Joe DePaepe and his wife, Susan, have reached an enviable financial position — and a rare one for a couple so far from retirement age. With no serious debt to speak of, a home in Langton, Ont., where they plan to live for the foreseeable future, and no child-rearing or education costs, the couple’s financial future is looking bright.

“The upside is that we may retire early,” says Mr. DePaepe, a partner at a general insurance brokerage. “That’s my plan right now.” Certainly every couple’s situation is different, but in many ways the DePaepes are a model from which to learn, from an investment standpoint, beginning with their assets.

Asset allocation
Mr. DePaepe says that as a couple they are tipped about 70 per cent to 30 per cent in favour of equities over fixed income instruments, an equation they worked out with their investment adviser, Darryl Reynaert of TD Waterhouse in London, Ont. “[At this age] I’m going to lean toward the aggressive end of the investment cycle from an asset allocation standpoint,” Mr. Reynaert says. Asset allocation refers to the balance of fixed income investments, such as government and investment-grade corporate bonds and GICs, against equities, including those invested in Canada, the United States and elsewhere. The logic is that equities are inherently volatile, but over the long haul they will achieve higher returns than fixed income, so investors should be tilted toward equities for as long as they safely can. And as relatively young investors — she’s 38, he’s 42 — the DePaepes will wait 20 to 25 years before they start drawing from their RRSP income for retirement. “In a retirement portfolio, I prefer never to get burned heavily. I don’t want to lose 10 per cent,” he says. “I want to be conservative.” Mr. DePaepe is willing to take more chances in their non-registered portfolio, where losses from one investment could be offset by gains in another.

Advisers say there’s no perfect rule for asset allocation. It is a function of age and personal taste for risk. An old rule of thumb, says Bruce Cumming, a financial planner with FundEX Investments Inc. in Oakville, Ont., is that one’s age should equal the percentage of investments in fixed income instruments.

“By virtue of their youth they have years on their side,” Mr. Cumming says of the DePaepes. “And making the added assumption that they’re not about to retire at 30 or 40, then they can do very well with equities.”

Equity diversification
Market conditions in Canada present a good opportunity to remind young investors about the importance of portfolio diversification, says Warren Baldwin, a financial planner with TE Financial in Toronto. Usually, the impulse for young investors goes something like this: pick a high-flying equity fund and strap yourself in, he says. Canada’s equity-market returns over the past decade have been exceptional, he notes, but they’ve been led by the energy and materials sectors, which are inherently volatile.

“A good way to approach this topic is by what not to do. To go aggressively into an all-equity portfolio, or oil and gas or something, is one of the worst decisions they can make,” Mr. Baldwin says. “The problem with young people is that they feel so invincible, they haven’t been through any market cycles and they haven’t seen the ‘haircuts’ that can occur from a nasty downturn,” he said.

A market correction would likely be accompanied by a tumble in value for the dollar, which has been supported by the strength of Canadian resources. Together, a drop in the buying power of the dollar and Canadian markets would be painful and hard to recover from, even for a young couple, Mr. Baldwin says.

Not many young investors have enough money to buy a diverse basket of stocks and bonds to protect themselves from a sector meltdown. For that reason he recommends what he calls “a boring old balanced fund,” which will contain a mix of investments, much like the DePaepes’ asset allocation. Mr. Baldwin would aim for a 60-to-40 ratio of equities to bonds, with the equities split among Canada, the U.S. and internationally. “Some would argue that’s too conservative because they’ve got so much time, but you don’t want a young investor to get the wrong idea about investing,” says Mr. Baldwin. “Slow and easy wins the race.” Of course, mutual funds that incorporate the same equity mix could do the job. Mr. Baldwin recommends any low-cost funds that have well-established records.

Portfolio reviews
Asset allocation should change as investors age; that’s one reason couples should review their portfolio at least once a year. A relatively new type of investment takes the concept of a balanced fund a step further. It automatically adjusts asset allocation to be more conservative over time, as investors approach retirement.

The DePaepes bought a so-called “life cycle” fund, an investment that is offered by Fidelity Investments, Ethical Funds, Scotia Securities and other providers. “A life cycle is one solution. It’s much easier to come at the market in a diversified portfolio this way,” says Mr. Reynaert. “This product essentially tries to create the best returns with the least amount of risk,” given age and risk tolerance. That said, the DePaepes still review their portfolio at least once a year with Mr. Reynaert, and they are considering rebalancing their asset allocation more toward international equities.

Debt reduction first
Other considerations can play a part in a financial review. Circumstances can change quickly — a new job, a child, a home purchase or inheritance, for example. Four years ago the DePaepes paid off their mortgage, a move that advisers unanimously praise. Debt reduction is often the first item on a young couple’s priority list, whether it’s a mortgage or car loan. Mr. Reynaert advises clients pay down their high-interest debt first. "I’m an advocate of reducing debt," he says. Inside a sensible financial plan, it may be wise to pay off debt substantially before investing. Otherwise, advisers say, interest on the debt might accumulate at a greater rate than investments are earning income, and that’s counterproductive.