Balance clients’ risk into retirement

With risk rising again to the forefront of investors’ minds, it’s hard not to worry whether retirement assets are as safe as they could—and should—be. While all investors struggle with how much risk to take on, retired investors especially have a lot at stake in making sure their portfolios manage risk well, lest they see their lifestyle directly worsened by plunging markets.

Naturally, fixed-income investments provide the bedrock for retiree portfolios but they shouldn’t be relied on over the long term. Instead, diversity among asset classes is even more crucial to retirees; they are more exposed to market fluctuations because their income generally comes from their portfolio returns. If clients want to maintain their current lifestyle; they need a highly diversified portfolio while staying insulated from the markets’ ups and downs.

David Stovel, a division director and portfolio manager at Macquarie Private Wealth, suggests a focus on equities as a strong basis for creating income and preserving assets.

“The only danger in owning equities is having to sell them at the wrong time,” he says. “The only people in 2008 who really suffered were the ones who had to sell something for either their financial circumstances or their own peace of mind.”

Macquarie deals primarily with high net worth (HNW) clients with $1 million or more in assets and the firm advocates a fixed income exposure between 0% and 40% of the portfolio. Stovel says the majority of Macquarie’s investors tend to stay below the 20% line because they usually have between $2 million and $3 million in assets to draw upon. For particularly nervous clients, he advises up to 30% or 40% in fixed income investments, most of which is held in GICs to keep the portfolio tight.

“If you’re doing fixed income, take the whole risk off because you want it to be bullet-proof,” he says. “The client has to be comfortable. They have to be able to sleep at night.”

But investors shouldn’t completely abandon growth in their portfolio, as that would leave them open to the erosion of their portfolio’s buying power due to inflation. A balanced approach is still crucial. While it would be nice to have a catch-all investment template for retirement, the truth is that even among retirees, their goals, resources and risk tolerances can vary wildly, so the best thing to do for the portfolio’s growth segment is choose consistency.

When building an income-generating retiree portfolio, Gareth Watson, vice-president of investment management and research at Richardson GMP, recommends clients stick to businesses and market segments with a proven track record at generating cash and that have well-vetted numbers rather than current investor darlings that are on an upswing.

“If your main priority from your retirement portfolio is to generate X amount of income per month, the keys will be putting together a portfolio of investments that have a solid cash-flow generating business model and a lot of transparency,” Watson says.

Avoid high-yield myopia and look instead for longevity, much like a metaphor for your own retirement plans. “Sometimes stocks have a very high yield, but only because investors expect the company to cut a dividend,” Watson says. “A winning pick needs a steady and consistent cash flow. The highest yield is not always the best, you have to take into context the ability of hat business to pay future contracts.”

While it can be tempting to shift the lion’s share of a portfolio into fixed-income investments, if the client ends up living quite long, an overabundance of fixed-income holdings will likely not generate enough income to maintain their lifestyle. Retiree portfolios which shift towards a 30% equity-70% fixed-income allocation, or even a 20-80 respective split, are generally not suited to early retirees—or ones without sizeable wealth to draw upon. Investors have to calculate how much their lifestyle will cost them, leave room for unexpected longevity and perhaps even prepare to change their lifestyle upon retirement.

“If you retire at 55, 80% fixed income won’t be enough to meet your goals,” says Watson. “You may live longer than you expect so you need to be conservative about how much you’ll need to continue your lifestyle. Go a step beyond where you think you might be. You might have to work a little longer or become more frugal in your older age.”