Conventional wisdom states that those of us in the earlier years of our careers should be investing differently than those who are closer to retiring. But different generations aren't investing that differently. Why is that so and is it time to rethink retirement strategies?
As shared in this article on Manulife Blog:
The thinking is that the more time you have, the more risks you can take – and that once you’re in your final earning years, riskier investments such as equities should take a back seat to more stable vehicles such as bonds and other fixed-income products.
However, according to a recent report (Seeing Wealth Differently Across Generations – Wells Fargo), generations aren’t investing that differently. Millennials and boomers, despite their different objectives and timelines, are being similarly conservative with their money strategies. Philip Petursson, Chief Investment Strategist with Manulife Investments, weighs in on the reasons behind that – and what it could mean as the market changes.
“Millennials tend to be much more cautious than previous generations because their first investment experience would likely have involved the crash of ’08 – when they would have seen their investments fall by up to 60%,” he says. “That would definitely shift their way of thinking from ‘I’m a long-term equity investor’ to ‘I just saw what little money I had get cut in half, this isn’t for me.’”
And in addition to those experiences, bonds have performed well in recent years, making them an attractive option.
“I can see investors saying ‘why would I ever buy an equity when I can just buy bonds, which have been doing as well, and in some cases even better than riskier options,” he says.
But that will change going forward. According to Philip, a lot of people don’t understand the implications of a rising interest rate environment. If the Bank of Canada rate goes up, it will have a meaningful and negative impact on bonds. But whether interest rates rise or not, equities have significant benefits.
Equities vs. bonds
If we think interest rates will stay the same as today, we’re living in a 2% world. And that won’t provide the kind of growth people need to meet their financial goals. If we believe interest rates are going to creep a little higher, portfolio performance will increase as interest rates rise and the value of bonds falls.
“In both cases, bonds come second to equities, offering single-digit returns. It’s hard to see anyone who is heavily invested in fixed income perform adequately over the next few years. Equities simply have greater growth potential.”
Rethinking retirement strategies
Philip also thinks people close to retirement – and even those who have already retired – shouldn’t necessarily restrict themselves to fixed-income investments, but consider a higher allocation to equities.
“People are living longer, and retirements are getting longer – 30 years or more is becoming the norm,” he says. “With a 30-year time horizon, I don’t think you can shun equities. In a low interest rate environment, I think equity income and equity growth will provide people with the income they need.”
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