Q: I am 69 and have approximately $600,000 but I’m afraid to invest in equities. What strategy should I use and how do I get over this fear?
A: There are good evolutionary reasons for why people are afraid of sharks and snakes, since they’re potentially dangerous. Investing in equities also carries some very real risks—namely that you can lose large sums of money with shocking swiftness. Even a fully diversified portfolio of stocks lost about half its value during the worst six months of the 2008–09 crisis. So, Richard, I don’t think you should try to “get over this fear,” because it’s a perfectly reasonable one.
I suggest you start by determining how much risk you need to take with your investments in order to reach your financial goals. Don’t do this on the back of an envelope: it’s worth hiring a fee-only financial planner to run the numbers. (Avoid using a planner who is paid by commissions from investment or insurance products, as there’s too much potential for conflict of interest.)
A planner will look at your spending and all your sources of retirement income, including pensions and government benefits. He or she should then be able to calculate the shortfall you’ll need to make up using withdrawals from the portfolio, and then estimate the rate of return needed to ensure it’s sustainable throughout your life.
It may well turn out that you can achieve your retirement goals with a modest return of 2% or 3%. In that case, you can keep a large portion of your portfolio in safe, stable investments such as GICs and short-term bonds, with only about 20% to 30% in equities. If your plan suggests you need to target a return of 5% or more and you’re not comfortable accepting more risk, then the only solution is to reduce your spending accordingly.
One more word of caution: if you speak to an advisor about your predicament, be very skeptical of the many products targeted to risk-averse investors. These include market-linked GICs and principal-protected notes (PPNs), both of which promise a chance to profit when stock markets rise without the risk of losing money in a downturn. While they sound appealing, these products usually have high (but hidden) fees, complicated structures, and a lot less upside than it appears at first. Don’t be seduced by the promise of a free lunch: there is no reward without risk.
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