Understanding risk factor essential
With interest rates at low levels, finding the right mix is easier with expert advice
Traditional wisdom suggests that investors follow a typical investment pattern as they grow older: more risky in youth, conservative in middle age and cautious in retirement. But according to some investment advisers, how you choose to invest may have more to do with the economic climate, your personality and your tolerance for risk than the passage of time.
Any traditional demographic investment cues have taken a back seat to the current macroeconomic picture, says Andrew Ruhland, the president of Integrated Wealth Management in Calgary.
“The economy is a gong show right now,” he says. “With governments holding down interest rates to defibrillate the economy, traditional safe investment vehicles are providing poor returns. Until governments deal with their overindebtedness, which I don’t see changing for the next four to five years, I don’t believe that the financial industry can offer any one investment vehicle that can provide both enough income and safety.”
While younger investors may be willing to devote a limited share of their portfolio to more risky investments, Canadians are typically allergic to the notion of catastrophic financial loss. Clients under 50 want growth and a little volatility, he says, while those over 50 simply ask that they will never get back less than they invest.
Ruhland finds clients increasingly abandoning traditional buy- and- hold strategies, which include bonds and mutual funds, to embrace actively managed portfolios, with an emphasis on exchange- traded funds ( ETFS). “If bonds and dividendpaying stocks are yielding two to four per cent, that’s simply not enough return for most people’s retirement cash flow needs,” he says. “A portfolio of well- chosen and actively managed ETFS has a higher probability to provide the return that people need to become or stay financially independent; that is, they can eat and work or play during the day, and still sleep at night.”
As clients reach their 80s or 90s, however, their tolerance for even a low level of risk often decreases.
“At that age, portfolio growth is no longer a consideration,” he says. “It shifts to income and guaranteed investments, such as guaranteed investment certificates ( GICS), as assisted living and medical needs become more important, even if that means eating into capital.”
Gina Macdonald, a fee- only financial adviser with Macdonald, Shymko & Company Ltd. in Vancouver, counsels investors ranging from teenagers to those in their 90s.
“I’m not a big believer in the unerring relationship between age and investment strategy,” she says. “It all comes down to personality, experience and your ability to handle risk. While age might be a factor, it isn’t the only factor.”
Typically, however, people seek the services of a financial adviser a few years before they retire, simply because they may have procrastinated and assume a change of investment strategy is required.
“Just because you retire doesn’t mean your investment strategy has to change to a safe, fixed- income portfolio that generates cash flow,” she says. “If you invest in GICS, you would still need an equity component for growth, because that traditional two- point spread between inflation and rate of return on a five- year GIC has disappeared.”
Macdonald recommends a balanced portfolio containing elements such as five- year laddered fixed- income investments that may offer more security and a better long- term return, diversify risk, and provide a higher degree of liquidity. On the equity side, she suggests a diversified equity component made up of low management expense ratio index investments and real estate investment trusts.
She also notes that older seniors often build their investment strategies around the mistaken assumption that they should never touch their capital. That’s not realistic in most cases.
“The average Canadian’s investment income will decrease as they age and they’ll eventually consume capital,” she says. “There’s nothing wrong with that.”
Paul Tyers, a certified financial planner, managing director of Toronto- based Wealth Stewards Inc. and author of Fiscal Fitness, also agrees that the economy is trumping the traditional retirement plans of even his high net worth clients.
“The overlay of extremely low interest rates is causing people with a million dollars or more to wonder if they have money sufficient for retirement,” says Tyers.
“The economic downturn of 2008 and 2009 certainly got their attention and made them realize they had to start saving.”
Tyers says he’s alarmed by the vast majority of Canadians who simply have no financial plan at all, something that hasn’t changed substantially over his 25 years in the business.
“There’s no reason to build a financial plan only around retirement,” he says. “You need to focus on how much cash flow is necessary to live the life you expect to lead at 62, 80 or 85, given reasonable assumptions about inflation, whether that money comes from employment income, income on investment, dividends, pensions or depletion of capital. Most people haven’t even got to the point of planning how to get there, because they haven’t even thought about what they’ll need.”