The building blocks of an investment portfolio

Asset allocation for a retirement portfolio is a highly individual decision, based on need for income, appetite for risk and the time frame until the money will be needed.

Most portfolios for retirement can be broken into three asset classes — equities (stocks), fixedincome (bonds) and cash (Guaranteed income certificates and savings).

EQUITIES

Stocks offer the greatest reward with the most risk. Investing in the stock market is generally more suitable forpeople with a longer timeline before they need the money. For example, a 30-year-old could invest most of his or her RRSP in the stock market because over the long-term the money will grow faster even if there are losses along the way.

The point is that the money has longer to grow and overcome any short-term losses.

But equities aren’t just for the young. Retirees can benefit, too, because retirement can last decades and returns on equities are

generally higher than the rate of inflation which eats into a retiree’s buying power over time.

Moreover, dividends and capital gains from equities are taxed more favourably than interest-bearing investments like GICs when held in taxable accounts.

FIXED INCOME

Bonds often are the go-to investment for retirees because they provide a fixed rate of return. Similar to GICs, they pay interest as income. But unlike GICs, bonds are tradable on the market and affected by interest rate moves by the Bank of Canada, so their value can increase or decrease if you need to sell them before they mature.

Investors can also choose from a variety of bonds, from government issues to corporate bonds, with varying degrees of risk.

Lastly, while retirees tend to favour bonds over equities, bonds are good for investors of all stripes because they are often a hedge against stock market risk so when stocks fall, bond values often rise.

CASH

GICs are the perennially popular investments of this group, though savings and chequing accounts are also cash investments.

While GICs can’t lose money, their investment can be reduced by inflation because current GIC returns — especially after taxes — barely outpace rising prices.

Money market funds and term deposits also fit in this group. The returns are low, but so is the risk. And the money is easily accessible.