Welcome to a summer amygdala mail, where I respond to some of the messages you’ve sent me in recent months. There’s a lot of talk about the financial markets, which are an inexhaustible source of attractions, doubts and questions, and which end up affecting everyone, young and old, eventually.
Saving for your 50s?
Let’s start with Hugo, who says he has a “modest” income, but spends a “larger than average” amount on investments.
“I personally invest so that I have more options when I’m in my 50s,” he wrote. “I’m curious to know what your motivation is for going through this process? Are you doing it for early retirement? The only thing that bothers me is that I sometimes get the impression that you view this approach as superior to the traditional approach of saving for retirement at 65, when I see it more as a matter of value and lifestyle choice.”
Good question, Hugo. If I boil it down to the essentials, I invest like you to have options. In short, to be independent, so that my family’s financial security does not depend on the needs of newspaper advertisers, my boss’s mood or the ups and downs of Quebec’s economic activity—elements over which I have no control.
The worker who saves for retirement at 65 and spends everything else is making a bet. He is betting that the economy will always need his services. That every Monday morning for the next few decades, the place in the world he will most want to be is at his workplace. That he will not experience separation, that his parents or children will not become seriously ill and need him. That his salary will always cover his expenses.
My opinion? Practically no one takes up this challenge by choice. As Jean-Sébastien Pilotte, author of the book, says Retirement at 40people yearn for more freedom, even those who wouldn’t put it that way. The proof? If everyone were happy, the 6/49 notes would remain unsold.
In news reports, when someone loses their job, they sometimes say to the camera something like, “I gave everything to this company, and this is how they treat me?!” Every time, I hear, “I got into debt, and now I have a problem.” I’m investing in never being that person.
Invest 100% in the stock market?
Next, let’s welcome Louis-Philippe, who would like to be able to take more risks with his portfolio.
“You often mention the benefits of investing in portfolios that include a percentage of bonds. For my part, I have been fortunate to have been contributing to a defined benefit pension fund of the Government of Quebec for 15 years now. I therefore consider that my “fixed income” portion for retirement is covered, and I therefore only buy index funds that are 100% stock since I have a good risk tolerance. Is this a good strategy?”
You’re right, Louis-Philippe. We have to take into account all of our assets when we calculate our risk tolerance level. A government defined benefit pension plan is the most solid asset there is. So it removes an element of uncertainty from your retirement planning.
As for the idea of having a 100% stock portfolio, you have to take a good look in the mirror before you take the plunge. How would you react if the value of your investments fell by half in a stock market crash, and remained there for years? Calculate what that would mean in dollars.
It’s no big mystery that with a 100% stock portfolio, sooner or later, such a scenario will occur. Having 20% in bonds could help you relax, and even give you the opportunity to rebalance your portfolio by buying stocks at low prices during down years.
Very few people can get through a stock market crash without giving up in some way. But very few doesn’t mean zero.
All eggs in one basket?
Finally, Kevin wants to make a money grab. Here’s his strategy:
“I am a young 24-year-old investor. I would like to have your opinion on a find that seems to me to be a rare pearl in a promising environment. A company, Ceylon Graphite, has a patent on a technology in the field of graphite that will provide it with income for a very long time. I put $30,000 in the company at 4 cents per share and I am waiting to see how it evolves. Do you think that putting all our eggs in one basket (although not generally recommended) can be interesting and profitable in certain cases?”
What you describe, Kevin, is simple: it is speculation.
When I started out, I speculated, and I lost everything. Almost everyone who is interested in the stock market started out that way. It’s almost a rite of passage. You have to touch the stove to realize that, in fact, it’s burning.
The worst thing that could happen to you is to make money from this investment. It would teach you that speculation works. And it would ensure that you lose even more money one day. As Zola wrote: “One dies, on the Stock Exchange, from such a victory.”
I’m not saying your analysis doesn’t make sense – all speculative investments seem logical. But the mining world is very much followed by experts – when you bought your shares, it was these experts who sold them to you.
Do you have information that they don’t? Often the answer is no.
It is crucial to be diversified. Diversification increases the chances of having a gain over time. Concentration decreases them.
Stop chasing home runs. Invest in a diversified, balanced index fund with low management fees. Focus on saving and investing regularly. Stop following the ups and downs of the market: it’s not the one that’s going to make you rich in the first place. For the next few years, every dollar invested will come from the sweat of our brow. That’s why the first $100,000 is the hardest to accumulate.
Read “Why the first $100,000
are the most difficult to accumulate”
Some lessons cost more than others. At least reading this article was free. We take the small victories we can get.