Business & Finance Investing & Financial Markets

You Need Equities in Your Retirement Portfolio

One of the asset classes that most retired investors will overlook is the growth asset class, which consists primarily of equities and other specialized assets that offer potential for capital growth.
Turning a blind eye on the growth asset class makes a bit of sense; in retirement, investment goals shift from "making" the money to "spending" the money.
And if investors have been able to achieve their financial goal, why take on the additional risk associated with such assets? The reality is that equities offer protection in way a lot of fixed income assets will not.
In fact, many fixed income assets will actually pay interest (the income) based on a rate that will shift up and down depending on the interest-rate environment at the time, the economic and business cycles as well as a host of other time-specific factors.
So when an income-hungry investor decides to lock in their rates at x% for the next so-many years, they are not just accepting the level of income that investment will provide.
They are agreeing that this level of income will actually manage to keep up with the cost of living including inflation, that it will allow for unexpected and emergency expenses and that it will allow them, come maturity, to have a sufficient capital base to allow for a continued retirement at the level they have grown to enjoy.
In most cases, fixed income assets do not satisfy all of the above concerns.
In many cases, investors are finding themselves digging more aggressively into their principal than they would otherwise like.
This means that they have to shift their way of thinking; either take less income or take more risk.
Equities need not incorporate a whole bunch of risk.
In fact, many of the lower risk equities will pay a dividend that, while low compared to some of the below-investment grade corporate debt, provides income that might be comparable to government debt (again depending on the stage of the economic and business cycles and so on).
More importantly, however, is that equities will grow given the right amount of time and offset higher rates through greater capital growth.
This process makes simple sense: when rates are low, companies can invest in their growth and when rates are high, companies are enjoying greater growth and profits, allowing them to strengthen their balance sheets and/or increase dividends thereby boosting their share price.
Even income-focused investors need to carry equities.
Even a small percentage, such as 30% of their portfolio, should be allocated to the growth asset class.
Assets held in this higher risk portion of the portfolio need not carry a whole bunch more risk.
Depending on the investor's risk profile, even the most highly capitalized, high dividend paying securities will do the trick and still offer stability in terms of income and growth.
Of course, investors are encouraged to speak with their individual advisors to see what options work best for their portfolio and needs.


Leave a reply