Advice for a conservative investor

Taking on too little risk can be a risky strategy in and of itself

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Q: I have $300,000 in U.S. funds sitting in a bank account getting next to nothing in interest. Being a conservative investor, what could I consider to invest in?

—Anonymous

A: Unfortunately, Anonymous, your question is difficult to answer. It is very broad. So I’ll give a broad answer, but try to speak to all the relevant considerations.

I’m often asked how someone should invest their money and it’s hard to provide an answer in isolation. A thorough understanding of your risk tolerance is important, as one person’s “conservative” can look very different from that of another person.

I distinctly remember starting to work with a new client in the wake of the financial crisis in 2008 who described herself as a conservative investor. We tallied up her investments–held at different institutions–to identify her current asset allocation. She was 90% in stocks, which seemed entirely inappropriate for a “conservative,” widowed retiree in her late 60s with limited investment knowledge and no pension.

Whether it’s with your investment advisor or using an online risk questionnaire, you should begin by determining a target asset allocation. Consider your other investments when determining how this $300,000 then fits into the equation.

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As a retirement planner, I find it helpful to match an asset allocation to a retirement plan so an investor knows how much of their portfolio they need and how soon they need it. This provides perspective for the time horizon for an investment portfolio to determine if and how asset allocation should change over time.

Given that your cash is in U.S. dollars, there are a few considerations. The good news is you’ve made money on foreign exchange recently, assuming these funds have been in U.S. dollars for a while or came from a U.S. dollar investment you have sold. The U.S. dollar has appreciated over 20% against the Canadian dollar in the past year.

Whether or not you keep the funds in U.S. dollars going forward becomes a matter of fact. If most of your retirement spending will be in Canada, it probably makes sense to convert a portion of the money back into Canadian dollars–eventually. You might do it on a staggered basis over time to avoid picking the wrong day to convert all the cash.

This staggering applies to investing the money as well, especially if you’re investing in stocks. When you have a sizable amount of cash to invest, a staggered investment into the markets provides a little bit of dollar-cost averaging.

And while a conservative investor shouldn’t have too high an exposure to stocks, it’s important to assess whether you’re a conservative investor with 50% in bonds or a conservative investor with everything in GICs.

I like to help investors understand the impact of earning a 3% rate of return versus a 5% rate of return versus a 7% rate of return on their investments in the context of their retirement. This provides perspective to understand the full meaning of the word “risk.”

In its truest sense, risk applies not only to the volatility of your investments, but also the likelihood of outliving your investments. It may be considered risky to keep your savings in GICs because your savings are subsequently forecast to run out by the time you’re 85. If there’s a good chance you’ll live past 85, I’d say that’s a resulting risk of investing too conservatively.

Investing in low-risk investments that aren’t keeping up with inflation could be considered risky. You’re taking a risk that your investments shrink on an inflation-adjusted basis, even if they don’t have the risk and volatility of stocks.

So risk can be multi-faceted. Start with determining when you need your money and what rate of return you actually need to earn to realistically fund your retirement. If the return exceeds the yield on your version of a conservative investment portfolio, evaluate the risk of being too risky compared to the risk of not being risky enough.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.

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