5 changes you must make to your portfolio as you age

Follow these steps to ensure the balance in your investment portfolio is a fit for your stage in life.

By Bryan Borzykowski

5 changes you must make to your portfolio as you age
Portfolios are a lot like human beings -- the older they get, the more conservative they become. What worked when you were younger, such as investing in more aggressive stocks because you knew you had time to recover any losses, could spell disaster as you near retirement.

The closer you get to your golden years, the more important it is to protect your savings, since it's likely what you're going to live on for the rest of your life. But what investment strategies will help ease you into your post-working life? Here are five things to consider.

1. Change your asset allocation

Capital preservation is the name of the game -- Canadians need to protect the money they've saved. To do that, most experts recommend shifting assets from stocks into bonds. 

"One way to reduce your risk and look to preserve capital is by moving some money out of stock funds and into bond funds and cash equivalents," writes American Funds, a California-based investment company, on its website. "That way your portfolio may not experience as many ups and downs."

When you're younger, a 60 per cent allocation to stocks and 40 per cent to bonds makes sense -- you can take on more risk, since your time horizon is longer. When you're older, that number should be reversed, as bonds are a safer investment than stocks.

2. Play defence
For the equity part of a portfolio, baby boomers should consider buying stable, dividend-paying companies, such as Coca-Cola or McDonald's.

Large, multinational companies that produce goods people will buy in any economic climate -- food, for example -- are less volatile than businesses that only do well at certain times of the year.

Dividends are a must-have for boomers. It's income that many large companies pay shareholders, usually on a quarterly or annual basis. These payments help keep your portfolio afloat even when times are bad; some people even use this cash to buy their groceries.

3. Buy bonds
There are all sorts of bonds on the market, but retirees should either stick with safe Government of Canada bonds or highly rated corporate debt.

The former is one of the safest investments on the market -- it's unlikely the federal government will miss its debt payments -- but you won't earn much; at the time of writing, a five-year Government of Canada bond was only paying investors a 1.6 per cent yield. (Yield is income paid to investors on a regular basis, like a dividend.)

Corporate debt is riskier -- a company has a higher chance of going out of business than the government – but if you want to make more money, bonds issued by stable companies, rated AA or above by credit agencies, make sense. At the time of writing, for instance, a five-year Royal Bank of Canada bond was paying 2.17 per cent.

4. Get gold
It's important to know that gold is risky. The yellow metal's recent rise – it jumped 12 per cent to about $1,820 an ounce in August 2011 alone – is largely driven by sentiment. If people feel the economy is souring, they buy gold. If conditions improve, they sell it.

Because gold generally moves in the opposite direction of the market, many people suggest holding it as a way to hedge your portfolio. So if the market goes down you won't lose as much because your gold will go up. However, don't own too much -- gold's price can fall at any time. Most experts recommend retirees hold no more than 5 per cent of a portfolio in gold.

5. Hold some cash
No one needs to have all their cash fully invested all the time. In fact, it's smart for older Canadians to have some cash in a savings account. You never know when you'll need some emergency dollars; also, if the market crashes, you'll have the money to buy stocks on the cheap.

Consider holding from five to 10 per cent of your portfolio in cash. Some experts suggest building up greater cash reserves if you think the market is about to fall. In one of its market commentaries, Lorne Steinberg Wealth Management explains that "the only way to preserve capital is to hold cash when the risk-to-reward ratio is unfavourable."

If you don't follow these steps, and adjust your portfolio as you age, you could be in for a rude awakening. After all, the only time retirees should drain their capital is when they embark on a European vacation.

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