A Foot note on risk

There’s a saying that it’s better to be boldly decisive and risk being wrong than to agonize at length and be right too late. That may be true, but according to renowned economist and demographic guru David Foot, investors would be wise to wait until their late 50s before they maximize their risk.

In a speech to the Morningstar Canada investment conference in Toronto on Wednesday, Foot challenged the conventional wisdom of financial planning. “The idea of taking 100 minus your age as a percentage of stocks in a portfolio is totally wrong,” says Foot, the author of Boom, Bust & Echo and an economics professor at the University of Toronto. This is particularly true of the boomer generation, many of whom delayed saving for their retirement. But that doesn’t mean it’s too late for them to take some risk, Foot maintains.

“In you’re in your 50s or 60s and are still working and you can make back the investment, you can afford to be patient if the stock market comes down,” says Foot, adding that this is when investors should start ramping up their portfolios for retirement. “When you are young you have no money, you can’t afford to risk it.”

Of course, once one starts drawing on that money it’s an entirely different story. A loss in the years of retirement can make it hard to recover. In fact, a loss of about 10% in the first few years of retirement means there’s a good chance that the investor will outlive their portfolio, says Paul Kaplan, Morningstar’s vice-president of quantitative research. “Once you’ve lost the money you’re not going to get it back.”

Foot didn’t restrict his challenges to the way some advisors allocate assets in their clients’ portfolios. He also believes that, contrary to some naysayers, the Canada Pension Plan is in very good shape. “The Canada Pension Plan has all of the assets in place to satisfy its liabilities.” Why? Because the federal government raised contribution rates in an attempt to offset any future shortfall and created the CPP Investment Board to invest surplus funds not currently needed to pay benefits.

Foot also says investors should be given some flexibility to decide when to convert their registered investments to a RRIF, though he believes it should still be done sometime between age 65 and 75. “It is true that forcing people to convert to RRIFs at 69 is going to generate more income for government, but government is going to get the income anyway.”

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(06/07/06)