Suppose you are at the stage of your life considering starting your retirement savings or simply reassessing your current retirement investment portfolio. In that case, the chances are that you are wondering if a balanced portfolio or a growth portfolio is the best way to go. While investment goals vary across individuals, there are basic considerations to make when deciding on the best investment strategy for retirement. First, it is essential to identify the various investment assets through which you can build an investment portfolio that fits into your retirement plans.
Your retirement investment portfolio can contain various types of financial assets. Your allocation strategy across these assets would be dependent on your overall investment objectives. These financial assets include but are not limited to:
Cash: While this may not be the best option, some of your retirement savings can be left as cash in a regular savings account. Having your retirement savings in cash is generally considered a risk-averse strategy. Your money may be relatively safe in a savings account and they are usually insured by the Canadian Deposit Insurance Corporation (CDIC). However, this strategy exposes you to the risk of having a lower purchasing power in later years due to inflation. Another setback is that when your money is kept as cash, it barely grows.
Guaranteed Investment Certificates (GICs): If you are risk-averse but do not want to leave your money saved as cash, you can explore saving through a GIC. A GIC is another low-risk option that preserves your principal and provides a guaranteed return. However, due to the lower risks associated with GICs, the expected returns are relatively low.
Stocks: The equities market has provided investors with an opportunity to purchase stocks in public companies for a long time. Stocks are considered to be high-return assets as they can provide income through dividends or capital gains. Due to market volatility and uncertainties, stocks are considered to be higher-risk assets.
Fixed-income assets: As the name suggests, fixed-income assets guarantee fixed returns on your investments. They are generally thought to have less risks than stocks, and consequently, the potential returns are lower. Examples of such investments are bonds and treasury bills.
Exchange Traded Funds (ETFs): ETFs are financial assets that hold a pool of conventional and non-conventional assets, depending on the mandate. The performance of an ETF is usually tracked to an index. ETFs provide a means for investors to make potential returns from a single diversified asset. Think of these as an extremely cheap way to own a diversified basket of investments.
Mutual Funds: Mutual funds hold diverse assets, and they are usually targeted towards specific investment goals such as year of retirement, investment in foreign assets, balanced portfolios, growth portfolios, fixed return assets etc. Mutual funds can hold diverse assets such as bonds, equities, real estate, commodities etc. These are akin to ETFs above; however, they generally come with a higher price tag.
Alternative investments: These financial assets are usually more complex and carry higher risks than conventional assets. Non-conventional assets include real estate investments, cryptocurrency, commodities, and metals, amongst others. The advantage of alternative investments is that they are not usually listed on the stock exchange market, and thus their performances are not correlated with performances of assets such as bonds and stocks.
The best investment strategy can vary across individuals and depend on the following:
Your current age and the age you intend to retire play a significant role in your retirement savings strategy. All things being equal, you may be more willing to take on more risks when younger. As you get older and approach your retirement age, it is not recommended to take on investments that are very risky and volatile. The most appropriate time to adjust your investment strategies to a safer, more conservative one as you approach retirement would depend largely on your age, how early you retire and how much time you have left until retirement.
For most people, risk appetite is determined largely by age and stage of active employment. As you get older, your risk appetite generally changes and becomes more conservative. This shift is because any significant loss of investment can have more impact on your retirement income as you do not have as many working years left to recover financially.
Most times, your investment strategy reflects your investment goals. If you want higher potential returns, your retirement portfolio will most likely include growth assets. However, this approach could have higher risks. An investment objective that centers on principal preservation would consist of fixed returns assets that are less risky.
When you have diversified financial assets, it reduces the risk of losing all your investments, as could be the case if you otherwise invest in a single stock, bond, or geographical region. The best investment strategy is one that helps you meet your financial goals while also managing associated risks.
At a younger age, you may be able to allocate a more significant proportion of your investment portfolio to riskier assets like stocks and alternative investments and have a lower portion allocated to fixed income securities like bonds or government bills. However, your diversification strategy may change as you get older and closer to your retirement age –– usually from about 50 years.
Whether you are actively employed or self-employed, it is never too early to start saving towards your retirement. An earlier start towards retirement savings may be beneficial and put you steps ahead than if you start later. More time is better as your investments grow for longer, and you get potential benefits due to compounding interests and gains. You can take on higher risks at a younger age, but as you get closer to retirement, your retirement strategy should become more conservative and include principal preservation strategies. A flexible investment strategy can be rebalanced as you get older. It is essential to revisit your investment portfolio periodically with a financial advisor, as this helps you ensure your current strategy is still effective.
