Invest in high-quality stocks and diversify to develop a conservative retirement portfolio to rely on during your golden years

There are good reasons to stay out of the stock market, but approaching retirement isn’t one of them, especially if you have built a conservative retirement portfolio over time.

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Add high-quality stocks to your conservative retirement portfolio to create stability

Some retirees worry about having to sell some of their holdings at low prices if they happen to need funds during a market downturn. To counter that specific fear, you may want to move some funds into GICs or bonds for current income for day-to-day or annual expenses. As a rule, though, we think investors should also continue to invest some of their money in stocks in retirement.

After all, high-quality stocks with sustainable dividends, like those we recommend in our newsletters, can provide tax-advantaged dividends (for Canadian stocks), along with growth prospects. Over a period of years, stocks provide an attractive combination of total return, plus a hedge against inflation. Fixed return investments provide no growth and no protection against inflation. Moreover, today’s interest rates are simply too low to provide an acceptable alternative.

Diversify your conservative retirement portfolio to maximize returns

If you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

For example, manufacturing stocks may suffer if raw-material prices rise, but in that case your Resources stocks will gain. Rising wages can put pressure on manufacturers, but your Consumer stocks should do better as workers spend more.

If borrowers can’t pay back their loans, your Finance stocks will suffer. But high default rates usually lead to lower interest rates, which pushes up the value of your Utilities stocks.

As part of their portfolio diversification strategy, most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

For example, conservative or income-seeking investors may want to emphasize utilities and Canadian banks in their portfolio diversification, because of these stocks’ high and generally secure dividends.

More aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks.

However, note that if you have Resource holdings, you should spread them out among oil and gas, metals and other Resources stocks for diversification and exposure to a number of areas.

Estimate cautiously to account for unforeseen setbacks in a conservative retirement portfolio

As for the return you expect from investing for retirement, it’s best to keep that low.

Over long periods, the total return on a well-diversified portfolio of high-quality stocks runs to as much as 10%, or around 7.5% after inflation. Expect something lower in your retirement planning—5% a year, say—to allow for unforeseeable problems and setbacks.

Above all, it’s important to remember that while finances are important, the happiest retirees are those who stay busy. You can do that with travel, golf or sailing. But volunteering, or working part-time at something you enjoy, can work just as well.

One thing we encourage all investors to do is perform a detailed study of how you spend your money now. Then, you analyze your findings to see what personal expenses you can cut or eliminate. This too can have fringe benefits, especially if it helps you break unhealthy habits. You may be surprised at how much you’re spending and how much more you could be saving for retirement.

Use our three-part Successful Investor approach to build a strong conservative retirement portfolio

1. Invest mainly in well-established, dividend-paying companies. Ideally, some of your picks should also have hidden assets. That is, assets that many investors disregard or fail to appreciate.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance, and Utilities.
3. Downplay or avoid stocks in the broker/media limelight, where a modest business setback can set off a deep, sudden and sometimes permanent drop in the stock.

What level of risk do you feel is acceptable in your retirement portfolio in order to benefit from higher-growth stocks?