Here’s an old investing rule you’ve probably heard and maybe even ascribe to: When you’re younger, hold more equities and when you’re older hold more bonds.
Why? Because bonds typically aren’t as risky as some other investments; they don’t fluctuate as much as stocks, but they also tend to generate lower returns over time. And, if you’re like most people, you’re likely to become more risk averse as you move toward retirement – which means you’ll probably move your portfolio away from equities and into bonds to reflect your shrinking appetite for risk.
Here’s another reason for the conventional recommendation to switch from equities to fixed income investments as you reach retirement age: Younger investors have longer investing horizons but, when you’re older, you have less time to overcome downturns in the stock market so less potentially volatile investments are a safer choice.
Today, though, it can make sense to hold stocks for longer. That’s because we’re living longer – in 1990, life expectancy was 77 years now it’s 82 years and climbing – and a longer life means that more portfolio growth is required.
But bond yields are low – much lower than in years past – so they generate less income. In 1990, bonds returned 10%; in 2017, they yielded just 1.5%.
Today’s low interest rates for fixed-income investments are part of the problem. The other part: The impact of inflation on a portfolio which can erode your income over time.
Enjoying a longer retirement means you have to keep your money growing – and it’s a simple fact of investing life that equities compound at a higher rate than bonds – and the longer you stay invested, the more your portfolio will grow.
So instead of rushing to reduce your equities exposure as you age, consider this three-bucket approach.
Keep in mind that there is no one-size-fits-all financial planning strategy. The plan that’s right for you will provide you with a comfortable retirement income for all your retirement years and a comfortable exposure to risk. Talk to your professional advisor to see what’s best for you.
This column, written and published by Investors Group Financial Services Inc.(in Québec - a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Insurance products and services are distributed by I.G. Insurance Services Inc. (in Québec - a Financial Services Firm). Insurance licence sponsored by The Great-West Life Assurance Company outside of Québec.