Some investors get an urge to take one last speculative fling before they retire. For most of us, it’s better to plan a transitional portfolio.
Changing a portfolio to suit new personal circumstances can be easy at some times and difficult at others. For the young, for instance, changing matters around may not prove too unsettling—at that time in life all sorts of things are changing.
For older investors—past 55, say—a change in direction can prove trying. You have to cast aside old habits. In the midst of the change you’re constantly reminded of your own mortality. The need to act, aggravated by the pressure of time’s passing, can—if you let it—have a negative impact on the quality of your decisions. The best defence against that is to stay calm and, more important, to begin thinking about these things long before you need to act.
Investing pays, gambling seldom does
The need for change appears to be giving a friend cause for concern. Mr. W writes, “I’m 67 years old and this will be the last time I will have a chance to make a few dollars. At this time I do not need income. I will need income maybe four years hence”.
There are two key phrases here: ‘last time’ and ‘maybe’. The first indicates a certain—well, desperation may be too strong a word but it’s not too far off the mark. The ‘maybe’, on the other hand, suggests Mr. W’s questions and doubts over his financial situation. These phrases may reflect a vague uneasiness that he feels after reviewing his finances and the lifestyle he hopes they’ll accommodate.
No doubt Mr. W has other resources. Unlike the young, older people often have defined benefit pensions and real estate or business income. They tend to be satisfied with their ‘bread and butter’ income. It’s the ‘gravy’, so to speak, that they worry about.
There are a few things that Mr. W ought to keep in mind. At his stage of life, retaining what he has ought to command greater attention than running risks to increase his wealth. Second, with only four years left until he may need income, he cannot allow his portfolio to potentially suffer catastrophic losses.
Building a transitional portfolio
Third, Mr. W should have his eye at present on a transitional portfolio that could conceivably continue to serve his needs with only modest changes after those four years have passed. After all, four years from now we may find the market in a depressed state such as the one of 2008. That’s a poor time to have to sell low-quality, aggressive investments; they often take a particularly severe beating when the market as a whole is weak.
Mr. W’s transitional portfolio should hold some high-quality stocks that raise their dividends. He should put up to 30 per cent of his stock money into each of the financial and utility sectors, subject to the caveat outlined below. Both stable sectors include many companies that pay high dividends and regularly raise them. Mr. W should put a fifth of his portfolio into somewhat stable consumer stocks. Loblaw Companies and Canadian Tire, for instance, steadily raise their dividends.
Mr. W should keep only 10 per cent of his stock portfolio in the volatile manufacturing and resources sectors. Mr. W should favor manufacturers such as Toromont Industries, which regularly raises its dividends. With regards to resources, Mr. W should stick to stocks that have a stable dividend history. Imperial Oil is a good example.
Taking money off the table
The prices of utilities stocks are high and will likely remain so through the rest of 2019. Utilities are earning fat profits and interest rates are low.
Thanks to the favorable situation and outlook for utilities, their shares have jumped, of course. In fact, utilities now make up a larger percentage of the S&P/TSX composite index. As a result, if utilities once accounted for, say, 30 per cent of your portfolio, chances are they now carry a greater weighting. This exposes you to worse potential losses if utilities drop.
The solution to this problem, of course, is to ‘take some money off the table’, so to speak. That is, you should rebalance your portfolio by selling some of your holdings in utilities. After all, while the sector’s outlook is favorable, utilities can suffer in a market setback and from higher and rising interest rates.
This is an edited version of an article that was originally published for subscribers in the August 2, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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