Monday, January 12, 2009

My New Year's Resolutions

Have you ever had a feeling of deja vu? You sit quietly for a few moments contemplating how you found yourself in the same situation and trying to recall when or where that time was.

Over the weekend, I was sorting through receipts and trying to finish up my corporate taxes. As I looked at receipts for purchases from early 2008, I wondered what I was thinking spending money for some of the items, and whether I really needed them at all. The strange thing was remembering those very same thoughts from a few years earlier while sorting receipts. I realized that "those who forget history are condemned to repeat it" and thought that this would make an ideal way to "start" 2009.

One of the common misconceptions is that when markets fall, they may not recover. Let me say this that markets falling has happened in the past and will happen in the future. The question then becomes were you resilient and waited out the inevitable increases or whether you bailed on the way down and wondered what to do next. More aggressive investors are more susceptible to wanting to get out, but the problem is trying to predict when to get back in. Miss the bottom and you lose even more money.

When was the bottom of the markets? Some people believe we have not hit bottom; yet there is growing evidence that November 20, 2008 represented the market bottom on the TSX. Since then, markets have bounced up and down but overall are up 15%-20%. One client recently asked when I thought would be a good time to invest. My answer was rather simple - it's always a good time to invest - the only question is when is it a good time to sell.

Andex charts are used by many financial advisors as a way to demonstrate the historical performance of markets including portfolios. Whether you are an advanced, balanced or conservative investor, they can show you how markets have done in the long term. Imagine that you (or a parent) had the foresight to invest $100 for you on January 1, 1950. As of June 30, 2008, and depending on your investment choice, you could now have:

5 year GIC $5,993
Long Bond $6,829
TSX Composite $40,351
S&P 500 Index $56,757

Conservative folio (20% stock and 80% fixed income) $9,973
Balanced folio (60% stock and 40% fixed income) $28,216
Advanced folio (80% stock and 20% fixed income) $50,330

Now at the risk of sounding my age, what is the sense of showing someone a 58 year history for investments. Simple answer - people do invest for that long all the time. People don't work for that long. Here is the pure and simple genius in the above numbers. If you were born in the early thirties, and left high school and started work in the year 1950, and began investing money at that time, you would now be in your mid 70's. Assuming you are still alive and well, which investment from the list above would you now choose?

Based upon the above evidence, here are my business resolutions for 2009 and beyond:

1. Consistently remind people that investing is not for 5-10 years but could in fact be for as long as 60 years.

2. Consistently remind people that investing will mean losing money during market downturns.

3. Consistently remind people that investing returns are mainly based upon your risk tolerance, and is the reason for annoying questionnaires that need to be regularly completed to ensure you are appropriately invested.

4. Consistently remind people that investing should be an unemotional and methodical process based upon your ability to save money first and allocate the leftovers to pay the bills rather than the other way around (thanks Marilyn).

5. Consistently remind people that investing for their future does not cost them money, but is simply a matter of young you setting aside money for old you.

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