I have a friend who, about 15 years ago, decided to abandon the rat race. He and his wife set out on a cross-country trip, aiming to settle wherever they found the best skiing. Their quest led them to the interior of British Colombia, which is where they still live.
Rick is now a professional ski guide, and a fully certified mountain guide. His job is to lead groups of tourists through days of heli-skiing, back-country skiing or cat skiing – and then get them back again safely. In other words, Rick gets up in the morning and gets paid to ski top-notch powder all day long. That sounds like a pretty nice life to most of us.
By contrast, I’m sorry to say that I do most of my own exercising in the relative comfort and safety of urban gyms or parks. I knew that if I ever ventured into Rick’s domain, I’d need some serious help. So last time I saw him, I asked him what qualities I should look for in a mountain guide.
Rick’s response surprised me. “Find someone old,” he said. I was puzzled: I’d have thought younger was better when it came to that kind of arduous pursuit.
But Rick enlightened me. There are young aggressive guides, he told me, but there are no old aggressive guides. In the mountains, being aggressive is the one quality that ensures you won’t make it to old age. So an old guide is, by definition, not just experienced but also very careful. In fact, such wisdom itself is the sort that can only be dispensed by experience. It’s free from statistics, devoid of hype, and intuitively obvious – once it’s been pointed out.
Of course, in its way, my own world is just as dangerous as Rick’s. It too can often entrap the unwary with plunging stock prices, unpredictable financial markets, and treacherous interest rates. That’s why in my field too, you need to pick your guides with care. If a financial advisor combines youth and inexperience with too much aggression, those qualities won’t kill you – but they may well keep your cash from making it to old age.
So what’s the financial equivalent of my friend Rick’s sage musing? You could usefully start with some basic philosophy. Ask yourself (or your advisor): what do you believe about capital markets? Do you think you know what the stock market will do next year, for example? What the national economy will be doing? What type of asset class will perform best next year or what sector? If you answer “yes” to any or all of those questions, here’s something you might consider: a rather large body of evidence suggests that short-term movements of the market are essentially random – and therefore quite unpredictable.
That probably leaves you looking at your portfolio and wondering what to do. Many investors start by asking themselves, “Which investments are likely to give me the best return?” But the question they should really be asking is a slightly more complicated one. It runs: “Since no one really knows what will happen, how do I get a reasonable return AND still keep my money, even if the worst happens?”
Those two questions lead to very different places. The “best return this year” approach can lure investors into short-sighted strategies: betting on stocks, short-term trading, flipping real estate, charging in and out of markets. If you’re very lucky, this activity can sometimes work out well. But if luck isn’t with you every step of the way, it could kill you financially.
The cautious approach, by contrast, leads investors to diversify broadly, plan for the long term, assess worst-case scenarios, and have reasonable expectations. In short, the daily noise of financial markets is a lot like a Warren Miller ski film. It’s fun to watch, and doesn’t even look too dangerous – mostly because you don’t get to see the parts that end up on the editing-room floor. That illusion makes the activity look safer than it really is.
But in real life, risks don’t go away; and hype always melts away over time. What counts most is that your strategy works, and for a long lifetime. Portfolios are at their best when they’re diverse, maybe a bit boring – and when, like good ski guides, they make it home every day.
Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com.
Most of us view retirement as the inevitable final chapter of our work life. We go to school, we hit the job market, we work for several decades, and then at some point we pack in the nine-to-five business. For many years now, there has been an entire industry devoted to planning, saving, investing and insuring people’s retirements.
And retirement is much on people’s minds right now – not to mention in the media and in the bookstores – because we baby boomers are all heading into our twilight years. Like so many other things that affect this huge cadre, retirement has become a big issue. But though we think of retirement as a natural part of the lifecycle, in fact it’s anything but. Retirement is a purely man-made phenomenon, invented in the late 1800s by that great social reformer, German Chancellor Otto von Bismarck. Confronted with widespread unemployment among the youth of his country, Otto feared a revolution unless he could create some meaningful work for them. As any politician can tell you, having a large portion of the population idle and disgruntled is bad for business. So with a stroke of genius, he came up with the concept of “the golden years,” and put all the older workers out to pasture. This allowed the youngsters to get their chance at bat.
The idea worked well in Germany for several decades. And when the Depression hit North America, our politicians were faced with the same dilemma. They looked at Germany’s example, and saw mandatory retirement as a tool that could work on their own social issues. The idea worked so well that for several generations, we have all assumed unthinkingly that retirement is some kind of natural progression. But as with any policy tool, it has its strengths and its shortcomings. For many people, retirement is a welcome respite from their years of toil. Others, though, have a much more difficult time coping with the transition from busy-ness to enforced idleness. Retirement for them is more like putting a piece of machinery in mothballs, or closing down a thriving factory: there’s a sense of loss and waste. The fact is most Canadians don’t plan to retire anytime soon. Most of us have good work skills that will allow us to earn and be productive for a long time yet. We may work different hours, or just do parts of jobs we like, or even work without pay for charity; but we will likely continue to work in some fashion. Still, many people fear retirement – and financial planning is a big part of that fear.
In most companies in North America today, pension plans have gone the way of the dodo. Now, people face the challenge of funding their own retirement. To help them with this task, many turn to commercial software packages. They don’t provide much comfort, though. Assuming you’ll live for twenty or thirty years after you retire, and that you’ll want a reasonably comfortable lifestyle, the funding requirements can run into the multi-millions. I find that the effect of this is usually to completely discourage people from planning their retirement funding. When the numbers get too big, and the savings required too onerous – well, most investors would rather just forget the whole business. They sweep it under the rug, and plan to deal with it another day. But such unexamined problems unfortunately tend to weigh more on your psyche the longer you ignore them. So instead of trying to pretend that this particular 800-pound gorilla isn’t really on your back, let’s try to do some planning. Realistically, there are only two sensible approaches. You can either choose your retirement age and the lifestyle you want, and then save toward that goal; or you can realistically determine how much you can possibly save, how much it’ll net you at retirement, and then accommodate your lifestyle to that budget. If you choose the latter, there are various adjustments you can make to decrease your income requirements. You might consider moving out of the city, or even out of the country. In Mexico, for instance, you can live very nicely for about half of what it costs to live in most parts of Canada.
Granted, that’s not for everyone; but it is an option – and you’d never have to shovel snow again. Then again, you may not have to do anything at all. I had a client once who was petrified of retiring: he earned $250,000 a year, and thought he needed millions to replace that income. But when we closely examined his situation, it turned out that he was actually living on only $60,000 per year – that was the real figure his retirement income had to replace. His personal gorilla got a lot smaller that day. There’s a valuable lesson: when you look hard at your cash flow, remember to eliminate the expenses that will go away in the future: things like high taxes, contributions to savings plans, etc. Remember, retirement is just a concept that someone made up – one possible ending for your personal life story. If you’re creative enough, feel free to rewrite the plot to suit yourself.
Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com.