Which equities suit boomers?

Once you persuade a boomer to invest in equities, what should they buy?

Michael Jones, founder and CIO of RiverFront Investment Group in Richmond, VA has typical portfolios of “60% stocks that look a bit like bonds (high yield), 25% bonds that look a bit like stocks (high dividends).” The remainder’s in cash.

He’s been bulking up on lower-volatility stocks that will perform well over the long term but have been left behind, so far, by the market. And in his bond portfolio, he has a lot of high-yield and emerging-markets sovereigns.

Read: Managing volatility in equity portfolios

Phaby Utomo, executive director and senior private wealth manager at UBS Wealth Management in Toronto also looks to nontraditional fixed-income.

“High-yield bonds are currently paying about 7%-to-8%, which offers considerable premium above investment-grade corporate bonds,” she says.

On the equities side, dividend-paying stocks are the most bond-like, says Jones. “I’ve studied all kinds of asset classes, and the most stable relative to inflation is the dividend off of stock.”

Scott McKenzie, regional vice-president and general manager at T.E. Wealth in Toronto uses “direct investment in stock and bonds, pooled funds and ETFs. We’re looking to keep the costs down as much as possible” because they eat returns.

Utomo suggests preferred shares, but cautions investors to get into the right kind. There are two: perpetual, which have stable rates; and variable, where rates reset every five years.

“In a rising-interest-rate environment, the perpetual preferred shares could be hurt more than variable.”

For her clients, all of whom are wealthy, she also considers a structured strategy called barrier reverse convertibles, which uses derivatives.

The strategy links a coupon to an underlying equity index—the TSX, for example. This structure pays a guaranteed coupon and is linked to the performance of the index.

Read: 5 risks to retirement income

It also provides a conditional downside protection down to the barrier level, typically 20%-to-30% below the current market value.

If the TSX falls below the barrier, the client then gets exposure to the performance of the underlying index. But if the barrier is not breached, the principal is fully returned.

“It’s worked well for clients who want to replace some of their equity exposure,” Utomo says. “This is a satellite strategy to help them achieve a more steady return. At the same time, they build in a conditional downside protection through the volatile times.”

And downside protection is what clients will need if they stay in bonds.

“Bonds are going to go from the best investment over the last 30 years to probably the worst investment for the next 20 years,” says Joel Clark, managing partner at KJ Harrison in Toronto. “It’s just going to be horrible.”

Read the full story: Push clients toward equities >

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.