We’re all still suffering from the after-effects of last year’s stock market meltdown—one that saw a crash in almost every asset class. Corporate bonds, preferred shares, real estate, or structured products—none escaped unscathed. In the face of such carnage, investors might well wonder nervously whether stocks have any place in a retirement portfolio. After all, surely retirement is the time to preserve capital, put market worries to rest, and chart a steady course into the sunset years.

That used to be the case. Nowadays, though, people are living longer and longer—and the downside of a lengthy retirement is that most of us will likely live too long to make do with anything less than a high rate of return. The typical retirement now last thirty years or so; and when your portfolio has to last that long, preserving capital is very important indeed.

For one thing, investing over the long haul means that the biggest factor you have to worry about is inflation—which typically cuts your purchasing power in half every twenty years or so (sometimes even faster). If you don’t believe me, just go to the library and check out a newspaper from a couple of decades ago. You’ll find that a buck then was worth two bucks today.

So here’s the conundrum: to provide retirement income, portfolios have to at least double in value every twenty years, in addition to providing current income. For all their volatility, stocks are one of the few asset classes that are truly up to the job.

Once you start considering your retirement as a thirty-year proposition, it’s worth looking at how stocks perform over that length of time. In January 1980, the S&P 500 stock index sat at around 115. Today, it’s somewhere around 1,147. That tenfold increase doesn’t even include dividends: if you add them up since 1980, they actually represent more income than GICs paid over the same period. Although GICs may appear to offer a safe profit in the short term, they’re slain by the dragon of inflation over the long term.

Wharton business school professor Jeremy Siegel, in his book Stocks for the Long Run, looks back over the last two hundred years and demonstrates that stocks have very consistent returns over twenty-year periods. Through war, depression and recession, historically stocks have delivered a return of about 11%, compounded every 20 years.

Unfortunately, that impressive record is coupled with an annoying habit of falling through the floor every seven years or so. The last decade has been particularly bad, featuring two of the worst bear markets in history: first 2000–2002, and then 2008–2009.

Such bear markets are a huge problem if you want to use stocks as a retirement asset. Any market decline is exacerbated by the fact that you’re continually drawing on the income—which potentially risks depleting your capital.

Retirement portfolios, especially those built to last thirty years, need plenty of room for growth. That can be achieved by a broadly diversified range of stocks. Yet the real key to portfolio longevity is savvy asset allocation: a cushion of bonds or other safe assets provides a buffer against periods of low market returns.

An investor with a good balance of cash, bonds, and stocks has the flexibility of drawing income from whichever asset class is doing best at any time. Having the right asset classes, along with a finely tuned re-balancing strategy, preserves your capital against both declining markets and the threat of inflation.

If you’d like to learn more about creating the right asset mix for your retirement portfolio, attend our free lunchtime seminar: The Case for Stocks in Retirement Portfolios. It’s held at noon on Wed. Feb. 17. There is no charge, but space is limited; so if you’re interested, please RSVP by e-mailing Kathy Brunelle at Kathy.Brunelle@RichardsonGMP.com.

Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.