I’ve been in this business for nearly 27 years. During the course of my career, I’ve had the pleasure of meeting thousands of investors, each of whom had a unique story to tell.
I’d like to take a few moments to tell about just two of the more fascinating people I’ve met over the years. Both have now passed away. But their lives can offer us all a profound lesson about investing, the power of inflation, and the true cost of fear.
As chance would have it, both of these two unrelated people were widows. In each case, their husbands were men of means who had left them relatively early in their lives, but with significant sums of money.
By another odd coincidence, the amount they inherited was almost exactly the same: about $300,000. Now, $300,000 may not sound like a vast sum today. But 50 years ago, it was a fortune, worth more than $2-million in today’s dollars.
I met both of these women fairly late in their lives. As I soon discovered, despite the similarities between them, they had made very different decisions about what to do with their money. As a result, they were now leading very different lives.
The first woman had invested her savings in a combination of savings bonds and GICs. This was a careful, reasoned decision she had made with her husband, who told her that if he were to pass away, she should avoid taking any foolish risks with her money. Instead, she should invest it all in only the safest of guaranteed investments. That way, he promised her, the money would last, and she would be well taken care of her entire life.
Unfortunately, this lovely lady followed her husband’s well-meaning advice to the letter. As a result, by the time I met her many years later, her fortune had dwindled to almost nothing, and she was living on only the 3% interest from her Canada Savings Bonds and a tiny old age pension.
Her words to me were: “I have no idea what happened. I once had a lot of money, and now my money doesn’t seem to be worth anything.”
The thieves that robbed her of her life savings were time and inflation. By letting her money sit in “guaranteed” investments that paid only a few per cent in interest each year, she had allowed inflation to eat away more than 80% of its value.
She learned too late a lesson that all investors should be aware of: inflation is the enemy of all those who allow their fear of risk to push them into taking too “safe” an approach. And as this woman found out the hard way, it’s an enemy that always wins.
Compared to the wild ups and downs of the stock market, inflation is more like a war of attrition. We may not feel the cuts and bruises as they happen. In fact, it’s much more comfortable to see your capital stay safely intact rather than fluctuate up and down on a yearly, monthly or even weekly basis.
But given enough time, inflation can wear down even the largest fortune. And by the time we realize what’s happening, the damage may already be too great.
The second lady I want to tell you about had a very different experience. When her husband passed away, she bought an assortment of blue chip stocks. Then, she simply sat on them, somehow finding the strength to resist every new trend or frenzied media prediction about the next sure-fire money-maker or world-ending disaster.
Imagine how difficult it must have been at times, to hold onto her portfolio straight through the Cuban Missile Crisis, the Vietnam War, Watergate, hyper inflation, countless recessions, the default of South American governments on their debts, and on and on. But hold on is exactly what she did, and for 50 years, she stayed invested in that same, balanced portfolio of stocks.
When I met this woman, she had most of the same stocks she had started out with half a century earlier. Only now, her portfolio was worth about $2.5 million, and paid dividends of $75,000 a year. She didn’t think there was anything particularly extraordinary about either her results or what she’d done. She assumed it was just common sense, and figured that everyone else must be doing the same thing she did.
These two investors started in the same place. What’s most remarkable about their stories is that neither was conscious of the monumental difference that their initial choices would make over the course of their lives.
One investor lost everything she had, slowly over time, to inflation. In the end, her house was gone, she could no longer afford to keep her car, and her once gracious lifestyle was transformed into a daily struggle to survive.
The other investor hadn’t really noticed much of a change in things. Everything cost more, but her income and capital had grown in a similar proportion. Her lifestyle had hardly changed at all, or if anything, it had slightly improved.
As I reflect on these two lives, I realize that it was never about which course kept one investor or the other out of the fight. It will always be a struggle to get through your investing life and stay true to what you know is the right decision. Whichever path you take will result in challenges of one kind or another. The question is which fight actually gives you a real chance of winning.
My wish to investors is that they choose to face the slings and arrows of the market, and hold fast against all the too-familiar forecasts of doom and gloom. Then, 30 or 40 years from now, maybe they, too, will be fortunate enough to notice that their lifestyle hasn’t changed much, either.
Alan MacDonald, an investment advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.
For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.
All material by Alan MacDonald, Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.
Richardson GMP Limited, Member Canadian Investor Protection Fund. 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.