The Financial Pyramid
The tumultuous year of 1998 brought priceless lessons for all whether neophyte, seasoned or occasional investors in the stock market. Even speculators and spectators learned a fair bit.
Paramount was the lesson of greed: Markets couldn’t keep soaring the way they were, nor could investors continue generating the 20 per cent-plus annual returns of those halcyon 1995-97 years. The real crisis of 1998 was the continuing “irrational exuberance” that ringwise Federal Reserve Board Chairman Alan Greenspan kept warning about. This said, even he was surprised at the suddenness and the severity of the fierce “equinoctial storms” that swept through the markets from August to early October. No one escaped, and if your investments were not up to snuff you could be — and often were — blown clean away.
The glaring moral of 1998 was to be properly balanced and diversified in soundly-financed (e.g. not overly-borrowed) and positioned portfolios of good quality. In that way, one didn’t need to be a distress seller, plus some confidence of less severe losses that would be made good when the markets recovered — as has already begun.
Which brings me to the financial investment pyramid wshould all adapt. As illustrated below, it must be built on the secure foundation of an up-to-date will, emergency cash and insurance, the latter also having valuable investment applications; for example, Universal Life in estate planning to offset that ultimate day when Revenue Canada reaps its inexorable harvest, and Segregated Funds that guarantee the return of investment capital at original or re-set levels. Next comes the heart of the pyramid and the investment challenge; the Registered Retirement Savings Plan (RRSP) to be prudently built to age 69 when it then should be converted either to a fixable annual annuity or a Registered Retirement Income Fund (RRIF). In my view, the latter is the much more desirable option, with the caveat that while RRIFs must begin being drawn down (and taxed) at a minimum percentage each year, they also need to be nurtured to ensure they outlive us as we live ever longer.
The layers making up our model pyramid need to be filled in from a bewildering array of investment products and services. This “cement” is a complex one, but our parents never had a range of investments such as this to plan their independent financial futures. Lucky us — and how worthwhile if we go about our investment challenge properly.
In the end, the great financial storm of 1998 blew itself out thanks also to the collaborative efforts of the world’s central bankers (led by that indomitable septuagenarian Alan Greenspan), ministers of finance (among whom Paul Martin is walking very tall) and the International Monetary Fund which now has the wherewithal to provide the necessary support to Brazil and other remaining trouble spots. As a result, stock markets everywhere have begun seeking new valuation levels based primarily on the earnings, present and future, that will underpin them. Against this background, I’m counting on an exciting recovery equity called Canada Inc. More on this in my February 1999 column.
From the euphoric returns of 20 per cent-plus, we should all adjust our expectations to building investment wealth at a slower, healthier eight to 10 per cent annually. At these rates, we’ll double our investment capital every eight to nine years if we can reinvest the income as we proceed down life’s path. I also urge that we focus on investment criteria like quality and good management. Well-chosen equities are the proven best way to build longer-term investment wealth — now, more than ever, Canadian equities included.
Bear markets don’t endure, bull markets do. Given a secure foundation that includes an up-to-date will, a well-planned estate, and with proper positioning, we should approach investing in 1999 with the continuing confidence that long-term prosperity is sure to follow.