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Building Wealth through Saving and Investing

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3 Keys to Building Wealth Video





Do you ever find yourself unsure about what to do with an investment decision? Should you buy now or wait? Is this a good time? Should I buy something safe or invest for growth?

You are not alone. Most people struggle with investment decisions because they think short term and do not have faith in the market.

This leads them to make the single most common investing error – investing conservatively near the bottom of the market and aggressively near the top.

We see this everywhere today. The markets are extremely cheap and will not always be this cheap, yet investors are focused on fear of another decline or what might happen in Europe. Most investors are conservative today and focused on income investments, thinking they will be able to buy investments with more growth after the uncertainty clears up. When that happens, the markets will almost definitely already be much higher.

This video explains how to have the right mindset for investing and how to avoid the single most common investment error. It is the second in a video series.

You can find more detailed articles on this topic by reading:

This issue speaks directly to the difficulties most people have with investing. Even people not interested in finance need to understand this message.

The video is a bit small on this page, so hit the “full screen” button on the bottom right.

If you prefer, you can read the transcript here:

You have planned retirements for thousands of people. What you have learned?

The attitude you need to build wealth is: Think long term & have faith.

If you find it difficult to make smart financial decisions, it’s probably because you’re thinking short term. When you think long term, investment decisions can be easy.

One of the most common mistakes is to invest too conservatively to be able to have the retirement you want. Our experience is that most people need a decent return, like a long term average of 8% or more to have the retirement they want. This means you’ll need to invest in the stock market. To invest effectively in the stock market you need to think long term and have faith.

How do you deal with fear of losing your money?

We find that most people believe the stock market is far more risky than it actually is. Quite simply – They have a short term outlook. They focus on the short term ups and downs, not the long term growth.

You need to take a 20-year view, not a 1-year view.

We analyzed the S&P500 in-depth since 1871.  The facts are: The stock market consistently rewards long term, patient investors.

  • Fact: the worst 25-year period ever was a gain of 5% per year. Which means you will more than triple your money.
  • Fact: the longest it has ever taken to recover your money is only 7 years not decades. This was right after 1929.

The key is having faith. When the markets are low, you need to be confident and see it as a buying opportunity. Long term, the stock market always goes up.

Question: With the investors I have talked with, whenever they invest, it seems to crash. Why is that?

The problem is that they don’t have faith. They only are confident enough to invest after the markets have been gone up for a few years. They only invest after they have been hearing & reading good news about the stock market from the media and their friends. But that’s usually near the end of the bull market. If you have faith all the time, then you see the buying opportunities.

Here is how you do it; let’s say that you went into the future with a time machine and learned one fact – 25 years from now, your investments will be worth 10 times what they are today. Until then – who knows?

But 25 years from now you will have 10 times as much money, as long as you stay invested. If you knew that, what would you do during a market crash? You would see it as a buying opportunity.

For example at the bottom of the market crash in March 2009, I published an article called “Irrational Pessimism”. If you sold then, you lost many years of growth. That’s the mistake you have to avoid. If you maintained faith or bought more, you’ve done very well.

What’s the message?

Faith gives you an optimistic outlook. Investors that have faith in the markets, tend to usually have good experiences. It is their outlook that is different. Because they always are confident that it will go up long term, down markets are not scary – they are buying opportunities.

Question: In short, what have our viewers learned about investing?

The key to building wealth and having the retirement that you want is to invest with a long term, optimistic outlook, and most importantly, to always have faith that it will go up over time.

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.  Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Opinions expressed are the personal opinion of Ed Rempel.  Opinions expressed in this video are the opinions of Ed Rempel & not necessarily the opinion of Armstrong & Quaile

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.





29 Comments, Comment or Ping

  1. 1. Andrew F

    I’m concerned about one thing Ed says: The stock market always goes up. How does he respond to, say, the Nikkei?

  2. 2. Diane

    Also, he talks about long term (which is appropriate and reasonable if you are 25 or 30 years old) What about those of us nearing retirement (I am 60) and still looking to invest – and there are a LOT of us in this situation – probably more now than ever before!! I think there should have been a reference to our situation as well.

  3. 3. Basil

    I have a big problem with this video and investment advice that can be summarized in a few points such as “stick to your plan” or “long term stocks always rise” and so on. There are so many things that can go wong. Most of people are not equiped to do any investing beyond GICs. In my opinion that applies to most professional advisors. Not very good choices unfortunatelly.

  4. 4. Ed Rempel

    Hi Andrew,

    The major stock markets of all the developed countries have performed well in the long term, although there have been incidents of extreme valuations for a few years.

    The Nikkei was a case of a super-bubble – even larger than the tech bubble in the 1990s. In the 1980s, it gained almost 500% in 10 years. In the 1990s, it lost close to 2/3 of its value. Check out this graph which excludes dividends: http://www.chartsrus.com/chart.php?image=http://www.sharelynx.com/chartstemp/free/chartind1CRU.php?ticker=^N225 .

    The total return for the 1980s was 20.5%/year for 10 years, followed by a loss of 6.2%/year in the 1990s. If you include both the bubble and the collapse, the 20-year return from 1980-2000 was a gain of 5.7%/year.

    Ed

  5. 5. Ed Rempel

    Hi Diane,

    I have good news for you. You will probably live much longer than you think.

    Your investment time period is not just until you retire. Normally, it is best to stay invested right through your retirement.

    At age 60, you have about a 50% chance of living at least 25 years. If you are married, then you have to plan even longer, since you need to plan to have your money last as long as either you or your husband is around.

    The average life expectancy for a 65-year old is about 83 for men and 87 for women, but it is 92 for whichever one lives the longest.

    For investment purposes, you need to think longer than average life expectancy as well. Average life expectancy means a 50% chance of running out of money.

    Normally, it is prudent to plan for only a 10% or 20% risk of running out of money. A 20% chance of running out of money means that you should plan to live to the age that you have a 20% chance of living to. That means that it is prudent to plan for 20 years up until your mid-70s.

    So take heart, Diane, you probably still have a “long run” time horizon in front of you.

    Ed

  6. 6. Ed Rempel

    Hi Basil,

    You have a point that most of the issues related to stock market investing are investor behaviour issues – not the market itself.

    People are not naturally built for stock market investing because the human gut nearly always pushes investors to do the wrong thing. It will push you to sell at the bottom and buy at the top – over and over. All professional investors have a specific discipline that they follow in order to avoid listening to their gut.

    The answer, however, is not to go to GICs. We call GICs “guaranteed insufficient cash”. With GICs, you probably have a 100% chance of failing to have the income you need for the retirement you want. From the point of retirement planning, GICs are probably the most risky investment of all.

    The answer is that people can learn to deal with the ups and downs of the markets. If you can learn that and stay invested long term, especially after market crashes, then you can become a good investor.

    Everyone envies people that have a generous pension. A pension is primarily a stock market investment that is invested long term without you knowing what is going on. That is the secret to success and becoming financial independent.

    Ed

  7. 7. SST

    @Ed: “We analyzed the S&P500 in-depth since 1871. The facts are: ”

    The FACTS are, Ed, the “S&P 500″ did NOT exist in 1871 and there was ABSOLUTELY NO manner in which the average investor could have invested in the S&P in its entirety until 1976.

    Very telling of the integrity of the financial industry (and government) to condone and propagate such behaviour. Gotta make a living somehow, right?
    If I lived in Ontario I would most definitely be making a complaint to OSC and FSCO, at a minimum.
    (as a side note, it really is in your benefit, Ed, to use 1976 as a date of origin.)

    As for your other “fact”: “the longest it has ever taken to recover your money is only 7 years not decades. This was right after 1929.”

    WRONG.
    The longest drawdown in S&P history was 300 months in length — that’s 25 years — Sept 1929 to Sept 1954.

    And what of the last decade?
    If someone put money into the S&P 500 at the start of 2000, they MIGHT just be breaking even — over 11 years later.

    Calculating from 1976, the first time when an average investor could buy the entirety of the S&P, 11 years of 0% growth constitutes over 30% of the total period.

    The current investment span for the average Canadian is 20 years. Imagine being half way into your investment journey and hitting a brick wall…then having 0% growth (or less) for the second half of your investment career. Awesome.

    Please, dear readers, take EVERYTHING Ed has to say with a block of salt, and do your own due diligence!

  8. 8. SST

    @Ed: “…investment that is invested long term without you knowing what is going on. That is the secret to success and becoming financial independent.”

    I’m not sure I’ve read anything more inane.

    As an investor, I most sure want to know where my money is and what it is doing. Blindly throwing money at a fund manager for 40+ years hoping he is doing a bang up job is idiocy.

    In pretty much all cases an “investor” can check the performance and allocation of their pension fund. In most most cases what they cannot do is dictate allocation. In some cases, such as mine, the “investor” cannot even opt out of paying into the pension.

    Another fallacy is ‘financial independence’. The ONLY way a person can be financially independent is if they have enough CASH on hand to cover expenses until they die. Any other manner is completely DEPENDENT on the performance of an asset to deliver income/growth (eg. stock market, pension, rental units, tax payers, etc).

    Of course a freshly retired person, age 65, might need a million dollars plus in cash to be “financially independent”…and the chance of being a millionaire is 1%.

    p.s. — “Investing” is a huge misnomer. Putting money into the stock market is ‘speculation’, not ‘investing’. SAVING capital for future utilization is investing.
    Investing = GIC, CSB, savings accounts
    Speculating = stock markets
    Just one more thing the financial industry has twisted for a more pleasant marketing scheme.

  9. 9. Ed Rempel

    SST, I think it is time for you to get out of the way of people trying to understand investing. There are many readers here sincerely trying to understand investing. This is not an appropriate forum for a diatribe.

    The statistics quoted since 1871 are widely accepted as accurate by the academic community. The data before the indexes started was meticulously tracked by scholars who documented the returns of every single stock that traded on the New York stock exchange.

    The purpose of this data is to help us understand how stocks have performed as investments and in different environments. Financial scholars have put together this data and it provides very useful insight.

    One of the big insights is that stocks have always performed well over longer term periods of time, as was documented by Jeremy Siegel in “Stocks for the Long Run”, but also widely in many other publications.

    In general, returns were a bit lower in the 1800s than in the 1900s. Most companies were agricultural back then, since that is the type of economy we had, but it is still helpful to understand how stocks performed as an investment.

    This conclusion is not only for the U.S. Elroy Dimson analyzed stock markets the 16 major developed countries from 1900-2000 in his in-depth study “Triumph of the Optimists”. He found that all 16 countries had similar patterns with strong long term growth.

    For educational purposes, I need to point out 3 things related to your post:

    1. Your stat of the S&P not recovering from 1929 until 1954 is a widely quoted error. That is only true if you exclude dividends, which were about 5%/year at that time. I have seen the 1954 date on many web sites.

    Here is a good rule of thumb. Anyone that quotes the 1954 date has not studied the stock market. Why would they exclude dividends? It’s like saying bonds did poorly – if you exclude the interest payment!

    This is especially true before 1950 when dividends were a higher proportion of stock market returns. Excluding dividends is ridiculous.

    My experience is that anyone that quotes the 1954 year is trying to artificially understate the return of stocks in order to make something else look better.

    2. When we are trying to understand investments, why is it relevant that an average person could have purchased it? You question whether stock market returns were relevant before index funds existed. Why is that a relevant factor at all in understanding investments?

    The average person could not buy commercial real estate (office buildings and shopping malls) before real estate stocks and REITS existed, but they are still an investment that was worth understanding.

    The average person cannot buy hedge funds because they do not fit the qualification to be a “sophisticated investor” or an “accredited investor”. Does that mean hedge fund returns don’t exist?

    We are trying to understand investments. Whether the average person could buy it or not is irrelevant.

    In fact, it is interesting to understand returns of investments that average people cannot buy. Are they missing out? Are the rich people investing in exceptional investments that average people are excluded from?

    Hedge funds are a good example. Since the first hedge fund was created n 1954, as a very broad generalization, hedge funds have done better than the stock market, especially if you look on a risk/return basis.

    However, you have to be far more careful with hedge funds. There is a much wider variation than there are for stocks. There are 14 categories of hedge fund strategies, which range from much less volatile to much higher risk than the stock market.

    My point is that it is worth understanding them regardless of whether or not an average person could buy them. Who cares?

    3. The stock market has always recovered relatively quickly from every major crash. I had always thought that the 1929-32 crash was the one exception.

    When we looked at the numbers, I was shocked. The 1929-32 was the only case in history of 4 down years in a row. However, if you had $100 invested on January 1, 1929, here is what would have happened:

    Return $100.00
    1929 -5.81 $94.19
    1930 -44.2 $52.56
    1931 -22.72 $40.62
    1932 -9.46 $36.77

    1933 56.79 57.66 $20.88
    1934 -8.01 53.04 -$4.62
    193554.93 82.18 $29.14
    32.55 108.92 $26.75

  10. 10. SST

    Invested $100 in what, Ed?
    Which stock(s)?

    I’ve asked that question countless times, and you have NEVER provided an answer in any shape or form. Until you, or even your master Siegel can do just that, pre-1976 data is moot. You can concoct all the theories you want, but when applied to reality, they fall into fallacy.

    (Siegel also did a ridiculous comparison of buying stocks vs. other assets, such as gold, circa 1872-2000something. How (or why!) would a person “invest” in gold when gold was still being used as actual government money? It would be like comparing buying $20 bills vs. buying stocks.)

    1. Wrong, Ed. My calculation does indeed exclude dividends. But then again, an “investor” would have had to have held shares in ALL stocks providing dividends to reap full yield. Something most likely not to have happened. Thus, the theory is fallacy.

    2. An average person is NOT buying commercial real estate, Ed. What they are buying (eg. REIT) is a paper product TIED to that asset. Kinda like how all the banks were peddling MBS…and the resultant mess that came with trying to figure out who exactly owned the physical property. The paper blew up, but the houses are still standing. Two different things, Ed. As a nice segue, REITs comprise only ~2% of millionaire portfolios.

    “Are the rich people investing in exceptional investments that average people are excluded from?”

    Yes, Ed, actually they are. And that is why they are rich.
    Very few millionaires made their money via the stock market.
    The majority gained their wealth through building their own company and/or their salary.
    The rich have less than 40% of their portfolio in equities, with an almost equal amount in cash, physical real estate, private equity, and commodities. Why would you push your clients to speculate 100% (or more) in the stock market? Why don’t you push this type of millionaire asset allocation to your customers? It obviously works…

    Sorry that my diatribe upsets your theoretical beliefs.
    I can only present facts and math; hard-ball hard science.
    If people would rather follow the inaccuracies put forth by the financial industry, not much I can do about that. Free will and all that.
    But I surely won’t stop posting corrective information.

    p.s. — at one point in time, for centuries, it was “widely accepted as accurate by the academic community” that the planet was flat. Just because something is “accepted”, does not mean it is reality.

  11. 11. Basil

    Watching investment edication videos and learning about finacial marketa is one thing (and it’s good and desirable that people are educated) being a auccessful investor is totally something else. I still tjink most pepple are not equiped to be successful in stick market even after they spend a considerable time educating themselves. For one thinh to become an expert in any highly skilled area you need years of deliberate practice and coaching by experts in area and to how many of us this is available? Individual has only his saving to “practice” so to speak with little room for error. To me a key for retirement security is the following: try to find a high paying job, save as much as possible in riskless investments that at least beat inflation, minimize taxes, start early. Together with your partner try to accumulate 1-2 million in today’s money and with CPP and OAS you should be OK.

  12. 12. SST

    @Basil: “To me a key for retirement security is the following: try to find a high paying job, save as much as possible in riskless investments that at least beat inflation, minimize taxes, start early. Together with your partner try to accumulate 1-2 million in today’s money and with CPP and OAS you should be OK.”

    Sounds reasonable to me.

    Let’s take a look at our own Frugal Trader an what comprises his portfolio (all figures approx.; principle residence excluded):

    Cash/Equivalents: 37%
    Equities: 63%

    To achieve a millionaire’s portfolio, he would need to slash his equity holding by 40%. The majority of his portfolio growth comes from income earned (wages, pensions, etc) and not stock growth or dividends. As well, he owns his own business (kind of) in the form of a holding company.

    His growth via income has been 400% over the last 5 years.
    Growth of equities is ~90% over the same time period.

    (Although growth through income is probably much more due to contributions derived from income.)

    What more do you need to know?

    Far more valuable to growth of wealth than stock picks is level of education, economic sector of work, and location of residence. I’d put tax planning up there, too.

  13. 13. Basil

    Just wanted to comment on Ed’s: ”A pension is primarily a stock market investment that is invested long term without you knowing what is going on. ” This is not a fair comparison and this is why I think so.
    Pension like CPP is truly perpetual. This is not the case with individual who has to fold his investment at one point. Not to mention that government can always raise contribution in case of underperformance that is to say that government has various toold to deal with market risks which individual most certainly doesn’t. In the end individual should avoid risks that pension plans like CPP can take.

  14. 14. Jamie

    Depending on OAS may not be a reasonable assumption. We just recently saw that cut back to age 67 from age 65 for the first time ever. As the boomer generation enters retirement and continues to draw from that what are the chances in the next 30 years that the OAS will still exist? Seems like this is the first step in that direction.

  15. 15. Ed Rempel

    SST,

    The S&P500 did rebound from 1929 by 1936 and again by 1942. Your figure of 1954 does NOT include dividends. Check it out here: http://www.moneychimp.com/features/market_cagr.htm . From Jan.1, 1929 to Dec.31, 1954 the S&P500 made 7.43%/year compounded. Just enter the dates and look at the CAGR figure (compound annual growth rate).

    To answer your question, they could have just bought shares in all the companies on the New York Stock Exchange from 1871 to 1926, and then bought shares of all the companies chosen to be part of the index in their proportions.

    Why is that so difficult? There are detailed calculations of what return you would have made if you had bought all the shares.

    You may quibble over the mechanics made by financial scholars, however the general point about the returns of stocks is valid and very useful for understanding investments.

    Ed

  16. 16. Ed Rempel

    Hi All, My revised post #9 is not showing up yet. I realize it is hard to make out the figures at the end. The revised post is in for moderation, I believe, and should appear shortly. The figures there are interesting.

    Ed

  17. 17. Ed Rempel

    Here is my post #9 with the correct ending:

    SST, I think it is time for you to get out of the way of people trying to understand investing. There are many readers here sincerely trying to understand investing. This is not an appropriate forum for a diatribe.

    The statistics quoted since 1871 are widely accepted as accurate by the academic community. The data before the indexes started was meticulously tracked by scholars who documented the returns of every single stock that traded on the New York stock exchange.

    The purpose of this data is to help us understand how stocks have performed as investments and in different environments. Financial scholars have put together this data and it provides very useful insight.

    One of the big insights is that stocks have always performed well over longer term periods of time, as was documented by Jeremy Siegel in “Stocks for the Long Run”, but also widely in many other publications.

    In general, returns were a bit lower in the 1800s than in the 1900s. Most companies were agricultural back then, since that is the type of economy we had, but it is still helpful to understand how stocks performed as an investment.

    This conclusion is not only for the U.S. Elroy Dimson analyzed stock markets the 16 major developed countries from 1900-2000 in his in-depth study “Triumph of the Optimists”. He found that all 16 countries had similar patterns with strong long term growth.

    For educational purposes, I need to point out 3 things related to your post:

    1. Your stat of the S&P not recovering from 1929 until 1954 is a widely quoted error. That is only true if you exclude dividends, which were about 5%/year at that time. I have seen the 1954 date on many web sites.

    Here is a good rule of thumb. Anyone that quotes the 1954 date has not studied the stock market. Why would they exclude dividends? It’s like saying bonds did poorly – if you exclude the interest payment!

    This is especially true before 1950 when dividends were a higher proportion of stock market returns. Excluding dividends is ridiculous.

    My experience is that anyone that quotes the 1954 year is trying to artificially understate the return of stocks in order to make something else look better.

    2. When we are trying to understand investments, why is it relevant that an average person could have purchased it? You question whether stock market returns were relevant before index funds existed. Why is that a relevant factor at all in understanding investments?

    The average person could not buy commercial real estate (office buildings and shopping malls) before real estate stocks and REITS existed, but they are still an investment that was worth understanding.

    The average person cannot buy hedge funds because they do not fit the qualification to be a “sophisticated investor” or an “accredited investor”. Does that mean hedge fund returns don’t exist?

    We are trying to understand investments. Whether the average person could buy it or not is irrelevant.

    In fact, it is interesting to understand returns of investments that average people cannot buy. Are they missing out? Are the rich people investing in exceptional investments that average people are excluded from?

    Hedge funds are a good example. Since the first hedge fund was created n 1954, as a very broad generalization, hedge funds have done better than the stock market, especially if you look on a risk/return basis.

    However, you have to be far more careful with hedge funds. There is a much wider variation than there are for stocks. There are 14 categories of hedge fund strategies, which range from much less volatile to much higher risk than the stock market.

    My point is that it is worth understanding them regardless of whether or not an average person could buy them. Who cares?

    3. The stock market has always recovered relatively quickly from every major crash. I had always thought that the 1929-32 crash was the one exception.

    When we looked at the numbers, I was shocked. The 1929-32 was the only case in history of 4 down years in a row. However, if you had $100 invested on January 1, 1929, here is what would have happened:

    Year Return $100.00
    1929 -5.81% $94.19
    1930 -44.2% $52.56
    1931 -22.72% $40.62
    1932 -9.46% $36.77

    1933 56.79% $57.66
    1934 -8.01% $53.04
    1935 54.93% $82.18
    1936 32.55% $108.92

    There are a bunch of numbers in this, but they tell a very important story that makes a huge difference when it comes to investing.

    This was the largest crash in history, but the market fully recovered in only 4 years from the bottom.

    This is the longest the US market has ever taken to fully recover. After the first down year (1929), it was back in the black 7 years later.

    Here is the question: If the market has always recovered in 7 years or less, then why do we have 10-year periods when it was down?

    The answer is that there were 2 times in history when there were 2 large crashes in a row. After the 1929-32 crash and recovery by 1936, 1937 was down 32% and took until 1943 to get back in the black.

    The only other example was this last decade. After the crash of 2000-2, we were back with a profit by 2006. Then 2008 was a drop of 37% and we are not quite back up yet now.

    Why is this important? The media would have us believe that the market “went nowhere” from 2000-9 in a “flat decade”. Were they there? It was not flat at all. It was a large decline that fully recovered followed by a 2nd large decline and partial recovery.

    The difference is that understanding stock markets is very helpful. Once you realize how consistently and relatively quickly it recovers from crashes, you can understand that crashes are buying opportunities.

    From every single crash of 20%, 30%, 40% or more, the market has bounced back and fully recovered within a few years – usually within 2 years and always in 7 or less. Most of the largest gains in the stock market have been after the big losses. These recoveries are the best times to be invested!

    In short, anyone who thought of the 2000-9 decade as a decade with 2 large buying opportunities did well.

    That is why we study the market. We want to understand it. Understanding it provides a lot of confidence in staying invested and is a huge help for anyone seriously trying to build wealth or save for their retirement.

    Ed

  18. 18. SST

    @Ed: “Your figure of 1954 does NOT include dividends.”
    I know. Please re-read my post (#10.2), my reason is stated.

    @Ed: “To answer your question, they could have just bought shares in all the companies on the New York Stock Exchange from 1871 to 1926, and then bought shares of all the companies chosen to be part of the index in their proportions.”

    Wow.

    According the NYSE itself, by 1926 there was over 1,000 stocks listed with a $67 average price. The average income in 1926 was $1,300.

    Between just 1925 and 1926 there were over 60 new listings on the NYSE with an average price of $61/share. Thus, the average “investor” would have had to have dished out almost TWICE their annual income (at a minimum) just to keep up!

    Not only would no one buy almost 1,100 stocks, they couldn’t afford to.

    By your own admission, current “investors are focused on fear of another decline or what might happen in Europe. ” If that’s the case today, it would have been even more so in the late-1800′s. If the average investor today is still skittish about the stock market from a crash four years ago, why would the average investor have bullish faith when they were faced with multiple crashes/panics (7) between 1871-1926? Most average “investors” would have been wiped out (don’t forget, markets crash almost every 7 years).

    Oh, btw, in case you weren’t counting, that span is 55 years. The average life span in 1900 was only ~50 years. So the average “investor” would have had ~30 years of market exposure — maybe — thus, incapable of participating in your theoretical scenario.

    Again, your theory is shown to be a severe and outright fallacy when put to the litmus of reality. At best, your market studies (pre-1976) are good for revealing trends, but useless for giving real-life returns.

    Here’s a question, you keep claiming these types of facts and math to be irrelevant: “Whether the average person could buy it or not is irrelevant…regardless of whether or not an average person could buy them. Who cares?”

    If that is the case, then why apply those those stats to real-life situations?

    Do you inform your clients (or readers of financial blogs) of the irrelevancy when you present such figures?

    I claim your stats are not accurate, you claim your stats to be irrelevant…would any “investor” be pleased to know their money is being speculated based on either platform?

    I see in your recent post you shift your focus to modern markets — 2000 onward. Kudos for that. How it should be when discussing “investor” engaged market indices — not “investor” irrelevant scenarios and theories (such as historical dividends).

    Besides that, and as I have posted many, many times, the evidence is there which shows the stock market is definitely not the be-all end-all to creating and building wealth. It is but one piece and should be taken in moderation. I’m quite sure most people put their money into stocks because it is easy and they don’t know what else to do. Isn’t it your job as a professional certified financial planner to alert people as such?

    I’ll leave you with this:

    https://www.fpsc.ca/sites/fpsc.ca/files/documents/FPSC_Standards_of_Professional_Responsibility_0.pdf

    I suggest every “investor” read this document before giving any amount of money to any kind of financial planner. Educate yourself and always remember, your advisor/planner works for YOU, not the other way around!

  19. Hi Ed/FT,

    I wanted to get your thoughts (see link)

    http://www.tradingonlinemarkets.com/Articles/Trend_Following_Strategies/History_of_Stock_Market_Cycles.htm

    One recent (yes 30 years ago) Bear Market.

    Secular Bear Market, 1966 – 1982 (16 years) …Quote from the link

    “Prior to the last secular bull market, the market was in a long term secular bear market which lasted from 1966 to 1982. During this time, the market essentially went sideways for 16 years. For example, the Dow hit a high of about 1000 in 1966, and low in the 800s in 1982. If you would have followed your brokers advice to ‘hold for the long term’ you would have been greatly disappointed. Sixteen years is a long time to receive next to nothing in return on your money.”

    My personal thoughts is inflation and taxes generally are not discussed and well as fees. After factoring all this in, one may need 5% or better just to break even. The problem now is debt levels (personal and Federal) is at an all time high. At some point consumers and the governments may have to pay off their debts or default.

    This does not mean one avoids the market. Yet as one is older say mid 50′s or later a down turn could be difficult to recover from. Or when one is withdrawing monies in retirement.

    The other way to lower the risk is to consider planning ahead and consider what I wrote awhile back.

    http://www.milliondollarjourney.com/how-annuities-work.htm

    Cheers,

    Brian

  20. 20. Ed Rempel

    Hi Basil,

    I agree with your comment about the average person not being equipped to handle the stock market. Studies show that is true, even though it is easy.

    Getting a decent return is as simple as buying a quality investment and holding it. For most people, just holding it is the hardest thing to do, especially when it goes down.

    That is the issue. People tend to tend to sell after their investment goes down. That is both the biggest mistake and the most common mistake in investing.

    That is exactly the point of this video. Having faith in your investments so that you can stick with them when they go down is the key to making money in the stock market. It sounds easy – just buy and hold – but it is very difficult for people to do.

    Ed

  21. 21. Ed Rempel

    Hi Basil,

    My comment about pensions was referring to employer defined benefit pensions, such as the pension of government employees or teachers. Most people envy those that have a generous pension like this.

    These pensions are mainly invested in the stock market. You put money in and have no idea how much it is worth. You can find out what investments they own, but you have no say in it.

    That also means that when the investments go down, you cannot sell since the investments are determined entirely be the fund manager appointed by the pension administrator.

    You are required to keep investing with each pay cheque regardless of what happens.

    Pensions tend to be a successful mainly because investors have to put money in all the time and they have no say. That means they cannot pull out at the worst possible time, cannot try to market time,and are forced to continue to buy when markets are down.

    They create a discipline that gets rid of the behaviour problems that plague most investors.

    Ed

  22. 22. Ed Rempel

    Hi Brian,

    “Secular bear markets” are a common myth. The link in your post excludes dividends, just like the stats by SST.

    The actual returns from 1966-82 were 6.74%/year – a bit lower than average, but certainly not flat.

    I do find it funny. There are a lot of web site and books that talk about secular bear markets. Virtually every single one quotes the index without dividends. As soon as you include the dividends, you see that the secular bear markets never happened.

    The government bonds of many major countries essentially went to zero in the last century because of high inflation. This includes the government bonds of Germany, Japan, Italy and Brazil. However, the stock market in every country adjusted for inflation and tended to stay ahead of inflation.

    If you are afraid of inflation, then you should avoid fixed interest investments. Bonds and annuities do not adjust for inflation and tend to get killed in high inflation.

    They don’t actually go to zero. Your principal just buys much less. For example, you may have enough money to buy a house. You invest it in a government bond or fixed interest annuity. 30 years later, you get your principal back, but you can’t even buy a chocolate bar with it. That is the risk of fixed interest investments.

    Ed

  23. We encourage healthy debate in the comments, but we do not allow personal attacks. Any comment of that nature will be either deleted or modified.

  24. Thanks for the videos, Ed, and your willingness to address questions/concerns in the comments.

    While I don’t necessarily disagree with anything you write, your advice should only be followed by people who have a long-term investing horizon (20+ years, as you point out). The problem is that many folks simply don’t understand the risks of buying and holding if their investing time frame is shorter than that. For instance, my in-laws dumped the proceeds of their business sale into the stock market in the late 2000s on the advice that their 5 years to retirement was adequate to make up for any dips in the market. They lost half of it in 2009 and had to postpone retirement for another five years. Buying and holding at that point in their lives was the worst possible advice their financial planner could have given them.

    Since I started actively investing a decade ago, one of the most crucial skills (disciplines) I’ve learned is money management–managing my exposure, position sizing, use of sell stops, etc.–if I want to consistently make money in the stock market year after year. It’s the key difference in my investing strategy that has allowed me to basically retire much earlier than I thought possible by avoiding the irrational types of behaviour you describe.

    Do you ever advise your clients to actively manage their investments if they have shorter time horizons, or do you simply advise them to avoid the stock market altogether?

  25. 25. Ed Rempel

    Hi Tropical,

    Interesting. Thanks for the great questions.

    My first thought is – did your parents sell after losing half?

    I agree that you need a longer time frame. In our webinars, we cover the question: “How long is long term?” The answer depends on how sure you want to be, but is generally between 7 and 25 years.

    The time frame for your in-laws is much longer than 5 years, though. Are they not planning to remain invested all the way through retirement? Today the average Canadian is retired for 23 years and the longest-living of a couple is retired 30 years. Those are the average. Half of Canadians are retired longer than these figures, so they should plan for their money to last longer than that.

    In short, if they are 5 years before retirement and planning to stay invested all the way through retirement, then they clearly have a long enough time frame.

    The question we struggle with is how much income can you reasonably take out every year when you retire. We found that withdrawing 5%/year is generally a safe figure. If your in-laws had $100,000 in an equity portfolio and withdrew $5,000/year, their money should last at least 30 years. We looked through the history of the S&P500 and found that if they had retired any time in the last 141 years, their $5,000/year would have lasted for at least 30 years every time except 2 (both right before the 1929 crash).

    In short, depending on how much income your in-laws need, they may have still been able to retire if they stayed invested.

    —-
    Your strategy is interesting. Does it really work? It allowed you to retire in your 30s? If you are able to make money every year, is it a low return?

    I have to admit I’m not really a believer in using charts for investing. We study professional investors and have seen hundreds of investing strategies. In general, investors that don’t use charts beat those that do.If you list the 100 best investors in the world, none use charting strategies as their primary method. If even the weak version of the Efficient Market Hypothesis is true, then you can’t beat the market by only using widely-available public information, such as the charts looked at by millions of investors.

    On the up side, it does sound like your style helps you avoid the irrational behaviours that plague most investors. Any strategy that enforces a discipline that helps you avoid behavioural mistakes is a plus.

    The impression I get from looking at your investment strategy is that you are a very conservative investor and are trying to avoid having any losses. My guess is that you would say that is not true, but why is it important for you to “consistently make money in the stock market year after year”?

    Have you considered “time arbitrage”? We ask all our fund managers why they beat their index over time and the answer is almost always fascinating. One fund manager says his secret is time arbitrage. He says most investors focus on the short term direction of their investments which means they don’t see the really big opportunities in stocks that will take 3-5 years.

    —–
    “Managing their investments” to me is using a market timing strategy, which we would not recommend. Market timing strategies rarely work and usually make losses more likely. From analyzing hundreds of investment strategies, we have found that in the vast majority of cases, whichever strategy has fewer trades wins. That’s part of why it is so hard to beat Warren Buffett.

    For clients with shorter time frames, it is partly art and partly science. We have to weigh the tolerance for risk, how sure they want to be, what return they need, and how important it is not too lose money. We can reduce the degree of risk partly by the type of asset, but also by the risk of specific fund managers. There is a wide range of equity fund managers, from relatively conservative to very aggressive.

    In short, for a shorter time frame, we may go with conservative equity managers, or go to an diversified income or balanced fund.

    Five years is an interesting time frame and can illustrate the issues. Looking 5-year periods in S&P500 history, 88% were gains, so there has been a 12% chance of a loss. The worst period was a loss of 11.5%/year, which is a lot in a 5-year period. However, excluding the Great Depression (which many experts think would not happen now because the government did not know how to handle it and made things dramatically worse), the worst -year period was a loss of only 2.6%/year.

    In short, if you have 5 years and stay fully invested in equities, you probably have only a 12% chance of losing a small amount of 13% or less. That does not sound like too much, but the 5-year period with the 2.6%/year loss was a wilder ride than it sounds. It was a $1,000 rising to $1,400 over 3 years and then plunging in a 2-year bear market down to $870. It was back to $1,170 the next year (year 6).

    If you can tolerate that and can stay invested, then you may be okay being 100% in equities. Being 100% in equities offers significantly higher return expectations, assuming you can stay invested.

    Ed

  26. 26. SST

    “Being 100% in equities offers significantly higher return expectations, assuming you can stay invested.”

    To offer a realistic and alternative point of view:

    The average millionaire has historically held less than 40% of their portfolio in equities.

    Only ~10% of millionaires gained their wealth via the stock market.

    Speculating 100% of your money in stocks most likely won’t make you wealthy. But those selling you stock market services won’t tell you that.

    I’ll address some other stuff as time allows.

  27. 27. Ed Rempel

    A few years ago, I researched the Forbes 400 richest Americans. These are not typical people, but there are interesting insights:

    1. 21 inherited their wealth and 379 made it themselves. This is one of the amazing advantages of our free enterprise system. Most of the very wealthy people were born into average families and were able to make their multi-millions and billions themselves.

    2. All of them made their money either by building a business or a few businesses (the vast majority of which are part of the stock market) or by investing in the stock market. 22 are stock market investors and 37 are mutual fund or hedge fund managers.

    3. Most of the ultra-rich did not diversify. For example, Steve Jobs and Bill Gates essentially made all their money in one company. There are lots of examples of people that did not diversify and lost their money, though. Not diversifying can make you lots of money or lose you lots of money. Diversifying is still highly recommended for most investors.

    4. Nearly all borrowed to invest and build their business or their portfolio.

    5. Nearly all held their stocks for many years or decades.

    Ed

  28. 28. cash_man

    Ed,

    I know this is an old post but had a question to ask… How would you handle a prospective client asking you how much money you have made in investing personally or questions regarding your own net worth or what you personally invest in. Also is it against the code of conduct to lie about the answer to those questions.

    I am starting to interview new advisers and wanted to ask a question like that.

  29. 29. Ed Rempel

    Hi Cash_man,

    It sounds like your real questions are about integrity of the advisor and how effectively he invests – is that right?

    In this post, I’ll tell you what is reasonable for you to ask advisors. Then in the next post, I’ll give you my answers.

    Integrity:
    It is a very good question for you to ask how an advisor invests personally. Many advisors invest differently than what they recommend for clients, and if they do you have a right to know.

    It is a point of integrity that an advisor should generally invest exactly the same as what he would recommend to a client with a similar risk tolerance.

    There are also biases. Most advisors are really just investment salespeople and will recommend whatever is easy to sell or popular to clients. It is an easy sale to get people to invest in a “safe income producing” investment today, so that is what most advisors recommend. Many advisors will also recommend the in-house investment products of their firm and brokers often recommend companies for which their firm was the investment banker.

    Do they own the same investments themselves? Good question.

    You can ask about whether they invest the same as their clients, what allocation they have, how often they trade, how they decide what to buy or sell or their allocation, where they get their information, and questions like that.

    Confidentiality and securities rules:
    It is difficult to ask advisors about how much money they have invested or specific investments they own. It is generally now wise to tell many people how much money you have and advisors usually know about these risks.

    There are compliance risks about naming specific investments, as well. Naming an investment he owns could be considered to be recommending that investment, which can potentially leave an advisor open if it crashes.

    Years ago, “pump and dump” schemes were common. A broker would go see a doctor or dentist just to tell them about a hot stock they claim to own hoping the doctor would either buy from them or would just go out and buy the stock. Often, their firm would buy nearly all the shares of a penny stock, then get their brokers to flog it. The doctors thought the broker was genuine, because he did not try to sell them and just told them about this great stock he claimed to own personlly that was skyrocketing. I heard of one broker that had his teeth cleaned by 6 dentists/day! I saw a few examples, where a stock would trade at $.10/share for years, then in a month or 2 shoot up to $2/share, then crash back to $.10/share. Once the firm had sold their shares and the brokers were no longer flogging it, the price would fall back to where it started.

    The securities commission has cracked down on these schemes, but an advisor can still get into trouble by saying they own a specific investment. It can come across as recommending an investment to everyone, which of course you cannot do without knowing everyone’s risk tolerance and objectives.

    Therefore, you likely won’t learn anything valuable by asking the advisor how much they have invested or about specific investments or to see their investment statements.

    Rates of return:
    This may sound strange, but asking about rates of return is probably the wrong focus. It brings out the competitiveness in advisors. It can also focus you on short term returns, instead of on having an effective investment process.

    From my experience, nearly all investors, including advisors, will lie about their rate of return – if they even know it. I read one study years ago that said the average investor adds 20% to their return – meaning if they say they make 15%/year, they actually lose 5%/year.

    Rates of return for shorter periods may not be very meaningful either. For example, if an advisor says their 3.5-year return is 25%/year, but their 4.5-year return is 1%/year, what does that tell you? Even longer term returns can vary depending on whether they start just before or just after the tech crash (forexample). Without having an appropriate comparison or benchmark, returns can be meaningless on their own.

    Also, high returns may be bad, since they can imply a lot of risk-taking. You can’t evaluate a rate of return without understanding how much risk was taken.

    Rather than asking about rates of return, you could ask about what benchmark they use for their own investments, how they did in specific periods such as during the 2008 crash or the 2009 recovery, or about specific investments mistakes they made and the lessons they learned. Watch out for everything having a positive spin, such as “I should have followed my gut” (implying that his gut has always been right).

    In general,the best questions are integrity questions (How do your personal investments compare to your clients’ investments?) or process questions (How do you make investment decisions?).

    This post is already long, so I’ll give you my answers to these questions in the next post.

    Ed

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