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Smart Boomers haven't sold off
Not all Baby
Boomers are bailing out of stocks, financial planners and retired Boomers
say. Responding to
yesterday's column outlining James Cramer's controversial "Boomers
are bailing" thesis, Vancouver-based advisor Adrian Mastracci said,
"Thankfully, my calls from Boomers are completely different." Mastracci says
clients are not bailing out of equities and swimming to the lifeboats.
"They all have part of their portfolio allocated to fixed-income
securities. This makes a substantial difference." Where Cramer
is closer to target is a particular type of investor who overdosed at the
top of the bubble on fashionable tech stocks, who are now looking for
advisors to straighten out what's left of their battered portfolios. He's hearing
from potential clients who had "virtually everything in stocks. The
past five new clients had 85%, 90%, 95%, 95% and 100% in equities,"
Mastracci says, "Obviously, they had not heard of asset allocation
and investor profiles until I pointed it out." It's hard to
believe that in this age of 24/7 media and Internet coverage of investing
that 50-year old investors haven't absorbed the lesson of asset
allocation. But I'm not
that surprised. The past year I've heard from many retirees whose advisors
-- whether out of ignorance or malice -- had elderly clients still 100% in
equities. High equity
content is "probably the biggest difficulty with Boomer
portfolios," Mastracci says, "often coupled with an investor
profile that has no resemblance to the actual allocations." Asset
allocation is not the same thing as diversification. A portfolio of a
dozen equity mutual funds representing stocks from around the world, in
all the economic sectors and representing companies of all sizes, is still
not diversified enough -- because it's not asset allocation. Such
portfolios consist of only one asset class: stocks, also known as
equities. There are at least two other core asset classes: bonds and cash,
plus several optional asset classes: precious metals/gold,
commodities//managed futures, real estate and short-selling hedge funds,
to name a few . Since Baby
Boomers are roughly half a century old, their core asset allocation should
be almost evenly divided between stocks and cash/bonds. Every case is
different and professional advisors can suggest the exact appropriate mix. Despite three
years of sagging stock markets, diversified low-cost portfolios have held
up amazingly well, says the Web site www.bylo.org. Using this newspaper's
FPX indexes as a benchmark, from inception in April, 1996, the Balanced
(50%/50%) portfolio returned 7.2%, Income (70%/30%) portfolio 7.7% and
Growth (30%/70%) portfolio 6.6%. Any of these returns are a far cry from
the devastating losses some investors have suffered. Asset
allocation was the key to the Rip Van Winkle portfolio I've described in
columns aimed at younger investors with modest RRSPs. A simple
balanced fund -- preferably a low-cost one like Trimark Income Growth --
provides instant asset allocation. As portfolios
grow, tax considerations bring complications. But after a decade at this
job, I've come to the following simple approach which may help free you
from worrying about markets every day. If you're in
the 50-50 camp (near age 50, with a risk profile of 50% stocks and 50%
bonds), forget about stocks and pack your RRSP entirely in a ladder of
strip bonds and real-return bonds, or a high-income bond fund. Such
investments are too highly taxed outside RRSPs. By now,
Canadian Boomers should also have started to build a non-registered or
"taxable" investment portfolio. If this is roughly the size of
your RRSP, it can be packed with quality dividend-paying stocks and equity
funds. Again, taxes
are a major consideration: Canadian dividends receive favourable tax
treatment, and capital gains and losses are better handled in
non-registered vehicles. I'd go so far
as to suggest this: the core of a non-registered portfolio need be no more
complicated than being half the Barclays i60 exchange-traded fund
(passively managed Canadian stocks, MER 0.17%), and half a reasonable
priced active global equity fund like Trimark Fund (MER 1.62%). If Boomers are
bailing, it's because they now realize their registered plans are too
heavy in stocks. For many,
their non-registered portfolios are smaller than their RRSPs, which means
the bear market is an opportunity to gradually build up a quality
non-registered portfolio. I also heard
from Boomers who still believe in stocks. Norm Rothery, publisher of
Toronto-based The Rothery Report quips that he hopes Boomers will flee the
markets more quickly. "I hope to spend another 50 years or so on this
rock and I'd like to see low low prices." Keith Betty of
Lethbridge retired in 1998 at the age of 50 and continues to advocate a
mix of bonds, quality dividend-paying stocks and REITs (real estate
investment trusts.) His portfolio is up 30% since retiring. Since world
markets tend to move down in tandem, investors must include non-equity
assets in their portfolio, he says. However, "this isn't the time to
exit equities altogether. Buy well-managed companies, with real earnings
and real dividends, that have been beaten up." Selling all your equities now would be "utterly wrong," Betty says, "Just the opposite: I have sold bonds in the last few weeks to increase my equity holdings." FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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