Portfolio Management

Structuring Investments for Retirement

Most investors contemplating retirement do not have 40 years to wait and for this majority, getting a return over a period of 10 to 20 years is vital. One is entitled to ask, however, if stocks outperform bonds, why bother with bonds at all? The answer is relatively simple: bonds outperform stocks for nearly half the monthly periods during which surveys have been done since World War II. But over long periods, equities continue to have the highest returns. Since 1921, stocks and stock portfolios have outperformed bonds in 88% of every 10 year period. Since bonds and stocks do not always rise and fall together, a blend of debt and equity will tend to reduce the average volatility of the portfolio and boost returns too.

The more finely one can subdivide the asset classes, for example, consumer staples and electrical utilities and Canadian federal bonds and global governments bonds, the truer it is that covariance (the tendency of assets to change in price together) is reduced and total portfolio diversification and returns are increased. The concept of minimizing covariance is diversification. Portfolios which allocate their assets in different national markets, over stocks and bonds and real estate and cash equivalents are structured to do well both in bullish stock markets and, courtesy of the bonds, to do well in hard times. As well, further diversification is possible by spreading equity investments over various industries, over small, medium and large companies and by different management styles and by ensuring that bonds have a spread of due dates.