There are many investing rules that advisors have followed over the years, but there’s one that’s stood the test of time: the older a client gets the more conservative they should become.
We all know the reasoning behind this. They need their savings to last the rest of their lives and the best way to preserve capital is by sticking it in bonds, which is usually a less volatile investment than equities.
Like any rule, though, this one can be broken and, in many cases, it should be. It’s time for some retirees to get more aggressive with their money.
In the past, there were no good reasons for the 65 plus crowd to own more equities than bonds. Besides being a stable investment, bonds paid a hefty distribution. It was only a decade ago that a 10-year Government of Canada bond had a 5% payout. As well, yields were falling, which pushed bond values higher.
Today, 10-year fixed income yields are at 2.45% and as yields rise in the future — as many experts say they will — bond prices will actually fall. What was once a low-risk investment could wind up hurting your clients’ portfolios.
That’s not to say that people should be fully weighted to equities, but advisors need to take a more careful look at their retired clients’ asset mix.
Here are three reasons why your clients may want to own more equities than bonds in retirement.
They need income
No matter how the markets are doing, retirees will always need some income to live on. To get even a modest amount of monthly income these days, people need to be invested in dividend paying equities that yield more than inflation.
Allan Small, senior investment advisor with HollisWealth’s Allan Small Financial Group, has had clients who’ve come to him and said that because they’re nearing retirement they have to de-risk their portfolio. When he tells them that they’ll average a 3% to 4% return in today’s market, they’re flabbergasted.
“They say, ‘I can’t live off that,’” he says. “We then have to come up with some combination that they’re comfortable with.”
In many cases that means a higher proportion of equities, with many of them in income payers.
They have enough to live on
People used to make the mistake of putting all of their money in conservative investments even if they had more than enough to cover their living expenses.
Today, with people working longer and with many boomers having already saved enough over the years, a case can be made to keep any extra money—money beyond what someone would need to live a comfortable retirement — in more risky investments.
Some people will want to keep growing their savings so that they can leave a larger purse for the next generation. Others, though, will simply want to play the market in their spare time.
Small has some clients who want to put their extra money in speculative stocks.
“They look at the extra saving as play money and they want to take a shot at something,” he says. “It’s OK as long as they’re not afraid to lose it.”
They don’t have enough
There are also many retirees who haven’t saved up enough, and a portfolio of bonds simply won’t cut it.
They need more than just dividend payers — these people have to grow their nest egg and grow it quickly.
It’s a high stakes game, says Small, but many people have no choice. They have to be invested more aggressively in order to make up the money they didn’t save when they were working.
There are other reasons why a retiree might want to be more heavily weighted to stocks, says Small. For instance, some of his clients are so used to investing in equities that they don’t want to switch.
Whatever the reason, it’s clear that not every rule — even one as hallowed as this — is meant to go unbroken. For some retirees, more aggressive investing is the way to go.