If you’re retired or are planning on retiring within a few years, you probably went into a state of panic when your portfolio suffered alarmingly steep losses last week.
Unlike a young investor, you may not have the time to recover if you’re slapped with another market crash that’s as bad as the one we suffered in 2007-08. And unlike the Financial Crisis, the markets may not be so quick to bounce back, so it’s vital that retirees are prepared to invest through such a volatile market, so they don’t put themselves in a position to panic in the first place.
One of the greatest fears of a retiree is running out of money in retirement. And a top worry for prospective retirees is losing enough money such that one’s expected retirement date is pushed back, perhaps substantially (or, goodness forbid, indefinitely).
Unfortunately, today’s generation of (prospective) retirees find themselves between a rock and a hard place because of how notoriously unrewarding “risk-free” fixed-income instruments have become in an era of rock-bottom interest rates. Gone are the days where bonds can help you grow your nest egg while providing you with the safety you so desire in your golden years.
So, today’s retirees have to make a compromise, by either upping their risk tolerance to get better returns or settling for no real growth with bonds and running the risk of running out of cash in the event of an emergency contingent expense later on.
It’s a less-than-ideal situation, and there are no easy answers. Fortunately, retirees can mitigate a majority of the risks that come with investing in the equity markets.
Despite their now severely unrewarding prospects, bonds still have a place in a retiree’s portfolio. Still, I believe we’ve reached a point where an overweighting in bonds can be just as risky as being overexposed in equities when you consider the opportunity costs. So, I don’t blame retirees at all for being put in a bad state of mind after last week’s implosion in stocks.
If the 13% five-day drop in the U.S. markets caused you to panic sell, because you’re not ready for another repeat of the ominous events that occurred 12 years ago, you missed out on the massive Monday rally and are likely kicking yourself. But as a retiree, you shouldn’t be so hard on yourself given the tough hand you’ve been dealt.
You’re either taking risks you’re not comfortable making to get satisfactory returns to mitigate future personal financial risks, or your wealth is going to stop growing period if you don’t take any risks.
Fortunately, there exists a middle ground with low-beta, one-stop-shop plays like BMO Low Volatility Canadian Equity ETF (TSX: ZLB), which can smoothen the inevitable bumps in the road and reduce the magnitude of your worries during times of turmoil.
Now, low-beta ETFs like ZLB are still technically “risk-on,” because they invest in “risky” equities, but given the lower betas of the ETF’s constituent holdings, retirees can feel more comfortable knowing they’re likely to take on less damage than that of the broader equity markets. In a worst-case scenario, the markets could tank 50%, and while ZLB would still fall in such a crash, it’d likely only take on some percentage of the losses of that of the market indices.
The markets fell into a correction last week, but ZLB managed to avoid correction territory with an 8% peak-to-trough drop versus the S&P 500, which got pummeled over 15% peak to trough, and the TSX Index, which fell as low as 11%.
Of course, your mileage may vary in the next correction, bear market, or crash.
ZLB’s magnitude of downside relative to the indices will be tough to pinpoint, but, on average, retirees in ZLB will be less startled than their counterparts who invested in Canadian or U.S. index funds. And for retirees looking to maximize their risk-adjusted returns, ZLB is a terrific solution to the risk/reward trade-off dilemma that many Canadian retirees face in these tough times.
So, if you freaked out (or panic sold) last week, you may want to consider weighting your equity portfolio more towards the defensive side. ZLB is an ETF that can help you get the job done quickly, so you’ll be better prepared for the next selloff.
Stay hungry. Stay Foolish.
