Part 4 of the series: Rethink the Way You Invest.

There is little predictability in asset class performance from one year to the next. The moment anyone tells you differently, run quickly in the opposite direction!

At the bottom of the market in March of 2009, I had opinions from all sides – clients, other advisors, analysts, and the numerous talking heads of the media. Now that the dust has settled, we have seen that they were all wrong. Some were close, but no one really knew. There is absolutely no shame in that, as long as you know what you don’t know going forward.

Because the sky was apparently falling very quickly back then, many investors wanted to stay in things like term deposits. Since March, 2009, those who invested accordingly grew a $100,000 portfolio to around $116,000 as at December 31, 2017, not accounting for the poor tax efficiency of term deposits. That’s better than nothing, but let’s look at what would have happened if they had decided to keep equities in their portfolios. To illustrate, I will reference portfolio information available to us from Dimensional Fund Advisors Canada.

From March of 2009 through December 31, 2017, investors would have grown a $100,000 portfolio to $246,000 in Canadian equities, $406,000 in U.S. equities and $277,000 in the stock markets outside of North America. In all cases, investors were rewarded consistent with the risk they took. There was truly no free lunch.

It is important to know that the this 9 year period is far too short to evaluate. If you are investing in stocks, you need to be looking at far longer time frames.

I wouldn’t have picked any of those investments in isolation, but I certainly would have structured a portfolio using all of them in a strategic balance. They all have different random patterns and that can work for your benefit. You see, when you mix them all together, the risk is far less than if you invested in each one on its own. One useful analogy is to think of the many squiggly threads that, woven together, make up a relatively smooth rope.

What I’m recommending here is no great secret to those who manage serious money. The Canada Pension Plan (CPP) is a prime example. It invests approximately 21.5% of its $317 billion dollars into fixed income and the remainder into equities spread throughout Canada, the U.S.A. and the rest of the world. The BC Public Service Pension Plan has approximately 18% of its $29.2 billion in fixed income and the rest also invested in stocks around the world. They both largely maintain those mixtures through thick and thin. I don’t believe your portfolio should be invested any differently.

The greatest epiphany I have ever had as a financial advisor was when I began to know what I didn’t know. There was a profound sense of peace in knowing that I did not have to try to do the impossible but rather focus all efforts on a firm financial planning process and implementing investing strategies that work in the long run.

Click here for Part 5: “Smart Diversification”

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