Reasonable Optimism

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For people who are just trying to formulate a solid investment plan or map out a reliable strategy for their retirement, the world of finance can be a confusing place.

The cable news networks are constantly bombarding us with all the latest tips, fads and prognostications. The talking heads are fighting each other to sell us on their own particular can’t miss solution. And the airwaves are full of economic outlooks and forecasts about everything from the price of gold or the newest high tech IPO to small-cap stocks and emerging markets.

Thankfully, investing doesn’t have to be nearly as complicated as some of those so-called “experts” would like you to think. After spending the last 30 years in the financial services industry, I believe I have discovered the single most important element to the success of any long-term investment strategy. And no, it has nothing to do with the growth rate in China or where interest rates are going to go next year.

In my opinion, the most essential element in the creation of a sustainable investment strategy is to have a sense of reasonable optimism. At first glance, this may seem a little strange. But take a moment to think about all the ways your outlook can impact your future.

Humans are not, by nature, optimistic. Our primitive brains are hardwired for pessimism, because for all but the last few hundred years, being fearful kept us alive.

Twenty thousand years ago, if you decided to go skipping down the savannah while singing a merry song, you were probably going to end your day as someone else’s dinner. Those of our ancestors who survived long enough to pass on their genes were the ones who crept silently about in a state of constant terror, peering around every corner and listening to every bump in the night. As a result, humans became naturally risk-averse creatures.

Unfortunately, what worked on the pre-historic savannah doesn’t work so well when it comes to thinking strategically. Take retirement planning, for example. Many folks don’t believe they have to make any long-term plans (financial or otherwise) for after they retire, because their mom or dad checked out at 75. They figure they probably won’t make it much past 76, either, so why bother making any plans or preparations when you probably only have a few years left?

Maybe. Or maybe not. It’s possible you’ll follow in your father’s footsteps and pass away a few short years after you get your gold watch. But what if you don’t? It’d be a shame to spend 20 or 25 years doing nothing but sitting on the couch watching TV just because you were expecting that your time would be short. Last time I checked, there wasn’t anything worth watching, anyway.

Instead of anticipating that they’re going to die young, I encourage my clients to map out their investment strategies as if they were planning on living to be 100. This isn’t as far-fetched as you might think. I recently attended a presentation at The Ottawa Hospital where a doctor with a much bigger brain than mine said there was a really good chance a lot of us would live to 100, given the medical advances that are happening all the time.

Even if you don’t think you’ll make it to 100, wouldn’t you rather think about your future as though you were going to be around for a long, long time? Personally, I plan on working until I’m 75, because I’m planning on living to 100 – and 25 years of retirement seems like enough.

To me, thinking in terms of a longer life span than our parents ever imagined isn’t a frightening prospect. It’s a way of opening some potentially interesting doors, which might have stayed closed if you didn’t stop to question your basic assumptions.

When it comes to investing, it’s equally important to take a reasonably optimistic long-term view. When I started my career in 1984, the TSX index stood at 2,000 and the S&P was at 150. Today, three decades later, those indices are at 12,600 and 1,691 respectively. That’s a six-fold increase for the TSX and more than a ten-fold increase for the S&P.

Perhaps more importantly, there’s nothing particularly remarkable about that kind of growth. It’s been happening in the equity markets every three decades or so for the last 200 years. It’ll probably happen again over the next 30 years. Even if you don’t have 30 years, your kids almost certainly do.

Don’t get me wrong. It takes a lot of faith to prepare today for something that’s 30 years away, especially with all the doomsday scenarios the media barrages us with whenever they decide we’re in a financial crisis. But no matter how much all those horror stories may resonate with our primitive lizard brains when we see them on the evening news, they have almost nothing to do with our real future.

To make matters worse, there are real and often tragic costs to being pessimistic or always preparing for the worst. Inflation will eat away half of your money every 20 years. That’s a lot of growth you’ll need to realize over the next two decades just to break even, and keep your standard of living where it is today.

Investing for growth is, by definition, an exercise in optimism. Sure, there’s a small chance something truly catastrophic will happen. But doesn’t it make more sense to plan for what’s likely to happen, rather than something that probably won’t? In my experience, the investors who fare the worst are those who are so focused on protecting themselves from the unlikely worst-case scenarios, they end up missing out on all those great opportunities that are far more likely to occur.

Whether you’re deciding the asset allocation of your investment portfolio, managing your career path or planning for a comfortable retirement, the foundation for your success all comes down to adopting a realistic optimism that the future will likely be okay. There are no guarantees in life. There’s no guarantee the sun will come up tomorrow. But if you have a little faith, odds are – it probably will.

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 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.

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