Sound too good to be true?
Well, you’re right. It is. At least, right now.
But if you were in the market for a house in Ottawa sometime around 1956, that’s about what you would’ve expected to pay for an average home. Fast forward to 2013, and an average house in the nation’s capital will set you back around $361,000 – more than 27 times as much as it cost in 1956.
Now, you may be asking yourself – what has any of this got to do with your life today?
For starters, that $13,000 house isn’t exactly ancient history. Most baby boomers were alive when their parents were paying that price for a new home. Even 30 years later, in 1986, the average house was going for about $110,000 – less than a third of what you’d pay today.
Of course, this shouldn’t really surprise any of us. We all know that the price of nearly everything we buy has gone up by a lot. Gas, cars, clothing, food – even the cost of mailing a letter – you name it, they all cost three, four or even 10 times more than they did when we were a few years younger.
In fact, there’s really nothing odd about any of these increases. What is unsettling is how well many of us think our investments are going to perform in the face of these tremendous changes, and how much income we expect to be able to get from them throughout our retirement years.
As a financial advisor, I often talk to investors about the idea of investing for growth. Most of them usually say something along the lines of: “I really don’t want to take any risks, I need to keep what I have.” My reaction is: great! We’re on the same page. Let’s invest for growth!
But for most people, that isn’t at all what they mean when they talk about keeping what they have. Most people think “keeping what they have” means never seeing their portfolio fluctuate. If they start with $100,000 today, they want to invest in something that will guarantee they’ll still have that same $100,000 tomorrow.
The problem with this approach is that the real purchasing power of that $100,000 is going to be dramatically less in 10, 20 or 30 years than it is today. Someone who had $100,000 in the bank in 1956, for example, could’ve run out and bought themselves seven or eight houses. In 1986, that same $100-grand would’ve gotten them just one house. Today, they could barely afford the down payment.
When it comes to long-term investing, anything that won’t multiply your money enough over time to at least keep up with inflation isn’t a “safe” investment. It’s a sure loser, whose only guarantee is that all the money you worked so hard to save will eventually disappear before your eyes.
To put it another way – most people in Canada will retire at around the age of 62. If you and your spouse are non-smokers, odds are at least one of you will live to be at least 92 years old. If you retire at 62 and invest your money with an eye towards keeping your capital exactly the same as the year you got that gold watch, by the time you reach 92, your money will be worth somewhere between a third and a half of what it was worth when you got started.
I guess some would say this preservation of capital is conservative by some measure. But it certainly isn’t risk free.
If you’re playing the long game (and retirement planning is always a long game), then you’re going to need growth. Growth means volatility, because risk and return are always related. When you take more risk (or volatility), you get more growth. The risk has to be real, and it has to be managed. But if you’re playing the long game, volatility isn’t your enemy. It’s your best friend, because it’s what is going to keep you from having to do your grocery shopping in the pet food aisle 20 years after you retire.
When it comes to long-term growth, there are very few investments that can consistently perform as well as stocks. Thirty years ago (the length of an average retirement), the S&P 500 index stood at 150 points. Today, it’s at 1,990. That’s a 13-fold increase over three decades – and that doesn’t even include dividends, which, incidentally, paid more than bond interest did over the same timeframe.
The bad news is, stocks also temporarily decrease in value every once in a while. About every 5.5 years, stocks will go down around 20% or more. Once in a generation, they’ll go down by closer to 50%. This volatility is what causes most investors to view stocks as “risky” – even though they’re one of the very few tools that can actually help you stay ahead of both inflation and your rising income needs.
Don’t get me wrong – the risk that comes with investing in stocks is real. If you need to turn your stocks into income right when they happen to have lost half their value, you’ll be feeling that loss for years or even generations to come. Similarly, if the market tanks and you listen to all the cable network pundits who are yelling at you to sell everything before the world comes to an end, you’ll also get to experience first-hand the risk that comes with equity investing.
But if you’re in it for the long haul, with some good planning and a balanced approach that includes sufficient cash and bond reserves to take care of your income needs, then you’ll be able to watch your stocks grow enough to keep you ahead of the juggernaut of long-term inflation.
But don’t take my word for it. Warren Buffett, the world’s most quoted (and least emulated) investor, had this to say in his 2012 newsletter to investors: “Since the basic game is so favorable, I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”
Words worth heeding for those playing the long game.
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 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. Past performance is not indicative of future results.
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.