Winning by not losing

Editor's Note

This article is sponsored by RBC Dominion Securities

It’s official: the SPAC (Special Purpose Acquisition Company) has landed. For those of you not familiar with SPACs, they’re the latest investing craze sweeping the global markets. And as with so many crazes, the closer you look at them, the less of a “sure thing” they start to become, and the less rational all the people who are rushing to pour their hard-earned life savings into them begin to appear.

But what exactly is an SPAC? Essentially, SPACs are companies that are formed for the sole purpose of (eventually) buying another, as-yet-unspecified company. The idea is that, when they do so, the star manager or management team behind the SPAC will work their magic to increase the value of the purchased company. Investors pile their money into the SPAC to fund the acquisition. In return, they get shares in the SPAC.

What’s odd about SPACs as an investment is that they have no actual revenues. Instead, investors are asked to buy into them based only on the prospect of potential future earnings. In some cases, this optimism is justified. There are some great managers out there with long track records of past successes. If you’d had the chance to drop a bunch of money a few decades ago on an up-and-coming young investor named Warren Buffet, it would’ve ended up working out pretty well for you.

But many of today’s SPACs are just straight up speculation. Consider the latest high-profile example. The SAPC that will hold Donald Trump’s new media company has rallied 842 per cent since it announced its intention to merge with the Trump Media Group. While there are any number of different views on the viability of this latest venture, I think it can objectively be said that an 842 per cent increase in share price for a company that hasn’t even had a beta test yet can only be viewed as completely speculative.

I bring this up not because I think this (or any) particular SPAC is doomed. I just want to be clear about the real risks that come with this kind of gambling.

For many investors, SPACs are all about trying to prove they’re right, or making sure they don’t miss the boat on the “next big thing.” When you win, you can win big. But when you bet wrong, you can lose some or even all of your capital. And while you may win it back on the next bet, the odds of this strategy working out over the long term are pretty slim. If you don’t believe me, ask the owners of any Vegas casino. Whether you’re gambling at the roulette table or on the stock market, over the long run, there’s a reason the house always wins.

A different approach is something I call “winning by not losing.” It may not be as exciting as making big, all-or-nothing bets on a single company or venture. But for the vast majority of investors, the long-term results are likely to be much less anxiety-inducing – and much more profitable.

Winning-by-not-losing means creating an investment plan that meets your goals, buying a diversified stock portfolio that reflects that plan, and then sitting tight for the next 20, 30 or 40 years. Do it reliably enough for a long enough period and you’re almost guaranteed to end up with a phenomenal return on your investment, without having to risk losing everything you’ve worked so hard to save to do it.

Over time, a diversified stock portfolio will fluctuate with all the inevitable market ups and downs. But it’s highly unlikely that you’ll lose your capital over the long haul. On the contrary. Statistically speaking, a new investor who puts $1,000 a month in a diversified portfolio over a 30-year period will earn an average of about eight per cent a year.

Thanks to the magic of compounding, at the end of that 30 years, the $360,000 they ended up investing will be worth a little over $1.5 million. That’s an investment return of $1,140,000, all for doing nothing but having a little patience, and not taking any chances that could put your whole portfolio at risk.

True, inflation will make that $1.5 million worth less 30 years from now than it is today. But even if we factor in an average annual inflation rate of a little over two per cent, that $360,000 you invested would still turn into more than $1 million in real buying power. Still not chump change by any means.

With results like that, why do so many of us spend so much time chasing one can’t-miss deal after another, risking everything for the dream of scoring that one life-changing win? Unfortunately, one of the biggest reasons is that, when it comes to investing, most of us like company. We see the talking heads on the nightly news or read social media stories about all the people who are getting rich from each new craze, and we figure, surely thousands of investors can’t be wrong, right?

For others, it’s the adrenalin rush. We all know the allure of investing in something that could double or triple in value overnight. By comparison, buying a bank or utility stock is just plain boring. But when it comes to something as important as your retirement, boring is exactly where you want to be.

With enough time, a good portfolio or even a few well-chosen index funds will earn you your eight per cent a year with surprising reliability. It may be hard to get excited about compound interest. But for disciplined investors, this approach is one of the surest ways I know to realize the kind of truly fantastic returns that are out there for the taking by just about anyone.

And you don’t even have to place any big, risky bets to get them.

This article is supplied by Alan MacDonald, an investment advisor with RBC Dominion Securities Inc. Member–Canadian Investor Protection Fund.