Power Your Retirement Investing with our Successful Investor Plan

The post-World War II generation—the baby boomers—were born between 1946 and 1964. The youngest boomers are now around 59 and the oldest are around 77. At least half have already retired or are making plans to do so.

When investors reach retirement age, they tend to switch some of their investments from equities (stocks) into debt investments (bonds). In previous decades, some would start switching into bonds before retirement. However, bonds lost much of their appeal for retirees in the past couple of decades, due to the historically low bond yields in that period.

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Of course, some investors (including many of the most successful investors) stay out of bonds and mainly buy stocks. They recognize that stock market downturns come along unpredictably, but that’s something they can accept. That’s because they focus on the long-term growth that stocks have provided over the past century, plus tax advantages.

They understand that you can neutralize the volatility of stocks—and enhance your profits—by buying them gradually during their working years, and selling gradually in retirement.

They see stocks as the best choice for investors who focus on investment quality and diversification, and who can afford to hang on for a number of years. In fact, a lot of stocks-only investors look a little deeper and come around to the view that returns on stocks have to beat fixed-return investments over long periods. It’s a matter of what we call “financial physics.”

Stocks expose holders to bigger risks than bonds, so they have to provide higher returns than bonds, on average, to remain competitive. Otherwise, investors would only buy bonds.

Some investors mainly, or only, buy bonds. (For the moment, let’s use “bonds” to cover all fixed-return investments, including GICs and savings accounts.) This may be due to personal circumstances or temperament. It may reflect a temporary or lifelong preference.

This surge of baby boomers into the retiree population may spur financial institutions to create new income investments for retirees in this decade. Some (probably most) of these new retirement investment opportunities will come with negatives hidden in the fine print that can reduce the income investors receive. They may also come with easy-to-overlook risk.

For example, you may hear of real estate funds designed for income-seekers that have above-average yields. This added income may reflect leverage from borrowed money. However, if tenants leave and the fund has to lower rents to find new tenants, it still has to pay the agreed-upon interest. The difference comes out of investors’ cash flow.

The Successful Investor Retirement Investing Plan

We think the best retirement plan for most investors is to do as we do for our clients. That is, focus on high-quality stocks, and resist the urge to hold fixed-return investments.

Our basic Successful Investor retirement plan is to build a portfolio of high-quality, dividend-paying stocks, spread out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

Stocks represent partial ownership in a business. Over the past several decades, shares in prosperous, growing companies have provided great returns. Capital gains plus dividends overall may beat inflation, in many cases by a wide margin. Not all businesses prosper, of course. But if you follow the simple directions in the preceding paragraph, you’re likely to find your portfolio does well for you—perhaps better than you expected.

In contrast, bonds represent a loan, rather than ownership. (The bond buyer/holder is the lender; the bond issuer is the borrower.) Bond prices fluctuate during the term of the bond. When the bond matures (assuming it’s a Canadian or U.S. government bond), you get back the principal amount plus interest, as promised. However, bondholders suffer from two big “noes”: no opportunity for growth and no protection against inflation.

Some conservative clients choose to hold some short-term fixed-income cash-equivalent reserves that they can dip into as needed, to avoid having to sell stocks when prices are low.

Others find they can live well most years from dividends, plus any government and/or private pension(s) they receive. They always have the option of selling stocks when they need cash.

When our clients need to sell stocks to raise cash, we choose sell candidates with the goal of culling your portfolio—selling your weakest holdings. That way, every time we sell anything for you, we try to upgrade your portfolio’s investment quality and long-term prospects.

Most investors understand our approach. It makes sense to them. They know you get what you pay for, but only if you shop carefully. They also understand that you don’t get something for nothing. But the idea of an all-stocks portfolio still makes some investors uneasy. They grew up at a time when it was customary for retirees to hold bonds, and it made economic sense. Back then, of course, interest rates were higher than they are today.

Today’s interest rates seem high, but only because they’ve moved up substantially from a few years ago. Both interest rates and inflation rates are still below long-term averages. We suspect interest rates and inflation will move up over the course of this decade.

We are optimistic about the stock market for the rest of this decade, at least in North America. We expect a Successful Investor-style stock portfolio to generate a total return—dividends plus capital gains—that will beat bonds and give you an after-tax, after-inflation profit on your investments.

What’s your retirement investing plan?