A few years ago, I saw a great one-woman show by Jan Darbyshire. Jan is a prolific writer, comedian and playwright, who likes to take on conventional or taboo subjects to show us how ridiculous our preconceptions and prejudices can be.
Jan’s performance came to mind the other day when I was discussing the nature of risk with another portfolio manager. We were talking about the inclusion of “safe” assets in a portfolio as opposed to “risky” assets such as stocks, and it made me think about how we, as an investing culture, have come to identify the concepts of safety and risk in such a narrow and self-defeating way.
Typically, most people tend to label investments like GICs or bonds as “safe” and investments such as stocks as “risky.” Yet my 30 years in this business – and another 170 years of recorded experience in the markets – all suggest that the truth is actually the complete opposite.
When I got started in this business in 1984, the TSX composite stood at 2,000 and the S&P 500 was at 150. Today, those same indices stand at 13,500 and 1,750 respectively. In other words, if you’d had the foresight to buy the index in 1984 and just sit on your hands for the next 30 years, you would’ve earned between six and 11 times your initial investment. Plus, you would’ve also been paid dividends along the way for your trouble – dividends that would’ve exceeded the amount of interest income you could’ve gotten from bonds over the exact same timeframe.
But this isn’t where the really interesting part of “the opposite of everything is true” comes in. All this suggests is that stocks are good over the long haul. The part that really fascinates me is that we call bonds and GICs safe when, in fact, the only sure thing you can expect from bonds or GICs over the long-term is that they’ll be surefire losers against the combined hit of inflation and taxes, which will lead you straight to financial devastation.
Take that same 30-year investment timeframe. Stuff today costs three to four times as much as it did three decades ago. If you had invested solely in GICs over those 30 years, the compounding effect of taxes and inflation would have essentially robbed you of most of the real value of your money, right when you need it the most.
What does all this tell us? According to the conventional view, “safe” investments (if we define safety as an asset that won’t fluctuate in price) are really just a promise that you’ll have to get used to a diet of Purina puppy chow if you rely on them to fund your retirement. “Risky” investments, on the other hand, will fluctuate constantly from day to day and year to year. But those same investments are the only safe choice if you want to overcome inflation and increase your real buying power over your lifetime.
In the past few weeks, I’ve had several conversations with investors who are, unfortunately, on the receiving end of a lifetime of “safe” investing. As a result, instead of talking about how they’re going to spend their portfolios or pass a legacy onto their children, our conversations are all about how they’re going to survive once their funds run out.
They thought they had saved a lot of money, and put it somewhere it would be safe from the ups and downs of the market. The problem is, they had that thought when $15,000 a year was a high-paying job, and you weren’t supposed to live 30 or 40 years after you retire. Now they’re in their late 70s and 80s, broke, and forced to turn to their own children for financial help.
When it comes to investing, to be successful, you have to follow Jan’s example, and be willing to walk in the opposite direction from the herd when doing so makes sense. The odd thing is, most of us already know this. Most people aren’t successful investors, so if you want to be a successful investor, don’t be like most people. Be different. Maybe even the opposite of everything you thought was true?
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.