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How can I get my Dad to play it safer?
Q: I’m concerned about my retired father doing his own investing. A couple of years ago, we started investing together and did really well. Then we had a few bad trades and some choppy markets and I told him that we should stop for a while and think about a better investment strategy. My dad is 60 years old and I don’t want him to ruin his retirement. Still, he insisted on holding on to several stocks that are in a loss position right now. His portfolio is down by 50 per cent and worth about $250,000. How can I convince this “risky” investor to play it safer through retirement? — Roger B. in London, Ont.
FP: Thanks, Roger, for your question. To start, defining risk is key to understanding whether this investment strategy — or another one — is best for your dad. And we should define risk as it relates only to your father, not to you or others.
Start by asking a couple of questions: Is he taking risks due to potential income loss and lifestyle impacts? Does he have other income sources that are less risky (for example, Canada Pension Plan, Old Age Security or an employer pension) that will balance out a higher degree of risk in his investments?
Your father could be in the investment market for another 20 years minimum, given that the average Canadian male lives to be about 80 years of age, according to 2019 data. Such a long time horizon allows him to likely recover from what may be short-term market dips.
As your father gets older, and his timeline for holding stocks decreases, he may need to increase the fixed-income portion of his portfolio. At that time, it could make sense to adopt a more balanced or income-focused approach. Many retirees adopt a very conservative asset mix of 50/50 mix of fixed income and equities as they approach their 70s and 80s and become more dependent on steady growth and income from their investments.
If his current portfolio is down 50 per cent, that likely indicates a higher equity/ stock weighting. And if his portfolio is his only means of income, then it needs to include more fixed income/ bonds to moderate the higher volatility of the equities.
There will always be some stocks in a well-diversified portfolio that will be lower when others are higher. That leads to more opportunities to buy low or sell high if it’s an active portfolio. But an income-producing portfolio needs to include stocks that produce dividends and/or other income themselves.
My guess is that there are likely other sources of retirement income such as CPP and OAS, so the investments can be used to manage the gap, meaning your dad would only have to withdraw that gap amount to maintain his lifestyle as needed in retirement. Growth in a portfolio is important, because it needs to cover any gap requirements. This can also help you and your dad determine the required portfolio asset allocation.
You don’t mention if this portfolio is in a registered retirement savings plan (RRSP), non-registered account or tax-free savings account (TFSA). Due to the different tax treatments of each, there could be different strategies needed. A good review of his current income and expenses is also helpful. List all his current expenses and income to identify any shortfalls or surpluses. Have you included irregularly occurring expenses such as home or car repairs and maintenance? Have you included future possible increases in health-care costs and changes in accommodation?
There are other options besides do-it-yourself (DIY) investing. Have you talked to your dad about considering a robo-adviser or a low-fee investment firm to help with investment selection? It may be something he hasn’t considered, and the two of you would find it valuable in understanding the total makeup of his investments and asset allocation.
That said, all investments have some degree of risk. Try to match the level of risk with your father’s financial goals in order to make it less stressful and more effective. You and your dad would likely find it helpful to discuss his retirement plan and financial goals with a financial planner. You can model some scenarios and portfolios going forward to ensure he feels fully comfortable with the investment strategy he’s adopting for the longer term.