Our blog on March 17th (In Need of a Steady Hand) generated a large number of hits, which given the investing environment at the time, is not surprising.  The main message in the posting was that investors shouldn’t hide under the desk, but rather start looking for the opportunities that weak markets bring.

I received a few comments or emails in response, but unfortunately, I misplaced one of the most thoughtful ones until this weekend.  The question was: What advise do you have for retired people who do not have a 20-year time horizon?  After apologizing for my poor organizational skills and failing memory, I responded to the reader this way:

Unfortunately, your question has an ‘it depends’ answer to it. 

Investors with a shorter time horizon clearly don’t have the same ability to take advantage of weak markets, but it varies greatly as to how limited they are. 

Investors that are still running a fairly balanced portfolio (because of ample wealth and/or a pension income and/or a younger age) can do some re-balancing and take advantage of weaker stock prices.  For these investors, we usually recommend that they maintain a 1-2 year cash reserve (Savings Fund) to cover any withdrawals required (i.e. additional to the on-going income distributions from the portfolio).  The benefit of this strategy is that the investor is paying themselves from a stable part of their portfolio.  By having a cushion, they have the flexibility in weak markets to wait 6-18 months before they have to top-up the reserve by selling more volatile long-term assets (stocks or bonds). 

In cases where the portfolio is in full income mode and has little or no equities, there isn’t much to be done.  In this case, however, the investor can still take advantage of the dislocation in the bond and income trust markets.  Depending on risk tolerance and other factors, he/she could make a shift from government bonds or GICs into some higher-risk income securities, such as corporate bonds or income trusts. 

Our Income Fund has continued to generate plenty of income and it pays distributions quarterly, but because capital values have fallen (bond and trust prices), the unit value of the fund has dropped.  There is more risk in our fund versus government bonds, but the market has taken that into account given that the fund is now yielding 6.25% (pre-fee).  In effect, the income stream from the Income Fund has gone on sale compared to a more secure stream from government bonds or GICs.

As I noted, the options for an older investor who is drawing on his/her portfolio are more limited.  But every situation is different and there will be some where changes make sense.

I hope this is of some help.  All the best.
TB