Most investment decisions come down to two factors: greed and fear.
This greed and fear are conditional in that they depend, largely, on what’s happening in the markets.
When markets are doing well, we get greedy. Don’t be ashamed; we all do.
When markets are doing poorly, we become afraid – afraid that we’re not going to run out of money.
It’s ok to feel greedy and fearful, but this should be fuelled by our need, not our view of the markets, no matter how sophisticated or naïve that view may be.
Few years in recent memory paint this picture more vividly than 2018. At the beginning of 2018, we were riding the euphoric wave that was the longest bull market in U.S. financial history. That mark was met in late August, so the sky seemed the limit come September. Then, along came the Fall – literally.
The Fall of 2018 saw the fall of the markets. The U.S. S&P 500 plummetted 17.5% between September 17, 2018 and December 17, 2018. Here in Canada, the S&P/TSX slid 14.1% over the exact same two-month period. Similar story around the globe: down 10.3% in the UK, a drop of 15.5% in Japan, and a slide of 7.9% in Hong Kong, just for example.
All of the growth, plus some, that we had seen over the previous eight months had vanished, along with the greed we were feeling during that time. It was replaced by a sea of red and, for many, a fear that we were now off mark.
Most investors need about 6% annual return to achieve their financial goals, provided the conditions are right. Conditions?
- Start early enough
- Contribute a reasonable amount
- Leave it alone!
If these three conditions exist, most investors are able to choose investments that are designed to return somewhere around 6% on average over its lifespan.
Two of the greatest managed investment portfolios in the country do just that: the Canada Pension Plan and the Ontario Teachers Pension Plan. No need for high-flying risky investments here – they both meet all three conditions perfectly: their time horizons are very long (even indefinite); their plan members are forced to contribute handsomely; and no money comes out until we reach a certain ripe age.
Greed and fear become irrelevant. When did you ever worry about the value of your CPP benefit when markets have tumbled? Never.