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Nest egg (Sharon Meredith/Getty Images/iStockphoto)
Nest egg (Sharon Meredith/Getty Images/iStockphoto)


Want a solid nest egg? You can't avoid stock markets Add to ...

The only thing more painful than watching 10 per cent of a portfolio evaporate in a matter of days is realizing how much more money will have to be set aside for retirement if you’re unwilling to embrace the risk of the stock market.

Sure, you can pull most or all of your money out of equities and stick it into savings accounts or GICs. But as you calculate how much money you’ll need in retirement – and you should make that calculation decades before you retire – you’ll need to sock away much, much more if you’re getting just the 1 per cent returns that safety provides.

“I can’t see my clients, particularly the ones who depend on their investments for income, getting completely out of this market,” says David Chellew, an investment adviser at Burgeonvest Bick Securities Ltd. “Rather than looking forward to 30 years of comfortable retirement, they’d be looking at 10 or 12, at which point they run out of money. So they remain, over time, pretty fully invested.”

To be clear, we’re talking about money for retirement. Folks who need to pay for a child’s university tuition this year can’t afford to lose 10 to 20 per cent of that money in a matter of weeks. The less able you are to absorb losses, the less money you should have in risky assets like equities. And all stocks, even the bluest of chips, are risky assets.

The longer-term your horizon – the farther out you need the money in your portfolio – the more you can afford to risk.

“Emotion is the single greatest enemy of successful investing and in this environment, you have to do your best to put emotion aside and be dispassionate about it,” says Robert Gorman, the chief portfolio strategist at TD Waterhouse Canada Inc. “Otherwise you’ll probably do precisely the wrong thing at the wrong time.”

Let’s take a look at various life stages and what investors should be considering in the face of a market correction:

EARLY STAGE: You’ve just started your career, or are only a few years in. If you have children, they’re young, more than a dozen years away from college.

“Younger investors who are just starting to save have nothing but time horizon, 30 to 35 years before they need that money to retire,” says Larry Moser, the Ottawa regional sales manager for retail investments at BMO Nesbitt Burns. “We believe those types of investors can really ignore the market as best they can, ignore the volatility, because what happens today, tomorrow, in a month, a year, five years doesn’t have that much of an effect on a portfolio that’s going to be invested for 40 years.”

At the same time, however, he says “everybody should have some type of fixed income in their portfolio, because 2008 taught us you need fixed income to protect the downside.”

MID STAGE: Your earnings have increased toward their peak; offsetting that, however, are children who are heading to university, or are already there, or elderly parents who need support.

“My advice is to take a deep breath,” says Mr. Gorman, and ask yourself if your investment losses are permanent and irretrievable. (Probably not.) “Do not yield to the temptation to bail, if that’s what your gut is telling you – you’re likely to lock in losses for a long time.”

LATE STAGE/RETIREMENT: The kids are grown, even old enough to have kids of their own, and retirement is near. This is your last chance to put away some of your earnings to enjoy in the golden years. Or, you’ve begun drawing down your nest egg.

Conventional wisdom, says BMO’s Mr. Moser, used to be that you subtract your age from 100 to get the proportion of your portfolio in equities. If you were 80 years old, you would have just 20 per cent in equities.

But that thinking, he says, was established a generation ago when people retired at 65 and lived to their mid-70s, a 10-year retirement. Now, says Mr. Moser, people are retiring before 60 and living into their 80s, a 30- or even 40-year retirement. “When you have that type of time frame, you need a much larger pool of resources, and you need to consider having more equity in your portfolio as you reach retirement age.”

Mr. Chellew estimates individuals with private sector pensions, Canada Pension Plan and/or other government payments still derive 25 to 30 per cent of their retirement income from their investments. “That means the difference between living comfortably and living on the edge. Over the long term, they’re going to have to be exposed to market risk.”

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