What Did We Learn In 2008?
David Christianson, CFP, R.F.P., TEP
Happy New Year! I hope you had a happy and healthy holiday.
Now, on to your resolutions and goals. Remember to visualize your ultimate objective until it becomes real in your head. Then find a picture or a phrase that represents that goal and its motivation to you.
Strategically place that image in the best location – on your fridge, exercise machine, wallet, credit card, chequebook, computer, cigarette pack – wherever you will see it when you need extra motivation or willpower. It will help you through the inevitable rough spots.
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So what did we learn in 2008?
It is obviously a year that will live in infamy. We were all shocked by the ferocity of the economic meltdown and the enormous number of former emperors who were revealed to have no clothes.
Can you plan for the unexpected? I would argue that you have to, and here's why.
Our approach to financial planning and investment management is based on knowing that we cannot predict the future and believing that the unexpected will happen. This means planning for the best, but always preparing for the worst.
In practical terms?
The first thing is to always have cash reserves, adequate to fund any expected (and unexpected) extra cash needs for two years or more. When all else fails (as it did this year), you never want to be caught in a spot where you need to sell investments when they are down.
That’s rule number one.
What helped get me out of the funk and guilt I was feeling in October and November was conducting a client-by-client review that showed our clients will generally not have to touch their equity investments for several years. This was helped further by rule two.
The second rule is to have fixed income investments, with guaranteed maturity values, that will provide cash needs through years two to five. Some of these should be government bonds or GICs, not all corporate bonds. Those were hit hard in the credit crunch, and most are still trading at a discount. (They look like a great opportunity now, though…)
The proportion of short term investments (cash reserves), longer term guaranteed investments and equity investments should be based on your own situation. Everyone’s need for liquidity, income and long term growth is different, as is everyone’s real risk tolerance.
Some 70-year-olds can afford to have more equity investments than some 40-year-olds. Asset mix is not based on age alone.
Following these guidelines will allow you to make equity investments in the stocks of great companies, which is the only real way to create wealth long term. This is as true today as it has ever been in the last 90 years.
These rules are basic, but I am astounded every week when we are approached by investors whose advisors failed to follow these basic fundamentals of capital protection.
Some people learned in 2008 that their risk tolerance was not nearly as high as they thought. This may require a change to their asset mix if they are going to sleep better. However, if they have time, it would be better to make this change gradually over the next few years after stock prices have recovered.
Never forget that stock prices will decline again in the future, as they have in the past. Thirty percent declines are the norm in a bear market, which happens every four or five years. Immediate recovery is not guaranteed.
Don’t invest in equities unless you are aware of these facts and unless your overall plan allows for the inevitable fluctuations. The ideal plan provides the cash and fixed income investments that will allow you to take advantage of depressed equity prices.
Oh, yeah – one last thought. Prepare yourself for your December 31 investment statements – they will not be a pretty sight. With the Toronto Stock Exchange down some 36% and other equity markets declining as much 50% on the year, don’t expect your portfolio or your investment managers to have been immune.
Thanks to all of you who have written me with kind words and story ideas. We will be talking about the new temporary RRIF withdrawal rules, and more about acting as an executor, in the next few weeks.
All the best in 2009!
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David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column, ‘Dollars & Sense’ appears Fridays in the Winnipeg Free Press.