Money & Career

5 ways to protect your portfolio in a downturn

By: Bryan Borzykowski

Author: Canadian Living

Money & Career

5 ways to protect your portfolio in a downturn

By: Bryan Borzykowski
If there's any age group that's been sweating during August's wild market swings, it's retirees. Many golden-aged Canadians rely on outperforming markets to help fund their postworking years, so you can't blame them for being worried about all this volatility.

But there are ways for retirees to protect their portfolio from the current fluctuations – and future ups and downs.

1. Diversify, diversify, diversify
Many retirees, who made a lot of money investing in Canadian stocks in the '90s and 2000s, continue to hold a majority of domestic companies. But, says Ted Rechtschaffen, president and CEO of Toronto's TriDelta Financial, our market is so concentrated in energy and financials that when one of these sectors gets hurt, entire portfolios can be obliterated.

Consider spreading money around to a variety of sectors to broaden your portfolio. Look to the United States for health-care and consumer-staples stocks. Or buy American and international exchange-traded funds (ETFs), which track an entire, well-diversified index.

2. Stick to your plan

Many people on the road to retirement have a financial plan, and the ones who don't should create one. A plan, says Rechtschaffen, puts investing into perspective. "A financial plan looks out for the rest of people's lives," he says. When things go wrong, the plan can be adjusted by cutting back here or investing more there. That's difficult to do when you have no idea what shape your finances are in.

3. Don't panic
The worst thing a retiree, or anyone for that matter, can do is panic when markets fall. Markets go up and they go down, but they mostly rise over the long-term. Sure, you may not have as long a time horizon as a 20-something, but a couple of lean years is better than selling at the bottom and having nothing. "If the markets have a really bad three-year period, it could impact people's lifestyle," he says. "But it will go back up."

4. Buy dividend-paying stocks
Dividends are a form of income that companies pay to shareholders. Not every business pays dividends, and the percentage of what gets paid varies from company to company, but if you hold some of the better-paying operations you'll be guaranteed a steady influx of dough, even if the market falls. Many people reinvest these dividends to buy more stock, but you can use them to pay for groceries if you need to. The best dividend companies to buy are those that increase their payouts consistently, every year.

5. Chose an asset mix that works for you
Listen up, nervous baby boomers – there's nothing wrong with investing conservatively, just as there's no problem being risky in older age. The key is to decide how comfortable you are when it comes to investing and to stick to your plan. (Re-read step 3.) Riskier investors will see their portfolios rise and fall more frequently than conservative ones, but if you sell all your stocks to buy bonds, you won't get the return you want, and that could harm your financial plan. Everyone needs a mix of stocks and bonds, but it's up to you to decide how you want to allocate your cash.

Of course, it's easy to say not to panic – when markets fall, you'll likely still feel the pressure to get out. Just take a deep breath and think about all the money you'll have when stock prices rise again.

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Money & Career

5 ways to protect your portfolio in a downturn