To help generate returns in retirement, advisors need to help clients think a little differently about investment risk, according to Toronto-based TD Asset Management Inc. (TDAM).
Most retirees, or those soon-to-retire, are hardwired to think that fixed income is the best asset class to be in as they withdraw funds from their nest egg, says Dino Bourdos, managing director, TDAM, but with the current low interest rate environment bonds are unlikely to provide the returns those clients expect.
“When you look at where we are today in terms of fixed income,” says Bourdos, “we just don’t think the experience for investors is going to be anywhere near what it was in the last 15 years going out for, say, the next, five, 10, 15 years.”
Instead, Bourdos said advisors should talk to clients about investing in equities. TDAM has placed a strong emphasis in equities for its retirement portfolios with the TD Retirement Conservative Portfolio and TD Retirement Balanced Portfolio each holding upwards of 60% of the asset class. To help mitigate concerns regarding stock market volatility, TDAM adds a little insurance to its portfolios through an option-collar strategy. More specifically, managers purchase put options in the retirement funds to mitigate downside risk, which are paid with premiums raised through covered calls. TDAM has used this strategy since the funds’ inception in September 2013.
“[These options] work like insurance,” says Bourdos, “in that like when you buy insurance on your house and the house burns down then your insurance policy comes through and will reimburse you the cost of rebuilding your house.”