A few years ago, I attended a wellness weekend to hear about all the different ways I wasn’t taking care of myself.
Most of the presenters were lean and lithe yoga types, who looked like they ate nothing but broccoli and tofu during those few moments each day when they weren’t meditating or doing Pilates. As someone who likes to enjoy a good steak now and then with a glass of red wine to help wash it down, I had a feeling we weren’t going to get off to a great start.
But all these years (and steak dinners) later, one presenter at that weekend still stands out in my mind. This woman weighed about 200 pounds, and she had a goal of losing 60 pounds. What caught my attention was that she had already lost 150 pounds over the previous two years – a remarkable feat that can be appreciated by anyone who has ever struggled to make their lives even a little bit healthier.
Her presentation focused on the challenges she’d faced in overcoming her life-threatening addiction to food. One of the most difficult obstacles she’d had to deal with was the well meaning, but often highly counter-productive, actions of her closest friends and family members.
She illustrated this point with a story about how, after she had turned the health corner and started seriously modifying her behaviour, people still sent her huge boxes of chocolates at Christmas and on her birthday. She became so fed up with these well-intentioned but misguided gifts that she remembered yelling at her mother: “I weigh 350 ^*@#! pounds and you’re giving me chocolates! What are you thinking?”
Of course, the people who were giving her chocolate weren’t trying to hurt her. They just wanted to give her something they thought she would like. What they didn’t realize was that their good intentions were only contributing to her illness, and making it that much harder for her to change her life for the better.
In fact, the only person who gave her the help she really needed was her doctor, who sat her down in his office one day and told her that if she didn’t alter her habits soon, she might not be around to celebrate her next birthday.
When I think about this woman today, it reminds me of the terrible sense of timing the financial industry seems to display when it brings new financial products to market. Take gold as an example. When gold hit $1,900 an ounce, the financial industry launched a record number of gold funds. Maybe gold will soar to $4000 an ounce, but where were all those funds just a few years back, when gold was stalled at $400 an ounce?
Or how about oil? In 2008, oil stood at $145 a barrel. Amidst all the talk of peak oil and oil going north of $200 a barrel by the end of 2009, out came a plethora of energy-related funds, ready to soak up all of that eager investor capital.
Sure enough, oil did indeed make a big move in 2009. It went down to $35 a barrel.
Whatever the crisis of the day may be, the one thing you can be sure of is that the financial industry will provide an abundance of whatever products it believes it can sell the most. This isn’t malice or part of some evil master plan. It’s just simple economics, the same as you’d find in any industry.
If blue shoes are expected to sell well, for instance, you can be darn sure the shoe industry isn’t going to introduce a new line of red shoes just in time for Christmas. They’re going to stock up on blue shoes, and they’re going to keep selling them until some new trend comes along.
Unlike the colour of your footwear, however, the financial products you buy can have a profound impact on your financial and personal well-being. Just like the woman who needed a little tough love to help turn her life around, sometimes investors need the financial equivalent of a straight-shooting doctor to warn them of the consequences of their actions, and get them to start making some hard choices.
Right now, for instance, investors are selling stocks and pouring their money into bond funds at a record pace. At first glance, this seems like a perfectly reasonable thing to do. For the past decade or so, bonds have enjoyed stellar returns while stocks have offered nothing but disappointment, stress and a zero overall return.
The trouble with this approach is that it’s trying to predict future success by looking backwards, rather than by examining where the fundamentals really stand today. The result is a recipe for disaster.
When interest rates go up, as they eventually will, bond values will decline. But even a big decline in bond prices isn’t the biggest problem. The real issue facing most investors is what holding so many bonds will do to their retirement plans over the course of what could be a very long battle with inflation.
Five-year government bonds are now offering a yield of less than 2%. When you factor in inflation, that’s a net return of zero or less. Extend that over the next 20 or 30 years, and you’ll see that this strategy doesn’t just have the potential for danger further on down the road. It is a guaranteed roadmap to failure.
Stocks, on the other hand, currently have the cheapest valuations relative to interest rates that they’ve ever had, in the entire history of the equity markets. In many cases, they also offer dividend yields that exceed those being offered by bonds. More importantly, stocks give you the ability to win the fight against inflation over time, and to protect your money for when you’ll really need it: after you retire.
Putting your hard-earned capital into stocks may feel like the last thing you want to do right now. It would be a whole lot easier to just do what everyone else is doing, and plant your money in one of those “safe, guaranteed” investments.
But if you’re like most Canadians, you’re staring down the barrel of a retirement that could last years or even decades. You can’t afford the luxury of investments whose only “guarantee” is that they’ll be worth less in real dollars ten years from now than they are today.
The financial industry will always sell you whatever products it knows you’re going to buy. It would be foolish to do otherwise. But it’s your advisor’s job to help you make the tough decisions and tell you what you really need to know about your financial health, whether or not you want to hear it.
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.
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.