I started working in the financial services business in 1984. At that time, I had no idea I would still be in the business almost 30 years later.
My first job was with Eaton Bay Financial. Most of us remember Eaton’s as a department store chain that competed against The Bay. But in this one instance, these two companies had teamed up to offer their retail customers products like insurance and mutual funds.
When I first started out, I didn’t know much about the financial world. I was more concerned with making my rent or paying off my student loans than I was with things like RRSPs and GICs. Gradually, I began gaining some experience. Then, just about the time I started to think I knew what I was doing, the crash of 1987 reared its ugly head.
At first, this seemed like the end of the world. In a matter of days, the Dow Jones Industrial Average plummeted from a high of 2,000 down to just 1,500 points – a drop of about 25 per cent of its total value. The gurus all believed that the investment world was never going to be the same. And anyone with any sense was selling their stocks and buying gold or parking their money in savings accounts.
In fact, there was only one thing we were all sure of: no matter how bad things were already, they were only going to get a whole lot worse.
Of course, as we know now, it only took about a year for the stock market to return to its previous levels. As I write this, the Dow is sitting at 13,649 – almost ten times its 1987 low.
But back in 1987, as a relative newcomer, I had no idea what to make of all the chaos that was surrounding this drop in stock prices. Our clients were clamouring for answers, and I had no idea what to tell them. So, I did the only thing I could think of. I went straight to the top.
The Eaton Bay family of mutual funds was run by an older gentleman who looked like he had just stepped off the set of The Andy Griffith Show. I called him up, and his answer was surprisingly simple: “this stuff happens all the time, young man. It’s programmed trading this time around, and it’ll be something else next time around. Just tell your clients to hang onto their funds and things will be okay soon enough.”
I remember thinking at the time that this guy must be nuts! Hadn’t he seen the headlines, listened to the news shows, felt the panic in everyone’s voice? Surely he must know that “diversification” now meant digging two holes – one for food and water, and the other for guns and gold.
Eventually, when I realized that his was the only calm voice I heard talking, I decided to follow his advice. While this was a good first step, it took me several more “financial apocalypses” to realize what he was trying to tell me; that new catastrophes will always come along about once every six years or so. And when they do, everyone will panic, declare that this time everything really is different, and then head straight out to start buying shovels and digging those holes.
As I’ve “matured” in this business over the years, there’s something else I’ve noticed that seems to go hand-in-hand with each of these catastrophes: cheerleaders of the apocalypse. These are the people who love nothing more than assuring the rest of us that, this time, the financial markets, equities in general – or even the entire human race – are on a fast track towards all-but certain doom.
The best-known cheerleader for the apocalypse was a guy who lived in England from 1766 to 1834, by the name of Thomas Malthus. Malthus famously postulated that humans were pretty much doomed, because food production could never keep up with population growth. And he would have been absolutely right, except for one small thing – the fact that technology changes the game we’re playing in ways we can’t even imagine, until after they actually happen.
Fertilizers, industrial farming equipment and modern-day agriculture all revolutionized food production in ways Malthus couldn’t possibly have predicted. Today, obesity is a bigger problem than food shortages in many parts of the world. The same principle holds true for almost every other aspect of our society and our economy.
The truth is, most of our presumed apocalypses will be solved by technologies, ingenuities or other developments that we haven’t yet invented. Consider the most recent example: the collapse in Government finances around the world. This collapse has been dutifully reported as the latest completely unprecedented and inevitable apocalypse, which will eventually drown all our boats in its global wake. Perhaps this will be the case. But my experience tells me otherwise.
The last ten years have been tough on capital markets. Yet over that same decade, the global economy has quietly doubled, and a billion souls have been lifted out of poverty as a result. Publicly traded companies currently have more cash on their balance sheets than at any other time in history. And it remains to be seen when investors will start ditching bonds issued by countries that have little to no means for repaying them, in favour of great multinational companies who happen to be sitting on piles of cash.
When I started out in this business, I didn’t realize that the best advice I could have given our investors, even during the worst of the ’87 crash, was to put their money into a good, diversified portfolio, and 30 years later, they would have had close to ten times their money back.
I know it now, though. And the advice I give my clients today is the same advice I wish I’d known enough to give them back then: if you’re in it for the long haul, the best return is always going to be a balanced and diversified equity portfolio.
Even if it means having to sit on your hands and do nothing during the next five or six apocalypses, while everyone else runs around screaming that the sky – this time for real! – is falling.
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 has been prepared 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.