Finance 5. Think “low beta” In the investment world, we talk about volatility as “beta”: a measurement of the price movements of a given asset compared to that of the overall stock market, typically expressed as a decimal. For example, if ABC stock has a beta of 1.0, its price will move in tandem with the broader stock market. If XYZ stock has a beta of 1.2, the stock is 20% more volatile and if 0.8, its price is 20% less volatile. You get the idea. During an economic slowdown, it’s a good idea to seek out investments with low beta − that is, assets and companies whose performance isn’t correlated all that closely to the performance of the overall market. Companies like this are generally less sensitive to the effects of a broader economic slowdown − sectors such as food retailing, pharmaceuticals and utilities are good examples here. All of these are “steady eddie” companies that sell products and services that don’t generate a whole lot of excitement, but which people will still need nomatter what the stockmarket happens to be doing. If you’ve tilted your portfolio away from these low-beta ideas over the past several years in favour of sectors and companies that are enjoying more growth (tech stocks, for example), now may be a time for a change. No, there’s no guarantee that such assets will be less volatile than others this time around, but history suggests that they’ll be a viable place to ride out any storms that may be coming our way. 6. Start playing defence Worried about what these “interesting” times might mean to your large position in XYZ stock? You might consider minimizing the effect of volatility on specific positions by utilizing any one of a number of more sophisticated strategies. One example: a stop loss order. A stop loss is a standing order to sell a given investment if it falls to a given price. The key word here is “if ”: your order will only be executed if and when the stock drops below the “strike” price. This makes stop loss orders a pretty efficient way to protect your holding in a specific stock. You can do much the same thing with a “put” option. Such options give you the right (but not the obligation) to sell a given amount of XYZ stock at a specific price for a specific period of time. The price of such options depends on how close XYZ is to the option’s “strike” price (the closer it is, the more it will cost), as well as how long before it expires (the more time, the more it will cost). For those with large portfolios, it may make sense to take a closer look at hedge funds, private equity, managed futures funds and larger real estate deals − all of these assets have historically zigged when the overall market has zagged. Keep in mind that such investments are strictly for sophisticated investors. Hedge funds and managed futures products can be notoriously opaque; private equity may require you to tie up your money for several years; private real estate deals typically require massive amounts of capital, and are rather illiquid. Still, they can be a good option for investors with substantial assets looking to protect themselves from choppy markets. 7. Look for multiple income streams Most retirees rely at least in part on their investment portfolios to pay their monthly bills. Many of us receive monthly cheques from CPP or Old Age Security as well. A lucky few have full pensions from our former employers. This diversification of income can be a very good thing during times of turmoil. The less you have to rely on your investment capital to pay your phone bill, for example, the better protected you’ll be from whatever might be happening in the stock market. Where can you find alternative sources of income?There are a number of options. Highdividend stocks or real estate investment trusts (REITs) fit the bill here − sure, their prices may decline in a downturn, but they’ll still send you a steady quarterly (or in some cases, monthly) paycheque. If you have the capital, buying a rental property − or maybe renovating your basement into a secondary suite, or building a coach home or laneway house on a property you already own − may be a viable option. If the kids have moved out, perhaps renting out a spare room for a couple of weeks in the summer via Airbnb or VRBO could bring in a little cash. If you’re a retired professional feeling a little restless, part-time work or consulting could be an option. Or maybe you could set up an online shop and sell some of your craft or hobby work that delights your friends and family so much. No, not everyone is going to want to pursue these options − once they’re retired, they want to stay retired. And fair enough. Still, if you find yourself worrying about whether you’re taking money out of your portfolio at exactly the wrong time (i.e. in the middle of a downturn), then building up another income stream could provide you with more cash − and more peace of mind. 34 | www.snowbirds.org
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