Changes in general attitudes and living standards lead to evolution of investment strategies and products, adjusting to higher risk tolerance and longer lives.
Trend 5: Breaking with tradition to reduce risk
Many high-net-worth investors are diversifying with “alternative” investments – including segregated funds, principal-protected notes and hedge funds.
> Segregated funds are similar to mutual funds, but being insurance products, they offer some unique features. Up to 100% of the original amount invested is guaranteed at maturity (usually 10 years) and if the fund holder passes away before maturity, the entire original amount is passed onto their beneficiaries.
> Principal-protected notes (PPNs) have grown in popularity among investors looking for some relief from the vagaries of the stock markets. Like segregated funds, PPNs guarantee the initial investment amount at maturity, also offering growth and income potential.
> Hedge funds can provide additional diversification benefits because they tend to perform differently than traditional asset classes such as stocks and bonds. There are several different hedge fund management styles, but some can involve higher risk. As a result, hedge funds are appropriate only for “accredited investors” – high-net-worth investors with higher risk tolerance.
Trend 6: Reaching for greater yield
One of the biggest trends over the last 10 or 20 years has been the increasing demand for investments that produce a satisfactory retirement income. Traditionally, retirees have depended on interest-bearing investments, such as government bonds and GICs. However, there’s often very little left over – after accounting for taxes and inflation. As a result, retirees have turned to other ways to generate income:
> Annuities provide an income stream comprised of taxable interest income and non-taxable return of capital, providing higher after-tax income compared to conventional bonds or GICs.
> Corporate bonds generally pay higher yields than government bonds. However, they can vary greatly in quality. Income-oriented investors typically look for higher-quality, investment-grade bonds rated “A” or higher, as opposed to lower-quality “junk bonds”.
> Dividend-paying stocks have also become increasingly attractive among income-oriented investors because of the preferential tax treatment of dividends compared to interest income.
Trend 7: Investing for a longer lifespan
People are generally living much longer – prompting a new approach to investing for retirement. Thirty years ago, people could expect to live for just a few years after retiring at age 65, and the shorter life expectancy meant that some modest savings, coupled with government benefits and possibly a company pension, were more than enough to cover living expenses. But now, people can expect to live for nearly two decades after reaching age 65. This means that most retirees need a much larger retirement nest egg to avoid outliving their savings or having to make lifestyle sacrifices. They also need to take a different approach to investing. Instead of investing only in income-oriented investments like bonds and GICs, retirees are increasingly allocating part of their retirement portfolios to growth-oriented investments like stocks.
This article is supplied by Angelo D’Amico, a Vice President, Portfolio Manager with RBC Dominion Securities Inc. Member CIPF. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. Angelo D’Amico can be reached at 514-878-5196.
