Tag Archives: investing

There is No Secret Sauce

There is no secret sauce blog header



I’m going to let you in on a not so well-kept secret from the financial services industry. There is no secret sauce. There is no specific investment, decisions, technique, or strategy that is going to make you rich. There is no one thing you can do that is going to make you successful.

a picture of a special sauce


In fact, I’d be that if you gave up and stopped trying to find an easy one thing you can do to be successful, you would have a much higher chance of getting there.


You see, when it comes to money, building wealth is not a matter of making 1 or 2 correct decisions. Building real wealth is a series of small decisions that over time add up to generate enormous value.


Why Do Asset Prices Keep Climbing?

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One of the strangest phenomenon for many people was watching various asset prices break new records while the world grappled with a global pandemic. How on earth could these assets be worth more now, than they were in 2019, given the economic carnage we suffered in 2020?


While there are many different reasons for this, and I do not claim this is the only reason, interest rates are surely to blame.


You see, when the economy stalls, governments around the world slash their interest rates in an attempt to get their citizens and businesses to borrow more money to either invest or spend. Let’s look at an example:

If you owned a local restaurant and you were looking to purchase new tables and chairs for your restaurant, maybe you could only get a loan at 9% to finance this. When you sit down and do the math, borrowing the money at 9% doesn’t end up being a profitable option for you as the expected increase in customer spending doesn’t offset the 9% interest rate. Now, if the government comes along and slashes interest rates to stimulate the economy, maybe now you can borrow at 4%. For some people, this shift in interest rates means that what was once a risky or non profitable option, has become less risky and more profitable.


Successful Investing Vs Getting Lucky

Successful Investing graphic


Record low interest rates, rich asset valuations, low inflation, and solid economic growth expected. The result? Speculative trading.

I’ve been getting more phone calls, emails, text messages and video calls from clients, friends, family and everyone else about purchasing speculative investments than I ever have before.

Now, the usual mantra is that by the time the retail investor gets involved, it becomes the pain trade. In other words if main street is finally rushing to plow their money into these investments as they soar in value, it means that there is likely nobody left to buy. It can be seen as a signal of a bubble or a market top.


stock chart falling


Now I’m not going to say whether this is or isn’t a bubble, because that is beyond the scope of this article. Also I don’t feel like people using this later and claiming I was wrong.

However, we do need to go over how to spot the difference between making a successful investment, and simply getting lucky.

This first method. If you are investing in something purely because you have seen it go up in value and are afraid of missing out, you have to acknowledge that you are in no way shape or form investing. You are purely speculating. Now this doesn’t mean you can’t make money speculating, but it does mean you are effectively gambling and have to time your entry and exit points in order to make a profit, before greed gets in the way.


gambling greed scrounging for money


The second method is to calculate your odds of success and compare that to your payout odds. I like to use a simple dice game when explaining this. Your job as an investor is to find an investment whose odds are in your favour. If you wanted to bet me $10 that you could guess the number to come up on a dice roll, you would have a 1/6 chance of being correct. To be fair, you would want a 6/1 payday. If we rolled it 6 times, you would pay me $10 X 6 = $60. If you were right 1 out of 6 times you would get paid 6/1 6*$10 = $60. Which means if we did this over and over again, statistically neither of us would have made or lost any money as these are balanced odds.


Dice and dice odds


If your investment has a 1/100 chance of working, but only pays out 20/1 those are terrible odds, even if you do successfully get paid 20x your money. If you can find an investment that has a 1/20 chance of working with a 100/1 pay out, then those are great odds and a very good investment.

You see, the reason people get lucky on speculative investments is that in the realm of statistics, anything that is possible to happen will eventually happen. For example, statistically speaking there is a chance of a racoon falling through your ceiling and landing on you in the next 5 seconds. Did it happen? No probably not, but here is the thing, it has happened, and it will happen again to somebody.


Raccoon falling on desk


What this means is that with millions of people buying and selling random speculative investments all the time, their will always be someone who hits it out of the park even though the odds of it happening were absolutely abysmal. The reason you hear about it, is people like to talk about when it happens, or that they heard of it happening. Do you ever hear people brag that their 10-year return on their balanced portfolio was 7%? No? Because it’s not exciting. You’ll hear about how someone turned $1,000 in penny stocks into $1,000,000. Even though it only happened to 1 in 1,000,000 people who tried.


Remember, just because you have heard of someone making lots of money on a speculative investment does not mean you should rush out and buy it. If you are comfortable with a small percentage going into speculative investments, then make that decision. However, don’t let the emotional fear of missing out dictate your investment strategy.





Stop worrying about short term performance

Stop worrying about short term performance


As a financial advisor I see the financials of people from all walks of life. I see some people who have had amazing financial success. I also see people who are on the verge of bankruptcy.


There are always striking similarities between the various different people we work with. The one I want to write about today, is how often people focus on their short term investment performance, rather than focusing on the long term.


Short and long term investing


As I write this, we are a week away from a U.S presidential election. By all accounts it will drastically shift the way the world works depending on its results. Nearly every conversation or phone call I have with clients is them wanting to know how their investments will perform over the next 2 weeks to 6 months.


Sequence of returns risk, what is it and how to manage it?

Sequence of returns risk can certainly be a retirees worst nightmare. Completely out of your control, and at the whims of the market.


To recap: sequence of returns risk is a portfolio risk that is based on the order of your returns, rather than your average return when in the decumulation phase of your investment strategy. You see, if you aren’t withdrawing, the order of your returns makes no difference, but if you are withdrawing the order of your returns makes a massive difference.


Let’s look at 4 simple examples. Each portfolio with $100,000 and averages 4.75% over the three yer period. The first will have no withdrawals and have bad returns first, the second will have no withdrawals and have good returns first. The third will have bad returns first with $10,000 per year withdrawn at the end of each year. The fourth will have good returns first with $10,000 per year withdrawn at the end of each year.

 No Withdrawals, Bad Returns First:


Table showing returns over the years



Emotional Capitulation and Your Investments


We all know that investments go up and they go down. The problem is how we handle the emotional roller coaster of watching our investments decline in value. As I am nowhere near qualified to act as a psychologist, my thoughts and ideas are my own as to why this happens. I base this on having watched hundreds of clients experience this dilemma and have even experienced it myself multiple times.


Everyone’s heard of the fight or flight response. It’s that fear response that picks up any time we feel threatened. This can be a physical threat, emotional threat, or in this case a financial threat.


When you see your investments going down in value, this fight or flight response kicks in. We have this instinctive reflex to try to avoid as much pain as possible. Our emotional response is to try to do something, sometimes anything, when the rational and logical strategy would be to simply stay put.


It’s why we move on from underperforming investments at the worst times and chase the high flyers even though we know we should never sell low and buy high. It’s why when the market is plunging we desperately attempt to time the market and sell out as it’s falling, with an illogical hope of timing the bottom and buying back in.



Then what can we do about it, and how do we avoid it?


Economic Collapse: A risk worth worrying about?



Economic Collapse. Yes, it’s a real risk, societies have risen and collapsed all throughout history. Each time the people thought this time was different and that they were too smart or knowledgeable to allow it to happen again. With a global pandemic shaking the world, fascism on the rise, and countries moving more towards isolation than cooperation, an economic collapse is a real risk.



The good news is it is not a risk worth worrying about. Why not? Well you can worry about it all day and accomplish nothing. The reality is it still has an exceptionally low probability of occurring. Since this is an investment related blog, let us discuss how it would impact your finances.


When clients discuss their investments with us, there is always that fear in the back of their mind that they might some how lose it all. A risk, which would only come to fruition due to an economic collapse so bad that our society never recovered from it. In this scenario, everything would be worthless. Yes, your stocks would be worthless, as would your house, your cash, your car, your gold, etc etc.



I like to explain this to people by using a rollercoaster metaphor about why you shouldn’t concern yourself with he risk of this happening, as you are subject to it whether you invest in the market or not.


The Three Primary Investment Risks

Three primary investment risks


When I sit down with new clients to discuss their financial goals, one of the most important parts of that conversation is how much risk they are comfortable taking. 9 times out of 10 the answer is somewhere along the lines of normal risk, or medium risk. The only reason I get this answer is because people don’t want high risk, and they know they need more than low risk. Oftentimes this is just the answer that makes the most sense to them, but they really don’t have a good understanding of what risks investing entails.


Today, I’m going to go over the three primary risk types of a properly diversified portfolio. I want to highlight the properly diversified portfolio part. If you are out there picking your own stocks, or you have a 20 stock portfolio, this is not applicable to you. Those portfolios are poorly diversified and have a magnitude of additional risks, with no additional upside. The three primary risk types of a properly diversified portfolio are: Economic Collapse, Emotional Capitulation, & Sequence of Returns risk.


Let’s start with the easiest to understand, and also the one least likely to matter. Economic Collapse. This risk is that something so major and powerful happens within the economy that you see the stock market & bond market effectively fail or drop to 0 in value. Believe it or not this is something a lot of people worry about. “What if I lose all my money???” The only way to lose all of your money is to have the market drop to 0 in value. The only way this could happen is if we have such a major event that capitalism collapses. With it, the North American economy, Europe, Asia, etc etc. This risk isn’t worth worrying about, purely because if this does play out nothing is going to have value anymore. Had you kept your money in the bank, under your mattress, or in gold bars, it wouldn’t matter. People will be fighting for survival and food and weapons will easily be the most valuable resources. In other words, if this happens, you’re screwed, but so is everyone else and there is nothing you could have done to avoid it. Only the doomsday preparers come out ahead in this scenario.



How to retire comfortably

How to retire comfortably


One life. One chance. Unfortunately, that also means you only get one chance to make sure you live a happy comfortable retirement.


You see, it is your choice whether you want to spend your retirement working as a greeter at Walmart, or if you would rather spend it traveling.


I’m going to show you how differences in your savings rate determines the success of your retirement.


I’ll look at three examples. The first individual, Joe, will save 5% of their after-tax earnings. The second individual, Barb, will save 10% of their after-tax earnings. Finally, the third individual Sam, will save 20% of their after-tax earnings. Let’s assume that all three of them earn $60,000 per year after tax, start saving at 30 years old, retire at 65, and live until age 90. We will also assume they all earn 6% on their investments while working and 4% on their investments in retirement.


Joe only saves 5% of his after-tax earnings, or $250 per month. By saving $250 per month for 35 years Joe manages to save up $345,073. He expects CPP of $1,175.83 every month and OAS of $613.53. Joe can also expect to be able to withdraw $1,800 per month from his investments until he passes at age 90. This sets Joe up for a gross retirement income of $43,072 every year.



One simple trick to nearly quadruple your money

1 trick to nearly quadruple your money


What if you could go from having $244,815 over 30 years to $906,222 over 30 years using one simple trick? You don’t need to earn a bunch more on investments, in fact you don’t even need to change your investments. All you need to do is increase your savings rate year after year.


You see, if you were 30 years old today and saved $250 per month for the next 30 years, all while earning 6% on your investments, you would end up with $244,815 in your investment account. Now, there is nothing wrong with that, but $906,222 sounds a lot better to me.



savings comparison



Here’s how you do it.