Q – I am 70 years old, and my investment advisor has proposed that I reduce the risk in my portfolio. I require a high level of income from my investments and do not want to erode my principal. What is the right asset mix? – Melissa T., Banff, Alberta
A – The decision to reduce risk in your portfolio is a question of need and ability, and it all comes down to the risk you are willing to accept. By age 70, most investors have a more conservative outlook and focus more on capital preservation and income rather than growth. A typical asset allocation might be approximately 30% in equity (for some element of growth) and 70% in fixed income (for safety of capital and income). But again, this depends entirely on the person’s individual needs, objectives, and tolerance for risk.
The higher the equity component, the higher the risk of loss. Given the volatility of the markets today, your investment portfolio should be adjusted to return only the risk you need to take. If your advisor is suggesting you reduce risk, perhaps your allocation to equity is higher than 30%, making you vulnerable to market volatility and posing a threat to your overall income objective.
The challenge is as always to generate enough income after fees and inflation to sustain your income needs. There is no magic number, so ask your advisor to compare the risks you are taking with the income you need. You may discover that you could be better served by eroding principal to some degree or reevaluating your lifestyle needs. – R.T