to your stock picks and therefore is based on a specific company or industry. This risk can be overcome by diversification and should be part of your overall asset allocation selection that you choose with your advisor.
Most mutual funds have already done this for you by diversifying the portfolio to correlate the securities. Here’s how it works: diversification of securities can be done to
offset negative returns. If one security has a negative return projection, it could then be offset by another security that will have a positive return.
This type of diversification is done using a mathematical formula also known as the correlation coefficient of each pair of securities and their returns. Efficient portfolios are best positively correlated when you use an experienced advisor or institutional investment fund like an SMA; however, many exchange traded funds (ETFs) and mutual funds (MFs) also provide good diversification to lower risk.
Bottom line, you want to always be mitigating risk and as you age slowly reduce
the overall impact of market swings to your portfolio.
Remember, you should also want to withdraw as much as you can out of your RRIFs before you die to reduce the taxation on your estate. Talk to your advisor, they will know what is best for your financial future.
Good luck and best wishes, ATML - Christine Ibbotson