How to make your savings last
Always remember that the superior investing of which we are all capable must be approached on a long-term basis. This should suit us fine, given that we are living ever longer. We now have more of our lives to look forward to in retirement than ever before/
It’s a thrilling prospect, and one that provides an opportunity for each of us to put our hard-earned savings to work in a way that makes them immune to the vicissitudes of the day-to-day stock markets, all the while delivering desired income or growth, or a combination of both. Ensuring our savings last longer than we do is an eminently achievable goal if we go about our individual investment challenge properly.
Portfolio PerformanceFirst and foremost, a customized investment portfolio should be positioned to increase wealth slowly — and surely, and steadily. For example, if it were to average a total return of 10 per cent annually, and we could afford to reinvest all the interest and dividends along the way, our investment nest egg would double in just over seven years. If the return were to average nine per cent, it would take eight years; and if eight per cent then nine years. These areot the “heady” returns that too many investors have been lulled into expecting in recent years, but chances are that this systematic, disciplined approach will facilitate the achievement of our investment goals.
Another essential pre-requisite must be a preparedness to stay in the markets through thick and thin. This, in turn, requires patience and fortitude, the favourite words of legendary investment managers Warren Buffett and John Templeton. Both expand further, Mr. Buffett urging “time in” rather than “timing” the markets, and Sir John the need to seek out bargains which, by definition, are securities others do not want and hence become even better bargains for this reason.
Both creeds are contingent on another tenet of superior investing; namely, to identify long-running trends and then to stick with them. “The trend is your friend”, one of investing’s best-known axioms, doesn’t mean that the stock markets and chosen equities go continuously upward. In fact, it would be unhealthy if they didn’t pull back, catch their breath and find new base levels from time to time.
In addition, today’s point-and-click world of instant news, action and reaction means the inevitability of huge trading swings and accompanying volatility storms that need to be ridden out — better still, taken advantage of — in the achievement of the long-term goals we should all aspire to.
Why investment-friendly trends should be paramount
- Hopes couldn’t have been higher, or the fanfare greater, when the Dow Jones Industrial Average first reached 1,000 in February 1966. Little did anyone know it would require another 17 years before this historical threshold was left permanently behind. In August 1982, with pessimism at its height, John Templeton made his famous prediction that the Dow, then wallowing at the 750 level, would hit 3,000 within five years. In that same month, on Wall Street Week, he opined that children being born in America at that time would never be able to buy stocks cheaper in their lifetimes. He was ridiculed for these predictions, but he knew it’s during times of extreme pessimism that great bull markets are born. In the end, Sir John was out in his predictions by three years, the Dow not reaching 3,000 until April 1991. Nevertheless, what a far-sighted prediction it turned out to be as this most famous of bellwethers thereupon began climbing through one plateau after another on its way to an all-time peak of 11,700 in January 2000, before pulling back to catch its breath for the next upward leg.
- In the spring of 1983 a Massachusetts Institute of Technology professor told me that if I were to buy IBM and put it away, I would never have to worry. We had a teenage family and a mortgage at the time, but on this expert advice we dug into the family savings to buy 50 shares of “Big Blue” at the U.S. $160 level. Thereafter, IBM started going down and down – and down. So much so, that I gritted my teeth and bought another 25 shares at $100 and then, a while later, yet another 25 shares at $50. At that point the cost of my investment averaged about $120 per share. Last year, IBM reached a high of $134, after twice being split 2-for-1. Even though subsequently pulling back to the $100 level, it remains one of the major — and most successful — holdings in my RRSP.
Personal experiences like these, are proof positive that the market and top-class equities always come back when the trends that count — especially those in economics and corporate profits — continue to be friendly. They also illustrate how en passant bargain opportunities can be capitalized on by those properly positioned to take advantage.
Above all, this means the right allocation of assets between fixed income (principally bonds) and equities (individual stocks and mutual funds), recognizing that this mix will vary according to individual income and growth requirements, time horizons, tax brackets, risk tolerances, et al. Nevertheless, by planning and positioning properly you will be assured of the lion’s share of the superior performances that is sure to follow.
Seven steps to make you a better investor
1. Seek professional advice (today’s world and markets are too complex to go it alone)
2. Determine your income needs (both now and in the future)
3. Balance your portfolios accordingly (absolutely vital, as above)
4. Build a ladder of high-quality maturities in the fixed-income section (no sense in
running credit risk for extra yield)
5. Focus on correctly setting up and shaping the all-important equity section (with which
to build that future wealth)
6. Select the “right” equities and equity products (like mutual funds)
7. Diversify by geography and sector (including technology, where mutual funds let the
experts make the decisions for us)