In 2002, Dr. Daniel Kahneman won the Nobel Prize in Economics for his research into the role cognitive biases play in decision-making during times of uncertainty. Specifically, he observed that we tend to have pre-conceived notions on just about everything, and those notions can influence almost everything we do.

According to Dr. Kahneman, our brains come hard-wired with two systems. The first is the system we use almost effortlessly to make quick judgments, such as reacting to a threat or reading the expression on someone’s face. The second is our “thinking system,” which, for example, kicks in when we have to do our taxes or multiply 27 times 38.

As a species, we tend not to like using System #2. Deep thinking causes us to burn glucose, dilate our pupils and increase our breathing. It’s much easier and quicker to use System #1. Unfortunately, relying on quick, easy conclusions can also get us into a whole lot of trouble.

Take the following example from Kahneman’s latest book, “Thinking, Fast and Slow” (named by Amazon.com as one of the Best Books of 2011). Let’s say you’re introduced to someone who is single, bookish, quiet, and who prefers their own company to the company of others. Would you tend to think this person is more likely to be a librarian, or a farmer?

Based on this description, most people immediately lean towards librarian. Yet in reality, there are almost 20 times as many farmers as there are librarians, so it’s actually statistically much more likely that the person we’re meeting is a farmer.

Of course, this isn’t to say that System #1 thinking is all bad. Our “think fast” system works quite well at a lot of things. For example, you don’t want to pause to analyze the physics of jumping when a speeding car is barreling down on you. Similarly, there’s no need to stop to calculate whether or not to hug your child when you see them in tears.

But our tendency to rely on the quick-and-easy System #1 for everything can often get in the way, particularly in areas where you may only occasionally need to focus your full attention. One of the best examples of these is your investments.

We all like to think we make sensible choices when it comes to our investments, and that we use our objective capacity to ensure our money goes to the right places. Too often, however, we let our feelings guide even our most basic and fundamental investment decisions, such as where to put our money or what to sell and buy.

I had a conversation recently with someone who’s in the process of selling his stock portfolio in order to go out and buy a condominium as an investment. After all, real estate, as we all know, has been on a tear for the last 10 years, and he wanted to get in while the getting was still good.

In other words, he was making this major life decision using only his System #1 thinking, which told him that real estate is always the best investment, without testing his assumption to see whether or not it was actually true. But what happens if we slow down for a second, and bring our System #2 “deep thinking” skills into play?

Consider the facts. The price for this particular condo was $500 a square foot. At this price, the rent he would be able to charge comes nowhere near covering the cost of his mortgage, let alone all the other expenses involved. In addition, renting out the condo would mean taking on the burden of tenants, and adding to his already-busy workload.

On the other side of the equation, the stocks he wants to sell currently have a dividend yield of about 3%. Stocks these days are trading around eight times cash flow, and are arguably at a very low point in the market cycle. They take no time or effort to own, and if history is any guide, they will return three to four times their capital over the next 20 years.

Now, I have nothing against real estate. I own some myself, and we’ve advocated incorporating real estate into some of our clients’ portfolios. The difficulty I see in this case isn’t that this person decided to buy a condo. It’s that, when asked what his reasons were for making the switch, all he could say was he’s “just more comfortable in real estate,” and “it’s real estate, so it will always go up.”

Doing something for no reason other than because it makes us feel “comfortable” is classic System #1 thinking. It’s what allows us to confidently make important decisions that completely ignore, or even outright reject, the actual facts.

If we take a look at the broad historical experience of the North American real estate market, we can definitely say that real estate doesn’t always go up. Just ask someone who bought a condo in Las Vegas or Miami five or six years ago.

But this person’s System #1 thinking told him that real estate is a can’t-lose investment. As a result, he felt comfortable making this choice, without taking the time to find out whether or not it was really the right choice for him.

The problem with his decision to sell the stocks isn’t about either the stocks or the real estate. The problem is that it’s a big financial decision, which should be made with careful, slow and detailed System #2 thinking.

System #1 works great for some things. Investments just aren’t one of them.

Alan MacDonald an Investment Advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

$26.3 billion.* That’s the dollar value of equity mutual funds that retail investors have liquidated in Canada since the start of 2011.

In the U.S., things are even worse. South of the border, a total of $266.2 billion* in equity funds have already been redeemed in 2011 alone. But that’s not the scary part. The scary part is that so many investors are cashing in their equities at a time when stocks are perhaps the cheapest (relative to interest rates) they’ve ever been.

At first glance, this may seem like a classic case of aberrant behaviour. Unfortunately, despite the fact that we all claim to know better, the pattern of investors buying high and selling low is anything but new.

If you were to look back over the last 40 years and draw a chart tracking the highs and lows of market cycles, and then overlay another chart of equity mutual fund purchases and redemptions along the same timeframe, you would see a very disheartening picture.

Most mutual fund purchases occur in a feverish frenzy at the very top of a market cycle, when demand is high and prices are even higher. And as we’re seeing now, most investors just as furiously sell their equity funds at the worst possible time, when the markets are at or near the bottom.

In other words, the lines on our chart are perfectly inverted to the way they should be, with the most redemptions at the bottom and the most purchases at the top. As an investment advisor, I have to ask the question: why? Why do investors continue to fly in the face of everything history has to teach us?

One argument I often hear is that the stock market is fixed, leaving little chance for the “little guy” to succeed. The only problem with this argument is that it simply isn’t true. The market is, by definition, almost perfectly liquid. Stocks don’t care whether you have $100 to invest or $100 million. They’re for sale regardless of who wants to buy, or how much money they have.

As a result, there are no real barriers to enter the market. Unfortunately, there are also no barriers to making a bad exit, either. This is where, over and over again, the little guy sabotages his own investment life, by buying at the peak and selling in the valley.

If you were to randomly ask 100 average investors, and 100 Wall Street tycoons, the single most important secret to success in the equity markets, the answer you’d probably hear most often from both groups would be to buy low and sell high. On the one hand, it seems like the simplest, most basic piece of investment advice. Yet, in my experience, it remains one of the most difficult things for most of us to do.

Take the current situation as an example. We are either at, or very close to, a market bottom. The record-low valuations tell us this beyond almost any shadow of a doubt. Logic would therefore dictate that investors should be flocking to buy equities while they’re still on sale at discount prices.

In reality, the opposite is happening. Thanks in no small part to the predictions of impending doom we’re being fed nonstop by all those 24-hour news channels, the average investor has forgotten that valuation will always trump fear and bad press sooner or later.

Of course, not everyone has given in to panic. Warren Buffett – who called the stock market an incredibly efficient tool for the transfer of wealth from the impatient to the patient – recently announced that, after never buying a single share of his own stock in his 40-year career, he will now be buying back up to $28 billion of Berkshire Hathaway stock because the prices are just too good to resist.

This isn’t to say that the declines we’ve experienced have no basis in fact. There will always be some crisis, some convincing list of woes that will make it hard for us to do what we know we should.

This is because it is hard. It’s not easy to hang onto your stocks right now, let alone have the temerity to go out and buy more before they double or triple in value. As human beings, we are genetically imprinted with a desire to follow the pack, and do what we see others do around us.

We read our investment statements when they come in, and month after month, we see our numbers – our hard-earned life savings – getting smaller. Fear trumps common sense, risk wins out over opportunity, and the sell orders go in. The more sell orders go in, the more stocks drop, which leads to even more sell orders, and the whole vicious cycle begins all over again.

But if you can step outside of this downward spiral, just for a moment, there are a few important clues happening that just might suggest an alternative strategy.

Right now, professional investors and insiders are busy buying. These are the people who focus on valuation, not the headlines on last night’s evening news. They know that stocks trading at eight times cash flow are a better investment than stocks trading at 15 times cash flow, especially when the alternative is a Treasury Bill paying one per cent interest.

So you have a choice to make. You can follow the herd, sell all your equities and stay on the sidelines out of the certainty that things will never get better, and stocks will keep going down until they hit zero. Or you can take the lead of insiders, professional investors like Warren Buffet, and some of the world’s largest publically-traded corporations, and take advantage of what may well eventually be remembered as the greatest buying opportunity of our generation.

It won’t feel good, mind you. Doing the opposite of what the crowd is doing never does. And the news will make you feel like a fool every day. That is, right up until the day they suddenly break the “surprising” news about the strong and sustained recovery, that no one could possibly have seen coming.

It may not happen tomorrow. It may not happen next week. But 200 years of history has proven that it will eventually happen. And when it does, all those “little guys” who got out of the market when it was at rock bottom will have missed the boat all over again.

The bottom line is, if you own stocks and equity mutual funds, and long-term growth is your objective, in my opinion, you’re in the right place. If you have the means, you might even want to buy a few more shares.

After all, there’s certainly no shortage of motivated sellers.

*All figures are obtained from Dimensional Fund Advisors, Canadian Business Update 2011.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

I know, I know. You read the headline for this article, and immediately assumed that I was either: (a) being facetious; (b) referring to some time long, long ago; or (c) crazy.

While there are days when my wife would insist on (c), the real answer to this question is none of the above. Believe it or not, over the past three months, the companies that make up the S&P 500 index earned more money than they have during any other three-month period in history.

Let’s stop for a moment and let that sink in. During the last fiscal quarter, while newscasters have been screaming non-stop that the global financial sky is falling, corporate profits for the S&P 500 – some of the largest and most important companies in the world – just set a brand new, all-time record high.

That’s not all. Most of the largest publicly-traded corporations in the U.S. are also trading at around eight times cash flow. When you factor in current interest rates, that means U.S. stocks today are the cheapest they have ever been.

Now, if you were to ask the average person on the street, they would probably have said that corporate profits must be down. Perhaps as much as 25% or 50% off from their pre-crisis levels, or at least as big a decline as their national stock markets, which (in Canada) is down 15% from its 12-month high as I write this.

So the fact that corporate profits are actually way, way up is great news, right? Then why haven’t we been hearing about that on the news, the same way we’ve been hearing about the riots in Greece or seeing the requisite shots of commodities traders with their heads in their hands, standing before a screen that’s awash in a sea of red?

Because news is also a business. And stories about Armageddon inevitably sell better than stories that say everything is eventually going to be all right.

Of course, you could also argue that it’s only a matter of time before corporate profits join the rest of us huddled together in the doom and gloom. After all, how long can companies continue to increase their earnings? Surely the party has to end at some point?

To answer that question, let’s look at one of Canada’s biggest companies: the Royal Bank. About 15 years ago, there was a protest by anti-poverty activists on Sparks Street. (Sound familiar?) The subject of their protest was the Royal Bank, which had just made history by being the first bank in Canada to surpass $1 billion in annual earnings.

If they had stuck around, those same protestors would have a whole lot more to complain about now. In the last quarter alone, the Royal Bank earned $1.8 billion. This year, they’re on track to earn northwards of $7 billion.

Today, if you have money to invest, you have a choice. You can buy a five-year GIC that will pay you about 2.73% per year. Or you could buy Royal Bank stock, and pocket a 4.5% annual dividend, plus the promise of lots of ups and downs as the market reacts to current events.

Despite earning 40% less than the dividend-paying stock, the GIC is proving to be far more popular these days, for the simple reason that we know it will never go down in value.

Stocks, on the other hand, have been going down a lot lately. As a species, we tend to extrapolate what’s happening in the present (or recent past) into the future. That’s why people who think they’re “on a roll” continue to make casinos one of the most lucrative business models on the planet.

But not all investors are so certain that the bad times are going to last forever. Remember those corporations with all their record profits and newfound cash flow? While the rest of us were running for shelter, they’ve been busy buying back their own stock at a furious rate.

In the U.S., for example, corporations have bought back almost $500 billion of their own stocks over the past year. Directors and corporate insiders are also buyers these days, taking advantage of the unprecedented fire sale to pick up stocks at rock-bottom prices.

In the near future, we can expect more volatility as the governments of the world wrestle with debt challenges and the unemployment rate remains stubbornly high. But in the midst of all the headlines heralding crisis after crisis, it just might be a good idea to take a few seconds, take a deep breath, and remember that 2011 is also the year of record-high earnings and low valuations for publicly-traded companies.

Then ask yourself: do you want to wait until things get better and prices go back up? Or do you want to follow what the smart money is doing, and buy low while you still can?

Alan MacDonald an Investment Advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

A grandfather was recounting an amusing moment with his young granddaughter. They were getting into a minivan and, as the granddaughter inserted her favourite DVD; she asked granddad what sort of DVDs he watched in the car when he was six years old.

When he told the youngster that there were no DVDs, certainly no cars capable of playing them, and television had yet to be invented when he was six – he was met with a simple stare of incomprehension. Then the six year old went back to selecting her favourite scene on the remote control.

I relate this story because it’s almost impossible for us to grasp the enormous progress that mankind has made over the past 50 years. The diseases that threatened children and adults alike 50 years ago have mostly been wiped out in the developed world. We have technology at our finger tips that, even 20 years ago, would have had NASA in a swoon.

It’s also almost impossible to imagine the wealth creation that has occurred in the stock markets over the last 50 years. To give an example, the S&P 500 stock index, on October 1st 1959, stood at 59.89 points. As I write this column (October 6, 2011 the S&P 500 stands at 1147 points). That’s a pretty good run, but it doesn’t include dividends. If an investor were to reinvest the dividends paid out by the stocks in the index, the wealth creation would be a multiple of the 17 fold increase in the index.

Today there is a lot of pessimism. We are just starting to work our way out the other side of one of the worst bear markets in history. Comparisons to the great depression abound and, implicit in the fear and the pessimism that rules the day, is the notion that there will be no further progress. We have had the good times, now comes the permanent hangover.

Like most hangovers, they rarely seem to end quickly enough. But the markets and progress will march on. The two are tied together through the economy, which has also grown and will continue to grow in the face of relentless progress.

In the modern age, every generation lives longer than the previous generation. It was only a hundred years ago that you were lucky to make it past 50. We tend presume that our experience in the future will be much as it is today. It’s human nature to extrapolate whatever is happening today into the future. But as the little girl at the start of this story shows us, progress creeps up on us and things that were once impossible become as routine as morning coffee.

If you can remember the leap from no television to playing your favourite DVD in the back seat, it’s not hard to conclude that a lot of our problems today will be solved by innovation we have yet to experience. Innovation will spark growth, growth reflects in the economy and the economy moves the stock market. It is not about if this will all happen – it’s merely a question of when.

What happens in the next few years to capital markets is anybody’s guess. But portfolios are usually built to fund long term liabilities such as retirement. As both progress and the S&P 500 tell us, growth is inevitable. In spite of recent experience and the uncertainty of today – stocks remain one of the best possible assets to fund the expenses of a long lifetime.

Alan MacDonald an Investment Advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

I had the pleasure of being challenged by a client the other day about the whole notion of putting money into stocks.

I say it was a pleasure because, first, it gave me the opportunity to clarify my own thinking about a question I suspect many people are struggling with these days. Second, the client is a person of goodwill, who I know was only sharing his genuine concern and fears with me.

The question the client asked was whether I thought the strategy of investing in stocks, since 2005, could be deemed successful.

To put this into context, since 2005, the world stock markets have produced, on average, a negative rate of return. The question was clearly meant to be rhetorical, under the assumption that the answer was a given – namely, since stocks were down over the past six years, investing in them must have been an unsuccessful strategy.

As part of my response, I asked the client if he could give me a definition of what “success” meant to him when it came to investments. He thought the answer was, once again, obvious: that success is measured by a steady gain or return.

As I get a little older (and slightly greyer), however, I have become increasingly cautious of things that are “obvious.” Let me give you a few examples why.

In the 1990s, it was obvious to most investors that investing in Nortel was a successful long-term strategy. In fact, in 1999, I had a conversation with a client who was working as an engineer at Nortel, about diversifying his $6 million in company shares into a broader stock portfolio.

This client, who was 64 years old at the time, had everything invested in Nortel – his retirement plan, his stock purchase plan and all his savings. His response was: “Mr. MacDonald, I’ve been told by people like you to diversify ever since I started putting all my money in Nortel. If I had followed their advice, today, I’d have less than $600,000.”

At the time, he was absolutely right. Had he invested his money in a broad portfolio instead of a single stock, his net worth would’ve been only a fraction of where it stood that day. So far, his strategy of investing in this “obviously” successful stock was paying off in spades.

Within a year, the value of Nortel shares dropped by half. I called my client to tell him that he was still independently wealthy, and that it wasn’t too late to cash out his remaining $3 million in value, and invest it in a more balanced way.

His response was that he had no intention of selling. In fact, if he could, he would be buying even more Nortel shares at these “low” prices.

We all know what happened next.

At around the same time, I had a similar conversation with an engineer at JDS Uniphase. This fellow was even more confident in his company’s future success than the Nortel engineer had been. So when shares in JDS dropped, he used a leveraged margin account at a discount broker to buy even more of them. This strategy was extremely successful – right up until the moment when it suddenly wasn’t.

Fast-forward back to the present. When I met with the client who had asked me about the wisdom of investing in stocks over the past six years, I told him that it all depends on how you define a successful investment.

My definition of investment success is a portfolio that delivers the results you require, over the specific timeframe you set for that investment.

If your timeframe is a year (meaning you’ll need to have access to that money within the next 12 months), then you should invest it in something that’s guaranteed not to lose money.

If your timeframe is rather longer – like, say, a retirement plan that needs to span more than 30 years – then you will need a portfolio that can deliver a return substantially in excess of inflation, over the course of a 30-year period or longer, without your money running out of time before you do.

Let’s take everyone’s current favourite investment as an example: gold.

Last month, gold briefly topped $1,900 an ounce. When this happened, the value of the SPYDER Gold Trust ETF (the most heavily-traded gold Exchange Traded Fund in the U.S.) briefly exceeded the value of the SPYDER S&P 500 ETF (the most heavily-traded stock Exchange Traded Fund in America).

All summer long, investors have been piling into gold despite the fact that, as an asset class, it has no earnings and no chance of income. In fact, over the last 30 years, gold has barely kept up with the rate of inflation – and that’s including this latest, frenzied run-up.

These investors have likely been selling stocks (which are arguably currently under-valued) to buy this asset (which is sitting at an all-time price high). Moreover, the stocks they’re selling to buy gold represent ownership in companies that have earnings, pay dividends, and which are steadily growing their earnings year after year.

As for gold – already, a third of the money that’s sitting in the SPYDER Gold Trust ETF was put there at prices higher than the price of the fund today.*

I don’t know if gold will keep going up from here, or for how long. But it strikes me that all these investors who are chasing after this one asset class may not have thought carefully enough about their definition of success, their timeframe, or the likelihood that their investment choices today will be able to deliver on their long-term goals.

There’s no doubt about it – we’re living in unusual times. Flat 10-year returns and global debt crises have driven markets down. Today, stocks are relatively inexpensive, and in many cases, their dividend yields exceed those of 10-year Treasury Bills.

Given all that’s happened over the past few years, investors can certainly be forgiven for their frustration and impatience with stock market fluctuations. But putting frustration in the driver’s seat of your long-term goals is a good way to end up in the financial ditch.

When you’re picking a portfolio that will meet your goals over the long term – make sure it’s one that can get you there from here.

*Source: Nick Murray newsletter – Issue 9, Vol 11.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

The S&P 500, a stock index that represents 500 of the largest publicly-traded companies in the United States, has had one heck of a tough summer.

Ongoing angst over European debt, U.S. unemployment and other ill winds have pushed share values lower throughout the months of July and August. Today, as I write this article, the S&P 500 sits at 1,150.

As a result of all these negative results, most investors are trying to decide how to position their holdings for the next inevitable decline. Should we pile everything into gold? Buy U.S. dollars? Or follow whatever other plan of action is currently being screamed at us non-stop by the 24-hour cable news networks?

What very few investors are thinking about, is how they should be positioning themselves for when the S&P 500 hits 3,000.

This probably isn’t terribly surprising. When we seem to be getting nothing but bad news after bad news, it’s hard to imagine that the S&P 500 will ever move in an upwards direction again, let alone triple in value. Yet there is no doubt about it: the S&P 500 will eventually reach 3,000. We just don’t know exactly when.

If we take a look back at history, however, we can perhaps get a better idea of how long this type of increase might take. To go from 1,150 to 3,000, the S&P 500 would have to grow to about 2.6 times its current value. Working backwards, the S&P 500 was worth 2.6 times less than it is today when it stood at 442.

So how long ago was the S&P 500 hovering around the 442 mark, representing roughly a third of its present value? Was it in 1982? 1967? 1945?

None of the above. The first time the S&P 500 hit 442 was on January 4, 1993 – just 18 ½ years ago.

Investors in 1993 had no idea that they were going to triple their money over the next 18 years. In fact, they actually tripled their money in less than seven years, but the index has essentially posted a zero annual average rate of return over the past decade.

Of course, this could just be an aberration. So let’s go back a little farther, to see what else we can turn up.

In the 1950s, the S&P tripled in eight years, from 23.35 on July 1, 1953 to 71.70 by July 1, 1963. In the 48 years since, the S&P has grown to more than 16 times its 1963 value. On average, this represents a tripling of the value of the index an average of about once every 18 or so years – including the flat 10-year period we just passed through.

But despite the historic inevitability of the S&P 500 eventually hitting 3,000, investors have a very tough time imagining it. I can’t blame them. I have a tough time imagining it, even though I’ve seen the S&P index grow from 159 when I started my financial career in 1984, to the comparatively dizzying heights of 1,150 today. It’s just hard to imagine a positive future when you’re surrounded by nothing but bad news.

This is, of course, part of the inherent nature of progress. The fact that your great-grandfather couldn’t imagine an operating room lit by electricity when his children were being delivered by candlelight doesn’t mean it didn’t happen. The Internet, which has changed the way we do just about everything, barely existed only two decades ago.

And remember that smartphone you can’t live without? It has more computing power than the mainframe computers that the federal government used in the 1970s. That’s another one I didn’t see coming when I was punching all those computer cards back in high school.

If there’s one thing the past teaches us, it’s that the future is never just an extrapolation of the present. It is shaped by things that lie entirely outside our current way of thinking.

In fact, just about the only thing we can be sure of, is that we have absolutely no idea what the future will bring. All we know for certain is that it will be completely different from anything we can imagine today, and that it will change our lives in ways we can’t begin to fathom.

The likelihood of the S&P 500 hitting 3,000, someday relatively soon in the overall scheme of things, is 100 per cent. The likelihood of the TSX composite hitting 30,000 (compared to its current 12,400) is equally certain. The only questions are when it will happen, and how many highs and lows we’ll have to pass through on our way there.

The fact that we’re having a hard time imagining it is irrelevant.

Alan MacDonald an Investment Advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.

Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

When I started in this business back in 1984, I thought I had signed on for the easiest job in the world.

My only experience with the markets prior to becoming a financial advisor was the spectacular run-up that followed the recession of 1982. During that time, the North American markets posted some great results, with the S&P 500 returning 21.4% from 1982 to 1983, 22.5% the next year, 6.3% the year after and then 32.2% the year after that.

Non-North American markets had an even headier time. International large cap stocks, for example, returned 31.1% between 1983 and 1984, 15.8% between 1984 and 1985, 64.2% from 1985 to 1986, and 63.3% between 1986 and 1987.

In other words, I – like pretty much everyone else at the time – assumed that stock markets existed for one thing, and one thing only: to offer investors a constant and uninterrupted guarantee of high annual returns. My job was just to convince people to pile their money into stocks, and then sit back and watch them get rich.

My wake-up call came on October 19, 1987. I still vividly remember watching, awestruck, as the Dow Jones Industrial Average plunged 508 points in a single day.

Now, veterans of recent market events might think that a 508-point drop is nothing to shout about. But in 1987, the Dow stood at around 2,000 points. A 508-point drop represented a loss of 25% of the value of the entire index. In today’s terms, with the Dow currently at around 11,000 points, this would be the equivalent of a one-day drop of nearly 3,000 points.

In other words, it was a very big deal.

Yet despite this seemingly catastrophic event, if you’d had the good fortune to be living on a desert island between 1987 and 1988, you might be forgiven for wondering what all the fuss was about.

It took less than a year after that unthinkable drop for the markets to not only recover all the value they lost that day, but to set new records that were even higher than their pre-1987 peak.

In fact, except for a few hiccups, the 1990s were by and large years of uninterrupted growth for both the stock and bond markets. Fuelled by this success, the doctrine of “buy and hold” took root. Financial planners started routinely generating retirement income projections that assumed a 10%, 12% or even 15% annual rate of return.

Then the year 2000 showed up. And like 1987, it was determined to spoil the party.

Most investors at the dawn of the new millennium were over-exposed to high-flying technology stocks. When those stocks came crashing back to earth, investors suffered huge setbacks. A few held on, and watched as their lost value slowly crawled its way back, posting modest but decent gains for several years.

Their reward for all that patience? The credit bubble of 2008, which almost overnight sent world stock markets back to levels not seen since a decade before. In 1999, the S&P 500 stood at 1,500. Today, it is hovering around 1,148.

A zero-percent 10-year return is enough to put a damper on even the most determined optimist, not to mention throwing a very large wrench into the gears of the most well-intentioned retirement projection. But before we throw up our hands and throw the whole idea of investing in equity markets out the window, let’s take a moment to expand our horizon just a touch, and consider where the 20-year rate of return stands today.

Over the 20 years from 1990 to 2010 – a period that includes all the bad news of the past 11 years – the average annual compound rate of return for the S&P 500 was a solid 8.8%. The TSX composite index, compounded over the same timeframe, grew by an average of 8.5% a year.

This is not intended in any way to discount the pain that investors have been going through lately. But it’s important to remember that there have been other long periods that registered a zero-percent return in the stock market, or worse.

The years between 1930 and 1942 produced no net gains for the S&P 500. Ditto for the years from 1966 to 1975. Yet, in both cases, those years of consecutive drought were followed by decades that racked up some significant gains. Today’s S&P 500 ceiling of 1,140 may seem pretty depressing. But when you think that, in 1966, it stood at 80 points, suddenly 1,140 doesn’t seem so bad.

The true tragedy of the recent turmoil is that it is causing more and more investors to become discouraged enough to sell all their stocks, and get out of the markets entirely. Currently, stock-based mutual funds are facing the highest rate of redemptions at the bottom of a nasty bear market. People are just getting tired of bad news and no returns.

But if history is any guide at all, selling now – when stocks have taken a severe beating – is almost certainly the most risky thing you can do. Investors have been through the worst over the past decade. That is precisely why things are bound to get better.

This isn’t just pie in the sky optimism. Consider the facts.

Stocks are trading at inexpensive valuations. Many are paying dividends that are higher than bond yields. And the largest companies in the U.S. have the more cash on hand right now than at any other time since the Second World War.

The value is there. We just have to hold on until the shell-shocked markets see it.

*Source for all figures: Dimensional Matrix Book 2011.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

We’ve all seen the headlines on the six o’clock news. Around the world, governments are struggling to balance their books. And many of them don’t seem to be succeeding very well.

The most notorious example at the moment is Greece. The Government of Greece has a $350-billion debt, which represents roughly 150 per cent of its entire Gross Domestic Product (GDP).

To put this in context, Canada is currently about $560 billion in the hole. But because our GDP is in the ballpark of $1.3 trillion, our debt-to-GDP ratio is actually about 47 per cent, or less than a third of the same ratio in Greece.

While a $560-billion debt doesn’t exactly inspire confidence, we’re also looking pretty good compared to places like the U.S. (whose $14-trillion debt represents 100 per cent of its GDP) and Italy (where the debt is around 120 per cent of GDP).

The reasons behind these almost unimaginable levels of debt are as well known as they are widespread. Governments across the globe are facing a perfect storm of aging populations, soaring health care costs, increased spending on benefits due to the recession, and program spending that is steadily outpacing revenues.

Clearly, we all have some tough choices to make. And as the deadlock in the U.S. Congress over raising their debt ceiling proves, making those choices is not going to be easy.

But for the individual investor, these turbulent times are not without a few silver linings. Up against this backdrop of public-sector red ink, for example, is a corporate world that is almost literally awash in cash.

Many of the world’s biggest publicly-traded companies haven’t had this much cash on their balance sheets since the end of the Second World War. Corporate profits are, in general, pretty healthy. As a result, the notion of what constitutes a safe investment – and what doesn’t – is being turned on its head.

In Greece, for instance, a company with a good balance sheet can borrow money at a substantially better rate than its own government. In the U.S., Berkshire Hathaway recently issued a bond that carried a lower interest rate than U.S. treasuries.

As the reality of this new state of affairs sinks in, savvy investors are beginning to look at the numbers, and coming to believe that a huge wad of cash on a company’s balance sheet just might be as good – or better – a “guarantee” than a promise from a government that can only afford to repay you if they can borrow it from someone else first.

Some of this is good news for stock holders. Big companies, desperate to find something to do with all their surplus cash, are buying back their own stock at a tremendous rate.

Ever heard of a little retail outlet called Walmart? The Walton family has evidently decided that there is no better home for their billions than Walmart stock. At the rate they’re currently buying, it won’t be long before they will once again own the majority of the shares in their namesake company.

Oil giant Exxon is similarly buying back its stock at a rate that, if kept up, will see every single publicly-traded float for the company retired within the next ten years. And Microsoft – whose shares are trading at the same price today as they did ten years ago, despite the fact that their earnings have doubled – is dumping $2 billion of free cash onto its balance sheet on a monthly basis.

The same story is being repeated across most of the multi-national blue chip stocks. In virtually every industry, big companies are deciding that their stocks are so attractively priced that the best thing they can do with their cash is to gobble them up, before the fire sale comes to its inevitable end.

What does this mean for you and I?

When a company you own buys up its own stock, the remaining shareholders get a larger share of the earnings. If the company in question had, say, 10 million shares outstanding, and it buys back a million shares, then the same earnings that used to get spread over 10 million shares now get spread over nine million shares. This gives each of the remaining shareholders a larger piece of the pie.

You might think that this trend would convince the investing public to put more of their hard-won savings back into stocks. In the U.S. market alone, for example, stocks are trading at around 8.5 times cash flow – a pretty good deal, when you consider that ten-year U.S. treasuries are yielding about 0.5 per cent less than the dividend yield on the Dow Jones dividend index.

Unfortunately, after all the ups and downs of the past few years, risk-weary investors are still largely deciding to leave their money on the sidelines. This is a shame, because those who are willing to accept that reward always comes with some measure of risk, could do a whole lot worse than follow the lead of all those companies who are voting with their wallets, and deciding that there’s no better place in the world for their cash right now than their own common stock.

Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. He is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

For many Canadians, Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are both the first and last stop on their investment journey. And for the vast majority of us, there’s nothing wrong with that.

RRSPs and TFSAs can be great investment vehicles, which offer significant tax advantages over other types of investments. Plus, most people nowadays consider themselves lucky if they can save enough to max out their RRSP (currently set at an annual contribution ceiling of $22,450) and still have enough left over to top up the $5,000-a-year limit on their TFSA.

But if you are among those few who are fortunate or hard-working enough to be able to save more than the annual limit on your RRSP and TFSA, you may find yourself looking around for the next tax-favoured place to invest your surplus cash.

The easiest thing to do is to open an investment account and drop your extra dollars there. A regular deposit into a good index fund or low-cost stock mutual fund will grow nicely over time, while enjoying the beneficial tax rates associated with capital gains.

A regular monthly deposit also lets you take advantage of what economists call the “dollar cost averaging effect.” Dollar cost averaging means that, because you’re investing the same amount each month regardless of whether share prices are up or down, you end up buying more shares when prices are low and fewer shares when they reach the top of the cycle. Over time, your average cost per share will therefore end up being considerably lower than the average share price.

Another good option for some is a whole life insurance policy*. Whole life insurance (called “whole life” because it is permanent, unlike term insurance, which expires when you reach a certain age) allows investors to put more money into a policy than it takes to pay for the cost of the insurance.

This extra money grows inside the policy on a tax-exempt basis. This growing cash can then be accessed when you retire, or left to your estate completely tax-free.

Whole life insurance can be a particularly good option for business owners who hope to pass their business (or its value) on to the next generation. In these cases, the business owns the policy and pays the premiums.

When it’s time to retire, the business owner can access the cash value of the policy through a loan from their company. If the owner dies, the policy will pay out a tax-free lump sum to their designated beneficiary. These tax-free proceeds can then be used to secure the family finances or fund a specific legacy.

Whole life insurance can also be a good idea for people who have insurance liabilities. A breadwinner whose spouse and children rely on their paycheque, for example, needs to be sure they have enough insurance to replace that paycheque if the grim reaper decides to put in an early appearance.

If budget is an issue, it’s probably more important to make sure you have enough insurance coverage to take care of your family, rather than focusing on a particular kind of coverage. Term insurance, for instance, is cheaper than permanent insurance, because the coverage will eventually expire. But it will still protect your loved ones if anything happens to you during your prime earning years, when they most need your support.

If you have the extra cash, however, the advantages of permanent insurance as an accumulation vehicle and tax-planning strategy can be very impressive. Business owners, in particular, tend to have significant insurance liabilities, and whole life insurance can be a great, tax-favoured place to put corporate dollars.

If you would like to find out more about these and other options that may be available to you, send us a note or give us a call.

Also, we are pleased to be bringing Tom Deans to town for a speaking engagement. Tom is a best selling author and advisor on preserving and growing the value of family owned businesses. If you or someone you know owns a family business, we would be delighted if you could join us on June 23rd to hear Tom speak. For more information about this event visit: http://www.gowlings.com/Events/Invitations/2011/OTT_0623.en.html or contact Kathy Brunelle at 613-788-8011.

* Insurance services are offered through Richardson GMP Insurance Services Limited in BC, AB, SK, MB, NWT, ON, QC and PEI. Additional administrative support and policy management are provided by PPI Partners. Alan Macdonald is insurance licensed.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

At first glance, it might seem like an odd thing to worry about. But if there’s one trend that I’ve begun to notice in my financial practice, it’s that more and more Canadians are concerned that they’re going to live too long.

As recently as a few generations ago, we humans were lucky to make it to our 40s. Living into our 50s or 60s was a true rarity, which meant dodging high infant mortality rates, a host of childhood diseases and a life of back-breaking labour.

Today, we are the most affluent society that has ever called this little blue orb home. Yet the pollsters say that our number one worry is money – including the fear that we won’t have enough of it to fund a comfortable lifestyle for nine or ten decades of life.

In the “good old days” (before we had luxuries like indoor plumbing, access to medical care and enough food to eat), most people worked until they died. The good news was, this often didn’t take very long. The bad news, was that the notion of having time to relax and enjoy one’s “golden years” was as foreign a concept as iPhones or the internal combustion engine.

Then, in the late 1800s, the German Chancellor Otto von Bismarck introduced the world to a brand new idea: retirement. Not surprisingly, the idea that people should actually stop working 14-hour days at some point in their lives proved popular, and it wasn’t long before it caught on in North America.

Of course, even in the early part of the last century, this new-fangled “retirement” didn’t last very long. The life expectancy for the average North American male in 1960, for example, was just 67 years. So most people typically worked until they turned 65, got a gold watch and a hearty handshake in thanks for all their years of loyal service, and then had at most a few months to enjoy life until they kicked the bucket.

Fast-forward a few decades to the year 2011. Today, there is a very good chance that at least one member of the average Canadian couple will live into their 80s or 90s. This is, for the most part, a good thing. But it also creates a number of new problems we never had to think about before – like the possibility that many of us could outlive our carefully-feathered nest eggs.

As a financial advisor, I often meet people who are in danger of outliving their savings. This can be due to unexpected longevity and escalating costs eating up their capital as they get older, or they may be facing unforeseen assisted living or other health care costs.

Whatever the cause, these people are in a tough spot. To fund the rest of their lives, they need to get a higher return on their money. But because they’re at the stage of their lives where they’re using their savings to live, they’re in no position to take any kind of risk with their capital.

As a result, their options often come down to an unpalatable choice between living in near-poverty on dismally low interest, or taking a risk that they’ll lose everything they’ve worked so hard to build.

When I meet with someone in this situation, one of the first alternatives we generally explore is a life annuity.

Life annuities are guaranteed income contracts you buy from an insurance company. I use the word “buy” rather than “invest” because, once you purchase an annuity, your capital is gone. There are options available that allow for the return of part of your capital to your estate upon death.

In exchange for your capital, the insurance company enters into a contract to pay you a specific amount of money every month for as long as you live. In essence, this gives you a guarantee that you won’t outlive your income. For couples, the monthly payment from an annuity can also be guaranteed until the last surviving member of the couple passes away.

Annuities can be a very interesting planning tool as we get older. In general, the older you are, the higher the monthly payout.

This is because insurance companies know that, statistically speaking, older people generally have a shorter remaining life expectancy than younger people. So if they sell several thousand (or several hundred thousand) annuities, they can price their contracts according to the current average life expectancy, and still turn a tidy profit.

Let’s say, for instance, that you just turned 75. If you buy a life annuity, the payouts will be very high, because the insurance company doesn’t think you’ll be around much longer to enjoy them. If you outlive the average life expectancy, you win – not just because you’ll have more time to spend with family and friends, but also financially, because you’ll keep getting paid even if you live to be 110.

Of course, there are no free lunches. The price for this kind of financial peace of mind is that you have to hand over your capital in order to gain the guarantee of lifetime income. But in the right circumstances, this may be the best thing to do – especially if longevity happens to run in your family.

Annuity payments also have another feature that can have a dramatic impact on how much money ends up in your bank account. If the annuity is purchased with funds outside of an RRSP, a large percentage of each monthly payment is classified by the CRA as a return of capital, and therefore not subject to taxation.

If your assets are in danger of being depleted, or if you just want to convert a portion of your assets into a guaranteed monthly income so you can have the financial freedom to enjoy your retirement, then annuities might well be worth a look.

Just remember that annuity rates can vary widely from one company to another. So make sure you find an advisor who can access a variety of insurance companies, and help you decide what course of action is right for you.

Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. He is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.