Asset Allocation the Key Investment Strategy

Landing on the right investment strategy boils down to balancing your expectations for growth with your tolerance for taking risks. But even the most aggressive portfolio should gradually take on a more conservative approach as retirement age approaches.

An investment portfolio may contain many types of investments, all of which fall into three main categories.

Risk versus reward

Stocks, or equities, offer the biggest upside for increasing in value. However, it can be a bumpy ride. Short-term dips in the stock market can be steep. Over time, however, the long-term trend is up. Fast and scary price drops in share prices become mere blips over 20 or 30 years.

Risk varies greatly within this category. Some equity-based mutual funds clearly identify themselves as growth funds, taking on more risk in an attempt to find companies with the highest potential. At the other end, some mutual funds aren’t shy about calling themselves conservative. Their holdings focus on well-established companies with solid fundamentals. The potential isn’t as high but investors face lower risks.

Middle ground

Bonds, or bond-based mutual funds, find a home in most portfolios. They’re inherently less volatile – well suited for protecting principals – but offer limited rewards. They’re classified as fixed-income instruments because owners receive regular payouts, which can also be re-invested.

As with equities, growth potential and risk varies widely within this segment. Government bond funds offer quite low risks but returns are also limited. Corporate bonds have greater potential and more risk. Investors comfortable with risk may opt for high-yield, or “junk,” bonds issued by fledgling or distressed companies looking to raise capital by offering high but uncertain yields.

Cold cash

Cash, savings accounts, guaranteed investment certificates and money market funds are the safe haven in a portfolio. The risk of losing your principal is extremely low. Many of these investments are guaranteed and losses in the others are rare.

The biggest risk in parking money in cash is inflation. If the inflation rate is higher than your return, you’re losing money in real terms. However, for people already retired, cash is an important category.

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Balancing act

My prime objective is to recommend an asset allocation that makes sense for your situation, including age, need for returns and tolerance for risk. Model investment strategies run the gamut of aggressive growth (all stocks) to ultraconservative (all fixed-income securities such as bonds, as well as cash vehicles).

Willingness to take on risk varies greatly. Some people are very comfortable with risk while others shy away from the stock market completely. This risk profile is a central element in designing the best asset allocation.

  • A 20 – something person may be more risk averse than a retiree but a longer horizon gives a young person the ability to take on more risk.

Beyond risk

Younger investors have a greater capacity to take on risk since their investment window can be 30 years or longer. Indeed, a 20-something person may be more risk averse than a retiree but a longer horizon gives a young person the ability to take on more risk. As a result, a large share of their holdings may be in equities.

Conversely, retirees who fly to Las Vegas twice a year may have little choice but to hold most of their investments in bonds and other fixed-income instruments to both generate income and preserve their capital.

Thus, for any given willingness to take on risk, a portfolio should start shifting to a more conservative approach as retirement approaches.

Needs-based decisions

Asset allocation is also a function of need. I can play a central role in helping determine the amount of savings you’ll need to support your lifestyle in retirement. Many factors may come into play, such as your willingness to downsize your home or expected inheritances.

First, the good news

Canadians, on average, are living longer. Statistics Canada reported in 2014 that a 65-year-old woman should expect to reach 87, up two years from 2001. A 65-year-old man today can expect to live to 85, also up two years.1

Longer retirements may require more savings. This increase in need could require that you incur more market risk.

Custom tailoring

Successful investing does involve some risk. I will assess your individual situation and help you design the optimal asset allocation to meet your goals, and help it evolve over time while staying in your comfort zone.

As you get closer to retirement, proper planning can help ensure the risk built into your portfolio will steadily diminish, leaving you free to start planning the next chapter in your life.