One of the most satisfying moments in the investment process is when a security reaches full value and the end result is achieved. At that point, investors will often sell out of a position and look for better value elsewhere. There are, unfortunately, other times when investors need to sell out of a position sooner, either for an emergency, a major expense, or when the need for retirement income arises.
The challenge faced by many older investors is deciding which investment to sell and which investment to keep.
For those with larger portfolios that hold more securities, it is always very important to consider how each stock that’s added or subtracted will influence the remaining holdings. Maintaining a diversified portfolio remains the best course of action at any age.
Given the nature of certain securities — growth vs. income or defensive vs. cyclical — investors must remain diligent when drawing down on their portfolios. When the time comes to sell out of a position to generate cash, most will want to hold the higher-performing names, which, during bull markets, are the growth or cyclical companies. The defensive companies, or value investments, are most often the lesser-performing names during prosperous economic times, which often leads to a portfolio that is not properly diversified.
Given that investors tend to hold the better-performing stocks while selling the lower-risk ones, this can often lead to holdings that carry excess risks for older investors. It is critical to remember that older investors must take less risk given the lower risk/return profile of their shorter time frame. Although it is appropriate in many cases for an investor to hold a portion of one’s investments in more aggressive investments, the core holdings for many older investors should remain on the cautious side. This translates to owning more defensive and more value-oriented securities.
In consideration of these lower-risk investments, investors have a number of fantastic names to choose from in the Canadian marketplace. Hydro One Ltd. (TSX:H) distributes electricity to consumers. It is highly probable that the company will be successful in generating consistent cash flows for investors throughout all phases of the market cycle. A recession should not greatly impact the underlying business of this company.
Beyond the utilities sector, investors can also consider shares in Canada’s Big Five banks. Currently priced near $108 per share, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) pays a dividend of almost 4.75% and has returned almost 10% to investors over the past year.
Another major bank is Bank of Montreal (TSX:BMO)(NYSE:BMO), which, at a price of almost $97, has increased by close to 15% over the past year and offers investors a dividend yield of no less than 3.7%. Clearly, there is still value to be found in defensive companies.
Although selling out of a security is much more difficult than moving into one, it is important to remember which securities need to be kept in a smaller, less aggressive portfolio.
