Should I Buy RRSP's This Year?

With the economy being as bad as it is and no sign of getting any better, I feel some people are reluctant to invest or even unable to save. Now is not the time to walk away from the table.

One of my favourite comparisons to make - would you rather pay 75 cents per litre or $1.35 per litre for gas? An obvious answer wouldn't you agree? Yet when I point out that the stock market is much cheaper to buy right now, people appear to become defensive. Let me ask this - does anyone believe we will ever see the price of gas rise above $1.35/L again in our lifetime? Of course prices will eventually go up again (summer of 2009?), which will in turn help to drive up the markets. Now does anyone really believe that the Toronto Stock Market will never reach 15,000 again? Let's check back in 20 years and see how many times it crossed that threshold.

The global economy is in recession and will likely continue to do so for a while. But don't make the mistake of thinking that this translates into further stock market declines. No one knows where the stock market will be in six months from now.

A mistake that many people make is thinking that the stock market acts in ways that are entirely predictable or even understandable. While some facts reveal possible futures, take a look at the economic events during the five-year period of 2003-2007:

• Price of oil triples
• U.S. deficit spending soars
• Sub-prime lending crisis spreads worldwide
• Canadian dollar skyrockets
• Property values begin a massive downward spiral.

This seems to me like some pretty depressing economic news. Yet how did the stock market react? Well, Canadian markets were up over 100%, U.S. markets went up by 80% and international stocks were up by 168%. Anyone want to join me in some head-scratching?

Now if you had known these events were going to happen, you might have made the assumption that this wasn't a good time to save and invest. You would have missed out on essentially doubling your existing portfolio.

It's easy to get caught up in the tide of doom and gloom currently being preached by the market gurus, and to let that anxiety scare you away from the stock market. In October 2007, however, those same "experts" were claiming stocks were undervalued, just as the stock market was hitting new highs and about to take a huge dive. Most experts merely predict the past. Ignore those gurus who don't know that they don't know what the market will do in the short-run.

The most important fatcs to remember when markets go through this is to focus on the destination. If you are getting slightly off path, then it's my job to point this out to you even if you don;t want to hear it. I don;t worry about the market - I am there to provide discipline and focus to stay the course in order to reach your financial goals.

It's always a good time to save. Though, like dieting, it can be hard because it involves giving up some pleasure today for enjoyment years later. It's a lot easier to make excuses, like your investments won't perform well. Sometimes you can trick yourself into being a better saver. Now if only I could take my own advice when it comes to eating.

Don't kid yourself into believing that you are smarter than the market. By saying now is not a good time to invest, you're trying to time the stock market. Many people have tried, and the data is compelling on our market timing skill - we buy when the market is up and sell when it is down. So in the end, trying to market time usually ends up accomplishing two things: increasing your risk and decreasing your return. Now is the time to start saving and investing. The longer you stay in the market, the greater the chance you will be rewarded with a handsome return.

When I first started in the business, an older advisor showed me something about saving money and human nature. It still applies today and will work for just about everyone.

When devising a budget, make a list of your expenses. Now here's the part where I pull out my amazing Kreskin hat and astound you. For most people devising such a list, the first item on the list (assuming you have one) is your mortgage or if you pay it, then it's your rent. How did I know this? Human nature. It's usually you largest expense and it forms the foundation for you/your family. While this would seem to make sense for the most part, let me show you something very simple.
People in the first circle put their expenses first. People in the second circle put their savings first. In other words, people in the second circle decide how much to save each month, and then adjust their other expenses accordingly. Inevitably, they save more money.

Which circle are you in? Which one would prefer to be in?

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.

Reflections of 2008 - The Year From Hell

I cannot think of a better way to start the new year than to forget about the last year. It seems that every headline from 2008 had the following words included; Doom, Collapse, Depression, Unprecedented etc. The main purpose behind this blog was to try to put a slightly more positive spin on the news - in other words, the glass was half full. That being said, we need to remind ourselves that as the picture above says, "we ain't outta dem woods yet".

Here is a quote from an investor blog that I found to be perfect.

The record fast emotional flip-flop from greed driven excess to fear fuelled panic has caused equity prices to collapse. With the investing herd heading to the exit at the same time, the market environment has transitioned to a seller’s nightmare and a value buyer’s dream. While it is impossible to predict when investor emotions will settle, we are confident that the economic cycle will continue to swing both ways and that there will be an economic recovery. The stock market will likely have a powerful recovery once investors realize that there is reason to be optimistic.

Wow. Talk about optimism in the face of danger. The funny thing is I couldn't agree more. If ever there was a time to want to "move on", this is it. So where do we go next?

Not knowing the future, I decided to consult my favourite fortune teller and see what their predictions were for 2009. Unfortunately the "economic situation led to an unfortunate confluence of events" that they didn't foresee and they are out of business, Needing something to start the year with, I decided to take a stab and see how wrong I could be. Here goes nothing;

1. North American (and global) stock markets will be noticeably higher at the close of 2009. Predictions for the TSX are from 11,000 up to 12,500 for a high point. Even reaching 11,000 points would be a 20% increase for the year. Now how could this happen you may ask. If you read my blog a couple months ago, this is happening just as predicted. If you wonder at my sanity in predicting this, you won't believe my next statement.


2. Canadian markets will lead global recovery. This statement is based upon several facts - a resource based economy and eventually those needs will increase. China is expecting 7-8% growth in GDP and they continue to need our resources. Our banking system remains strong and while the housing market has been negatively impacted, Canada's market is far stronger than the US and several European countries.


3. The current bull market we are experiencing, and have been for about one month will result in the usual short term profit taking, but markets will continue to climb. For anyone who didn't know, the past 22 years have consistently proven that stock markets love the month of December and 2008 was no different. Stock markets are up 20% from their lows of 2008 - the definition of a bull market. Even technical analysts are saying that the bottom has been reached and now we need to find a new "higher bottom". The chart below shows the TSX over the past three months. The brown and yellow lines represent average stock market closes over the previous 20 (brown) and 50 (yellow) day averages. Once the market breaks through the 50 day average, that signifies through technical analysis that we are entering/or are in a bull market.

There will likely be some down times in the future as well - just remember one simple fact. The media does not like positive stories. Nothing sells like a scandal. Whether in print, on TV, the radio or on the Internet, bad sells and good gets ignored. I just wish the general media would tell the "whole truth" instead of "nothing but the truth".

Oh yeah. The Toronto Maple Leafs will not win the Stanley Cup. Sorry Darrell B. And all the other "Leaf" fans out there. Well at least I will get one out of four correct.

HAPPY NEW YEAR !!!