Let's talk today about investing.
Are you finding it difficult to look at your investment statements these days? Is the non-stop barrage of bad economic news in the media getting you down?
With the first quarter of 2008 behind us (and hopefully soon forgotten), this may be a good time to take stock and review the basics of investing.
There is risk involved in investing. However, good investing is about taking only measured, calculated risks. It is about controlling the expected risks to a level you can withstand, by balancing your portfolio with different investment vehicles that will tend to do well at different times.
Investing is also about taking risks that are heavily stacked in your favour. Examples of this include only investing in equities with money that you can leave invested for a five-year period or longer, and investing after the market has retreated significantly from previous highs.
Why the five-year time frame? That's because there has only been one five-year period since the 1930s when North American stock markets have had a negative five-year return. That one was only if you invested in 1969 just after a speculative peak in the market and then cashed in your chips at the trough of the recession at the end of 1974.
Any other five-year period, especially those starting from a market trough like we are enjoying today, has shown positive returns, most of them far in excess of the returns on so-called "risk-free" investments like treasury bills or GICs.
Investing in the shares of good quality, well-managed companies and committing to that investment for five years or longer is taking a risk that is heavily stacked in your favour. This is what Tom Bradley, president of Steadyhand Investment Funds Inc., referred to recently as "an asymmetrical bet" in his Globe and Mail column.
Tom is a 25-year investment veteran and past-president of Phillips Hager & North mutual funds. His companies have been at the forefront of consumer advocacy in the investment industry, with fees that are less than half the industry average.
He made this comment in reference to currently popular "risk-free" packaged investment products called principal protected notes or index-linked notes.
Investors love these products because they provide some exposure to the stock market while guaranteeing a return of the original principal. The problem is that the principal protection is over a five year or seven-year period.
Over that period of time, there is virtually no risk for the guarantor.
In return, the investor gives up as much as 40 per cent of the potential gain and pays what I would term huge fees for the privilege.
That's an asymmetrical bet in favour of the issuer, not the investor.
With the stock markets down significantly this year and daily bad news, it's tough to be optimistic. I'm not trying to convince you that the sun will shine tomorrow or that it won't snow any more this winter. I'm not even trying to convince you to be optimistic.
Instead, I want to help you remain realistic. If you look back at a 50-year chart of economic trends, as I do most days, you'll see that the best time to invest in the stock market is almost always right in the middle of a recession.
In my opinion, the American economy has been in a recession for three to six months; it just has not been made official yet.
Now, I could be wrong -- maybe things are better than that, as some economists believe.
Or perhaps the bad news that CNBC and the business networks dredge up daily may be closer to the truth, and we have another year of economic decline ahead of us.
But here's the good news -- it doesn't really matter. If you are invested appropriately for your situation, with enough cash reserves or income to cover your spending needs through the downturn, and if your good-quality, equity investments remain in place for another five years, you will make money.
And Spring will come; it just might be later this year than usual. So don't sell your lawnmower, even if it snows in May. The grass will eventually grow.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column appears Fridays. You can e-mail him at dchristianson@wellwest.ca
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