But that’s too cautious, argues Adrian Mastracci, portfolio manager with Vancouver-based Lycos Asset Management Inc. He says stocks should equal 110 minus your age, so a 40-year old would be 70% stocks. His reasoning is that it takes a lot more resources to generate a return from cash or bonds today than 10 years ago. Figure a puny 2% return for GICs, and $1 million generates only $20,000 a year. If your income goal is $100,000 a year, you’d need a whopping $5 million in GICs, which is more than most will have.
New retirees need to come to grips with the fact they may live an additional 30-plus years, that they’ll have little capacity to save once they stop working, must hedge against inflation, and may not be prepared for the escalating costs of health care or retirement homes in their final years. Getting too conservative by cutting back on equity exposure too early is often “a critical mistake,” he says.
So we’re back to TINA: “There Is No Alternative” to stocks, at least for the growth part of a portfolio. But the pandemic laid bare the risk of putting too much into stocks. TriDelta Financial vice-president and wealth advisor Matthew Ardrey was recently featured in a newspaper profile on a couple in their 50s who were 85% in Canadian stocks and 15% in preferred shares. Their portfolio (near $3 million) was down 33.5% with the recent market decline. That hurts, even if the market has since regained half its losses.
Ardrey suggests those with jobs should hold on to them while the crisis is in progress. “No one knows how long this will last and remaining employed is a great way to preserve your capital,” he says. If you keep adding to savings, this “will only help as markets eventually recover over the longer term.”
There’s nothing like a precipitous market crash to reveal our true risk tolerance. After an 11-year bull market run, many investors lost the sense of what their actual risk tolerance is, Ardrey says, so “they may have had an asset mix with a much higher equity weighting than would otherwise be advisable.”
Losing a third of your money means you will probably have to delay retirement, Ardrey says. But, if you’ve properly diversified, overall losses may not be catastrophic: perhaps 10% or 15%. “There is no magic bullet in retirement planning. If a portfolio has lost value, it can only be made up through additional savings, higher returns and time.” If spending less in retirement is not an option, “then more time is likely part of the equation, unfortunately.”
In a recent blog, Toronto-based advisor Steve Lowrie said rebalancing in a bear market is “scary but important.” It’s also counterintuitive, since a 50/50 stocks/bonds portfolio hit by a bear market means you would rebalance by selling some bonds and buying now-better-priced stocks.
But what if you have realized you let the long bull market lull you into higher stock exposure than you are now comfortable with? Recent rallies mean it’s not too late to properly rebalance. If you can still find winning stock positions in your registered plans, they could be candidates for switches to fixed income. Taxes make non-registered accounts trickier but it may still be possible to find embedded gains from positions established long ago; these can be offset against more recent losses in comparable amounts to keep things tax-neutral.