Take risk tolerance into account

Consider using collared strategy if concerned about losses

Dear Money Lady,

I am a single, retired woman with a good stock portfolio but I worry about what I am invested in. My adviser says that everything is fine and that the investments are put in securities that fit my risk, but I don't think so. What should I do?

Shelly

You must be comfortable with your investment choices. Your adviser is there to help you, not take over.

Often when people talk to their financial advisers, they refer to your asset allocation as the primary driver of long-term portfolio performance, but what investment philosophy are they really following? Do generic risk questionnaires really help advisers create an investment strategy that meets your specific future goals? Maybe.

Experienced investors understand the risk-return trade-off of the market and are more comfortable with market volatility. These investors are constantly looking for opportunities to profit over longterm time horizons. It is true that one must accept a higher degree of risk to earn a higher return, but not all investors can afford future losses. Our ability to bear risk has a tendency to decrease as we age, and often those investors who believe they have a high tolerance for market risk suddenly change their minds when the market turns against them.

If you are not a knowledgeable investor and are relying solely on the decisions of your adviser, you should make sure you have communicated your risk tolerance and are invested correctly. Often, clients fill out risk questionnaires with their advisers the way they would like to behave when faced with risk, while how they really behave may be completely different.

Let's look at the basics of the two main asset classes to choose from and what key influences they have that your adviser should be aware of when formulating your portfolio.

The key influencers for equities are the current and future economic outlook, policy changes, current business cycle, market valuations and overall investment sentiment.

The key influencers for fixedincome investments would be the same as equities but also include the duration, credit and yield curve of the investment.

If you are purchasing securities in foreign currency, your adviser will have to consider the foreign economy and policy, as well as current rates and inflation.

Make sure you understand each investment product you have and are aware of the potential risks, as well as the potential future rewards.

Often, a collar strategy is a better approach, especially for those nearing or in retirement. This is a proactive strategy that includes giving up some upside return in exchange for downside protection.

With this method, you would split your portfolio into three components. One would be for lower-volatility securities, which still have some future growth potential (for example, a low-volatility equity ETF). The second portion would be for securities that have more stable and smoother returns and dividends (for example, a mix of blue-chip dividend SMAS). The third portion would be a fixed-income fund that concentrates on capital protection (for example, a fixed income SMA with a floor value return).

Why not discuss a collared strategy with your adviser? I have always recommended this approach to clients wanting to reduce volatility and requiring capital protection. It still gives you the traditional diversification that you need but provides a more consistent return and hedges against significant market declines.

Good luck and best wishes.

Christine Ibbotson is author of How to Retire Debt Free & Wealthy and Don't Panic – How to Manage your Finances and Financial Anxieties During and After the Coronavirus. If you have a money question, visit askthemoneylady.ca, and check out the Money Lady's podcast at Saltwire.com.