Building the All-Stock Retirement portfolio

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

How do you build a suitable retirement portfolio, made of stocks? I gave that a go recently on Seeking Alpha. That may lead to a greater debate about ‘can you really build a suitable retirement stock portfolio?’ I’d say that yes you can, but we have to cover off all of the bases (economic conditions). And we have to have a portfolio that takes a defensive stance. Also, the Canadian investor might be in a very fortunate position thanks to defensive wide-moat stocks that pay generous dividends. They can work as bond replacements. We’re building the retirement stock portfolio.

I will give you the juicy bits, but if you are able to access Seeking Alpha here is the original retirement post on Seeking Alpha.

The concept of the retirement all-stock portfolio is to take an all-weather portfolio approach. But instead of using bonds, cash, gold and commodities, we’re going to put stocks in the right place. And we’re going to use the appropriate amount of stocks to cover off the risks.

A good starting point for the all-weather portfolio is the venerable Permanent Portfolio. That model includes only one asset for each economic quadrant.

Stocks. Bonds. Cash. Gold.

Here is an outline of a study from Man Institute that details the types of stocks and sectors that worked in various economic conditions. Keep in mind that REITs have worked for inflation and stagflation from the 1970s. I’ve given REITs a pass for inflation.

Defense wins championships

At its core, the retirement stock portfolio is quite defensive. Certain types of stocks will do the job of bonds. They will help in times of bear markets and recessions. They can also deliver ample income: much more than bonds these days.

The Canadian retirement stock portfolio will take full advantage of the wide moat stocks.

I’ll cut to the chase. Here are the assets to cover off the economic quadrants:

Defensive bond substitute stocks – 60%

Utilities / Pipelines / Telecom / Consumer Staples / Healthcare / Canadian banks

Growth assets – 20%

Consumer discretionary, retailers, technology, healthcare, financials, industrials and energy stocks

Inflation protectors – 20%

REITs 10%

Oil and gas stocks 10%

Not listed in this inflation-protection section is consumer staples, healthcare, utilities and pipeline stocks. Those stocks can do double duty. They work during times of market stress (corrections/recessions) and they can often deliver modest inflation protection as well.

Maybe consider gold and commodities?

While you may opt for a stock/cash portfolio, it may be wise to consider gold and commodities, even if in very modest amounts.

Nothing is as reliable and explosive for inflation as commodities. The most optimal balanced portfolios do include gold.

A 5% allocation to each of gold and commodities may go a long way to protecting your wealth.

An inflation bucket might then look like:

  • Gold 5%
  • Commodities 5%
  • Energy stocks 5%
  • REITs 5%

A cash wedge is not a bad idea

Cash helps your cause during stock market declines, stagflation and deflation. Mark Seed at My Own Advisor plans to use a stock and cash approach for retirement funding.

Given all of the above considerations, a retiree might go off the stock-only-script modestly with 5% weighting to each: gold, commodities and cash. It’s quite likely that the 15% allocation will come in very handy one day.

You would be building the 85% stock / 15% other portfolio.

Positive trends for defensive stocks

The healthcare sector is well-positioned thanks to aging populations and the increased demand for healthcare. Also, the utilities sector will take advantage of the increased electricity demand created by the transition to ‘greener’ energy. The environmental movement might be the most powerful economic force on the planet.

Pipeline stocks should still thrive for quite some time as the need for natural gas increases. And because we’ve bungled the energy transition, oil demand might keep increasing and production can’t keep up: due to lack of investment.

Telecom is THE modern utility. As populations grow, each home and business has to be hooked up to the internet. Most of the household members will have a smartphone in hand. Canadian telcos have an advantage here thanks to robust immigration policy.

Consumer staples are the long-standing heavyweight champ of recession-friendly stocks. We still have to eat and drink and brush our teeth. Of course, you’ll have to look to the U.S. and international markets for suitable consumer and healthcare stocks.

Note: the U.S. has entered a technical recession. Will Canada follow?

I will be back soon with a blog post covering the Canadian all-stock retirement portfolio. Feel free to offer your ideas and commentary in the comment section of this post.

For U.S. readers, I am also working on a post for Seeking Alpha, putting the actual stocks in place to build the U.S. stock portfolio for retirees.

Here’s the ETF portfolio for retirees. Of course, this is not advice but ideas for consideration.

Dale Roberts is the owner operator of the Cut The Crap Investing blog,  and a columnist for MoneySense. This blog originally appeared on Cut the Crap Investing on July 30, 2022 and is republished on the Hub with permission. 

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