The case for keeping stocks, period.
In general, the longer your time horizon, the more stocks you should hold in your portfolio.
Historically speaking, stocks have offered the highest returns of any major asset class over decades of investing. This means the younger you are, the longer your investing time horizon, the higher percentage of equity assets you should own to generate higher portfolio returns. Consider this informative page from Vanguard for reference.
But won’t a heavy weighting in stocks lead to more volatility? Yes. Look at the 100% stocks table for further information. The “best year” was outstanding but the “worst year” was dismal; albeit this was 87 years ago. You could expect to suffer more years “with a loss” but the upside coming out of those down years can be tremendous. (Consider the bull run we’ve been on for almost a decade now. Anyone that was sitting on cash after the financial crisis has definitely missed out!!)
Is volatility a good thing? Yes.
Because in your asset accumulation years you’ll have time on your side to recover from short-term stock setbacks when the market becomes indifferent. When the market tanks (even temporarily), you’ll have a chance to buy equities at cheaper prices. Consider it the same as your favourite beer or fruit or tickets for an event – on sale. You get the same goods at lower prices.
What about fixed income? To cushion the blow when equities tank?
I would argue if you’re not yet in retirement, rather you are saving for it, rest easy. For your future self you’ll have a chance to lean on your workplace pension for steady income. Don’t have a pension? Fine, I know, this is becoming rarer these days for Gen X and likely non-existent for Gen Y. Consider your future government benefits like Canada Pension Plan and Old Age Security as fixed income. This fixed income should provide about $1,000 per month (combined) for most senior Canadians if you start accessing these plans around age 65. This fixed income is inflation-protected.
I’ve made the case for your wealth building years (the one I’m actively in).
What about your wealth preservation years?
Today’s seniors face a perplexing investing dilemma. You need safety (for wealth preservation) and you need income. If you focus too much on safety you’ll generate very low returns for that assurance. Returns from guaranteed investment certificates (GICs) for example might provide 1% real return. Depending upon the size of your particular nest egg, that portfolio of GICs could be a serious loser to inflation. Not to mention – you might exhaust your fixed income assets far too early in life.
What to do?
Consider this option – have a cash wedge instead. I intend to employ some form of this approach so I can keep most of my assets in stocks as I get older. Although I wouldn’t necessarily advocate a 100% equities approach for my 60 or 70-year-old future self, I do foresee a future whereby I have a decent years’ worth of cash ready to spend, some form of fixed income to rely on, and the rest in dividend paying stocks and low-cost Exchange Traded Funds (ETFs) to provide both income and growth throughout retirement to fight any longevity and inflation risk.
A portfolio of mostly stocks, some bonds and some cash still might not be enough for some seniors to sleep well at night.
So, if you have no pension in your future consider another option – annuities in retirement – basically your own DIY pension. Using annuities in retirement is well-documented in this book Pensionize Your Nest Egg as well as another book I recently reviewed here. (You may recall an annuity is an insurance contract to exchange a lump sum of money for a lifetime of monthly income.) In both books, authors suggest you can consider adding annuities to your retirement portfolio around the same time you start your Registered Retirement Income Fund (RRIF). This way, you can keep a good portion of your assets, including stocks, inside your RRIF growing tax-deferred AND you’ll get some monthly guaranteed income via the insurance contract (on top of CPP and OAS I already mentioned above). Basically, the annuity can be another fixed-income anchor so in your 70s, 80s and beyond, you shift the portfolio risk away from you and to the insurance company.
As a 40-something, our plan is to employ some sort of bucket-approach to generating retirement income. No doubt our plan might change as my thinking about portfolio management matures but I believe some form of this portfolio design, with a heavy dose of equities, will work for us.
Although some financial planners might make the case that some elderly folks should not be in stocks at all, I would say those retirees represent the extreme minority. This means I believe holding a combination of cash (at least one years’ worth of expenses), some fixed-income assets, and of course keeping a good dose of stocks for as long as possible is likely to serve the modern and aspiring retiree very well.
What are your thoughts about holding stocks in retirement? As a retiree, I’d love to hear from you. Can you share your real-life experiences? What do you make of my cash wedge approach? What % do you hold in stocks today? Thanks for reading and being a fan.