The New Year has officially arrived. For most of us, this is the time when we take a few moments out of our hectic schedules to take stock of various aspects of our lives, from our health and fitness to our careers, family priorities and financial success (or lack thereof). Resolutions will be made. Some will be kept. Many will be broken. Others will just fade away.
Many Canadians also view the beginning of a new year as a perfect time to analyze their investments, to see whether their hard-earned money is working as hard for them as they did for it. For some investments, this makes complete sense. Fixed income investments such as bonds and mortgages, for instance, should be reviewed regularly to make sure there hasn’t been a change in credit worthiness that might compromise future payments.
But there’s one place where an annual planning cycle not only doesn’t make sense, it can actually work against your chances of long-term success. That place is in the world of stocks.
Now, I’m not suggesting you should never look at your investment statements or review your portfolio. It’s just that stocks simply don’t fit into the timelines of an annual planning cycle – no matter how much we might wish that they did.
History tells us that the movement of the stock market over a one-year period is essentially random. On average, the U.S. stock market declines more than 13% at some point in any given year. Every five and a half years or so, it has a bear market, declining anywhere from 20% to 50% or more.
Given numbers like these, you’d think the stock market is a high-risk game. And it is – if you’re a short-term participant. You can do all the research and analysis you like. But if you invest in stocks with the intention of only sticking around for a year, you might find yourself on the wrong end of a bear market that you (and everyone else) didn’t see coming.
Investors who are in it for the long haul, however, realize that the “risks” of owning stocks tend to decrease dramatically when the timeframe expands from months to years, or even decades. They also know that the long-term rewards that come from investing in stocks can far outweigh the discomfort of all those short-term fluctuations.
Just take me as an example. I started in this business in 1984. Back then, the TSX composite index stood at about 2,000 and the S&P 500 was around 150. Today, the TSX is six times higher than it was 30 years ago (standing at 13,500 as I write this), and the S&P 500 Index is a whopping 12 times what it was on my first day on the job. And that doesn’t even include dividends, which have offered more income over the same 30-year span than the interest from investment-grade bonds.
This tremendous growth is exactly what most portfolios need to tame the twin dangers of taxes and inflation. And stocks are the only investment I know of that can reliably provide it. According to the experts, inflation will eat away about half of the value of your money every 20 years. On top of that, at some point, you’ll need to start drawing income from your portfolio to fund your retirement – all while inflation continues to nibble away at whatever nest egg you’ve managed to put away.
To counteract the effects of inflation, most of us will need our money to grow by a factor of six or seven over the next 30 years. The good news is, the stock market lends itself perfectly to long time horizons. There’s no reason to think the stock market won’t deliver the same tremendous growth over the next few decades as it did for the previous generation, the one before it, or the one before that.
That’s why, when it comes to planning your investment portfolio, the only timeframe that really counts is the rest of your life.
One of the tools we use with our clients to illustrate the benefits of long-term investing is our Retirement Spreadsheet. This is basically a cash flow projection that takes into account factors like inflation, stock market growth and retirement income to help us focus on the long haul, and highlights the need for higher growth to offset the erosion from both inflation and income needs.
Of course, like most of our tools, we review it annually. But then no one’s perfect.
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.
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