Dear Nancy Woods,
There have been so many changes to my portfolio the past couple of years that my asset mix is no longer the 60-per-cent fixed / 40-per-cent equity that it used to be. It has flip-flopped to 60-per-cent equity and 40-per-cent fixed. I’m 66 years old and I can’t afford to lose anything. I won’t be able to survive on the low interest rates that GICs and bonds are paying. What do I do?
It is true that before the fiscal crisis, and back when interest rates were higher than they are today, the “rule of 100” – a guideline that says “100, minus your age, equals your equity exposure” – was a valid way to calculate asset mix. Today is a different world altogether. Many people relying on the income from their portfolios have had no choice but to buy some kind of dividend or income-paying equity.
Getting an interest return (taxable when held in a non-registered account) that barely keeps up with inflation is difficult to buy. The low rates tended to turn people into “yield chasers”. Many were buying just for the high yields and not looking at the risks. When the whispering threat of rising interest rates is heard, those rate-sensitive stocks start to take a tumble.
I refer to the “rule of 100” as a guideline. This is the time where the guideline needs to be very flexible. If you are an informed investor and understand what you own, there is no significant harm in having a higher equity exposure than you usually have. If you look at dividend and income mutual funds, you will see a consistent investment theme. The typical top holdings are financials and utility stocks that pay an income. These investments are high on the security scale – paying their dividend without reductions and having a good growth component. They are not classified as fixed income, but the Canadian banks have not cut their dividends even during the financial crisis.
What you need to do is carefully dissect your portfolio and classify your equities on a scale of security of income, past growth and possible future growth. If you have a high weighting of stocks whose dividend can change, and price volatility, then you should lower those and look for alternatives.
A change in stock price to the downside does not necessarily mean you should panic and sell. Bonds fluctuate in market value just like stocks do. They just go to a predetermined value at a fixed point in time. It is important to note that values of fixed income, bonds, coupons etc, will fall in price, when the inevitability of rising rates occurs. Price goes down when yields go up. Price goes up when yields go down. Being able to know when to sell any investment is as important as knowing when to buy.
Always keep in mind that a higher yield is payment for higher risk. Look at how risk averse you really are. It never hurts to get a second opinion.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to firstname.lastname@example.org. You can send your questions to email@example.com as well.