He met an 80 year old widow, Jane, who inherited an estate in the 1950's of $300,000 in GICs and it is paying $9,000 a year. The problem is that $300,000 in the 1950's is worth $3M today. He met another 80 year old widow, Margaret, who inherited an estate in the 1950's worth $300,000 invested in blue chip stock. That portfolio is worth $3M today and is producing income of $80,000..
Should you invest for growth or to keep your capital? You should play the long game for investing. Inflation is your enemy. Growth is survival. Volatility is necessary for growth. Market corrections are normal. Retirement is a long game. Risk and return are related. You should manage risk, not avoid risk. GIC was a big risk for Jane, but it did not show up for a long time.
For current retirees, they will have 5 to 6 major market corrections in their future. There are too big levels you have in retirement planning. One is controlling or modifying your spending. The second one is reliably investing for growth and staying ahead of inflation. The amount of money you make and the amount you have do not correlate.
Level 1 is to control your spending. Why your budget failed.
- You made it up
- You sucked the fun out of your life
- The stakeholders did not buy into the budget
- Start with what you spend today and track your cash flow
- Decide on what is most important in your life and keep those things in your budget
- Get buy-in from your stakeholders
- Use cash (take out on Sunday night what you need for the week and only spend that)
Volatility and risk, are they the same thing? The answer is no. In 1984 the TSX was at 2300 and today it is 14,300. The S&P500 was 150 and is 1,925 today. Over this period there was 5 or 6 major market crisis. A typical decline every 3 years is from 15 to 19%. Every 5.5 years there is a decline of 20% to 52%. Once a generation you get a 1930's or a 2008's decline. He believes in buying ETFs and not individual stocks.
Successful long term investors are counter cultural. You need a reliable strategy. Create a reliable strategy that will fund your projections. You need a minimum of 5 years of liquidity. The longest market corrections last around 3 years, historically. You do not want to have to take out money in a portfolio in a bear market.
On my other blog I am today writing about Cenovus Energy Inc. (TSX-CVE, NYSE-CVE) ... continue ...
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