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.

Most ads for financial products and services focus on their impressive rates of return, usually accompanied by images of very serious-looking people wearing designer glasses and $2,000 suits.

The unspoken implication behind these ads is that these perfectly-tailored men and women are the financial equivalent of professional athletes. Clearly, these ads seem to say, we can play the game much better than you, so if you know what’s good for you, you’d better hire us to manage your money – and do it quick.

After all, these are intelligent, educated and informed individuals, who – in addition to their expensive wardrobes – have years or even decades of experience and expertise. It just makes sense that, when it comes to picking investments, they would have an insurmountable advantage over your average working stiff who just walked in off the street. Right?

This may come as a surprise, but in fact, an average of 80 to 90 per cent of all those highly paid, serious-looking experts are routinely bested each year by even the most basic stock market indexes.

Stock indexes are called “passive investments” because there’s nobody behind them trying to actively time when to buy or sell a particular security. Instead, stock indexes just buy a small piece of every company in a given market, and then hold onto them regardless of what the analysts are saying.

At first glance, this disparity between expectation and performance doesn’t seem to make sense. Why are all these extremely capable and intelligent people being paid so much for their expertise, if they can’t even beat an average market benchmark?

The answer lies in the fact that trying to time the market requires you to be able to predict the future, and even the highest-paid experts have as much trouble as you or I in guessing what’s going to happen tomorrow. As the saying goes: “economists have successfully predicted 17 of the last two recessions.”

Stock markets are affected by a vast number of different variables, each of which is constantly in motion. The sheer number of possible outcomes that can result from the interaction of all of these variables is what takes stock picking out of the realm of disciplined financial analysis, and turns it into little more than a high-stakes guessing game.

What does this mean for the average investor? If market indexes can give us a rate of return in the top 10 percentile, can’t we just fire all our managers, buy some big-box index funds and live happily ever after?

Unfortunately, this approach – as tempting as it may sound – has one very big catch. If there’s one conclusion I’ve been able to draw from my 20-plus years in this business, it’s that people need financial experts the same way professional athletes need coaches. It’s not that NHL hockey players don’t know how to score a goal. They rely on their coaches to help them with everything that comes before, during and after they take their shot on net.

To put it another way: left alone, investors have an alarming tendency to do the wrong thing at the worst possible time.

Take, for example, the huge net liquidation of equity mutual funds that has occurred over the past two years. Most investors are aware in theory that buying high and selling low is a bad idea. But in practice, that’s exactly what they’ve been doing for the past 24 months, to the tune of more than $100 billion.

In my opinion, the reason we’ve seen so many otherwise intelligent investors bail out of the markets at the bottom of a cycle isn’t because they truly believe that the markets will never recover. It’s because they think that their advisor or manager should have seen it coming.

Think about it – if you hired a world-class travel agent to plan your dream vacation, and they overlooked the fact that the resort they were sending you to was about to enter its monsoon season – wouldn’t you be more than a little upset?

Similarly, if you hired a top financial manager, with all their accolades and expertise, shouldn’t they have been able to foresee what was coming, and warned you to get out of the markets before the storm hit? Isn’t that what you’re paying them for?

Instead, when the inevitable drop came, and all those carefully analyzed and hand-picked stocks went down with it, investors lost confidence in the whole system and bailed out of the markets in droves, thinking that they must have been misled in some way.

The fault for this loss of confidence lies in large part with all those managers and advisors who claim – either directly or, as with our friends in those serious-looking ads, by implication – that they can predict the future, and therefore protect their investors from any unpleasantness it may bring with it.

The future is, by definition, unknowable. That’s why, in the markets as in life, risk and reward always go hand in hand.

The short-term ups and downs in the stock market, for instance, are a natural and necessary part of what enables equities to produce such high returns over time. Higher returns can only be achieved by taking some measure of risk.

If you want to avoid taking any kind of risk – say, for example, by stashing your savings under your mattress (or in a bank account that pays 0.001 per cent interest, which amounts to pretty much the same thing) – then you have to be prepared to give up the higher returns along with it.

So if financial advisors can’t be counted on to accurately predict the future, what exactly is their role in all this? To me, the crucial role of a financial advisor isn’t to hide the reality of market fluctuations from their clients. It is to prepare them for it, so they know what to do when it inevitably happens.

Markets will go down. They will go sideways, sometimes for an extended period of time. And, yes, they will go up, too – by an astounding amount over the long term. To attempt to predict when any one of these three outcomes will occur is to become a soothsayer, and when the prediction turns out to be wrong, the most likely outcome is that the investor who bought into it will lose confidence right when they need it the most.

Instead of predictions, a real financial plan’s success or failure depends on things you can control – like your asset mix, the quality of your holdings, and the goals you want to achieve.

The role of your advisor is to help you prepare for the unknown, so you’ll have the discipline you need to stay the course when the going gets tough – no matter what tomorrow may hold in store.

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.

“Every successful business is evidence of a previous act of courage.” So says Peter Drucker, one of the great management gurus of all time. In his view, success happens because someone took a risk – and it paid off.

We all encounter various risks throughout our lives. Some of us embrace them, and some of us reject them. The former are often thrill-seekers, addicted to an adrenaline rush; the latter are usually timid souls who view risk as unnecessary peril.

The middle-ground view – which in my opinion is the most intelligent response – is to accept risk, but try to reduce (or even eliminate) it whenever possible. But it isn’t always possible: many times risk is a necessary part of success. In order to create opportunity, I believe that investors should actively seek out risk.

When it comes to investments, there’s a proven relationship between risk and return. But like most intimate relationships, this one can be complicated by a number of factors.

One is “risk-aversion.” Many investors got burned taking risks at one point, and now feel the activity is a mug’s game. They keep all their money in low- yielding guaranteed investments, just because these present little risk.

Mostly, these investors have the right idea. Dalbar, a Boston research firm, surveyed the market and concluded that the average equity mutual fund investor earns less than Treasury Bills over time. This might seem puzzling, since the market usually returns three times what T-bills do.

But I can explain this apparent contradiction. Firstly, not all risks are worthwhile ones. Some are just plain ill-advised. You might open a beachwear store at the North Pole, for example, but not be rewarded for it. Or you could put your life savings into a couple of stocks, and get burned. The Dalbar study blames attempts at market timing for the struggles of the mutual fund investors. Most cash in-flows to equity funds occur at market peaks, and most out-flows come at market bottoms.

One of the tenets of modern portfolio theory is that you won’t get paid for risks that can be diversified away. This doesn’t mean that an undiversified portfolio is always a bad idea; it just means that you have to rely on something besides market-risk premium to make money.

So what can you do to ensure that YOU don’t join the crowd of unsuccessful market participants? My advice: first think about why you’re willing to accept risk in the first place. Then, be clear on just what risks you’re taking, and which of them you’re likely to get paid for.

Why is risk a good thing? Mostly because people need a high rate of return on their portfolios. Inflation takes away half your money every 20 years, and taxes take the other half – if all you do is just earn interest. So if you want to keep drinking decent wine, you really need some type of high-growth asset, such as real estate or stocks. And those assets are inherently risky.

When it comes to which risks to take, three principles guide my own recommendations:

1) Reliable evidence says that most professional portfolio managers don’t beat the market in the long run. So don’t worry about beating the market, worry about making sure you are getting market returns.

2) You don’t get reliably paid for taking risks that can be diversified away.

3) Nobody knows where the market is going in the short term – think long term. And for stocks, a reliable time period is ten years or more.

Based on these three principles, I think “intelligent risk” consists of having a portfolio that contains hundreds of stocks (if not thousands). Combine that with giving up the bad habit of “timing” markets, and only putting your money into stocks if you can leave that money alone for at least ten years.

Of course, that’s not to say you can’t also choose other strategies: Find a hot stock and load up on it. Get in on the ground floor, when the time is right. Put your faith in the portfolio manager with the lucky streak. But if those are your preferred strategies, I wish you lots of luck – you’ll need it.

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 most Canadians, the question of retirement planning seems to have boiled down to a basic equation involving two numbers: how long we think we’re going to stick around after we retire, and whether or not we will have squirreled away enough capital to keep us fed, clothed and travelled throughout our “golden years.”

But if you stop to think about it, is cash really the only essential ingredient for a happy retirement life?

I would argue that the most important question we should be asking ourselves isn’t whether we’ll have enough money to make our golden years truly golden, but whether or not we’ll be healthy enough to enjoy them.

Unless you have your own picture of Dorian Gray hidden away in the attic, the reality is, we’re all getting older. Unfortunately, even the most conscientious of us rarely plan for all the physical, mental, emotional and spiritual challenges that come with growing old.

As human beings, we’re hardwired to not want to think about the consequences of aging. So we don’t, preferring instead to take our current state of vitality and good health for granted – and simply hope for the best.

The end result of this head-in-the-sand approach is that many of us will be woefully unprepared for the health impacts of aging when they inevitably arise.

Thankfully, not everyone has forgotten that health planning is one of the essential pillars of a happy, vital and productive retirement. I was speaking recently with one of my own clients about retirement, for example, and I was struck by how many references he made to his health and well-being.

This client was born and raised in Rome, and his European view of the importance of staying healthy as he got older struck my “North American ears” as odd.

I suspect this is because those of us who were raised in North America tend to think that conversations about retirement should focus more or less exclusively on money. Maybe it’s that famous Canadian work ethic, but we tend to assume that if we work hard enough and save diligently, then somehow the play, quality of life and overall wellness parts of the aging equation will take care of themselves.

This might well be the case for a lucky few. But in my experience, most people who reach what is normally considered retirement age (particularly men) struggle much less than they expected with money issues, and much more with their health and wellness.

David Solie, an internationally-renowned authority on integrative health management and author of How to Say It to Seniors: Closing the Communication Gap with Our Elders, blames some of this disconnect on our refusal to believe that we still have developmental goals and objectives when we are in our 60s, 70s, 80s or beyond.

We recognize that babies have developmental needs. And we know that teenagers go through “phases” in which they develop by leaps and bounds. But for some reason, we tend to think that our development needs end once we get older.

According to Solie, however, we don’t suddenly stop having a developmental agenda once we reach a certain age. Rather, our developmental goals and objectives change, just as they changed from when we are teenagers to when we enter middle age.

But just because our developmental needs change during our retirement years doesn’t mean that they become any less strong, or any less important to our health, happiness and quality of life. If anything, our personal, mental and spiritual development becomes even more essential in retirement, when we no longer have the daily demands of deadlines, meetings or rush hour commutes to distract us from them.

If you’re concerned about how your developmental needs might change over time – and what you should be doing now to prepare for them – I invite you to join me at the Soloway Jewish Community Centre in Ottawa on May 3, 2011, at 4:00 p.m. for an afternoon lecture from David Solie.

Modeled after the approach developed by financial advisors, David’s pioneering “personal health portfolio” uses a unique combination of physical, emotional and spiritual elements to help you organize your health assets, simplify the burden of managing your healthcare, and create a sustainable plan for optimal health for decades to come.

If you’re interested in attending, please RSVP to Kathy Brunelle by April 22 at Kathy.Brunelle@RichardsonGMP.com or by calling 613.788.8011.

I look forward to seeing you there, and to hearing what David has to say about how we can all protect our most important asset: ourselves!

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.

If you spend a lot of time watching CNN, BNN or any of the other cable news networks that end in “NN,” you might come to the conclusion that, when it comes to investing, the only question worth asking is What Happens Next.

In the world of daily news, current events are king. That’s why they spend the majority of their time trying to forecast what’s going to happen tomorrow, next week, next month or – for those rare few who adopt a truly long-range perspective – next year.

The unspoken implication behind all this prognostication is that knowing the answer to this question is somehow actually important to you, your family and your financial independence. The subtext seems to be that, if you can just figure out what’s coming next, you can align your portfolio to take advantage of your foreknowledge and guarantee unending financial prosperity.

Unfortunately, no matter how much we might wish otherwise, the future will always be a complete mystery. If there’s anything the past has taught us, it’s that the future has a way of turning out in a manner that is completely different from what we expected. Trying to align your portfolio to anticipate this essentially unknowable outcome is a lot like placing your life savings on a craps table in Vegas.

Instead of asking what’s going to happen next, a better question might be: “is knowing the immediate future important or even relevant to my financial independence?” If the answer is no, then you can start ignoring all the conflicting voices from the cable news, and start enjoying the rest of your life.

In fact, for most successful investors, the importance of what’s going to happen in the financial markets over the next few months pales in comparison to questions like “how will my post-work portfolio stand up to 30 years of rising costs,” “what impact will the sale of my business in four years have on my finances” or “how can I remain fully engaged and productive throughout my retirement years?”

Unlike the relatively useless “what happens next,” these three questions can help you develop a plan that’s based on things you actually know and can do something about – namely, your own life, career and goals – rather than focusing on market events that are largely beyond your ability to predict or control.

In my own wealth management practice, one of the most useful exercises I recommend to my clients is to quantify their goals and objectives in a spreadsheet. Because they are specific and personal, goals like a particular retirement age, anticipated savings and income, plans for the kids’ education, inheritances, and downsizing or upsizing a home can all be calculated and anticipated with a relatively high degree of accuracy.

Once these numbers are laid out in an organized fashion, it often becomes obvious what investment strategies we should pursue in order to make sure they reach their preferred destination. A destination, I might add, that is unlikely to be impacted by whatever happens to the price of oil next month.

In my experience, investors who focus intently on current events tend to jump in and out of the market, repeatedly changing their asset allocations and experiencing costly tax events in a vain attempt to dodge paper losses. Unfortunately for these investors, their frantic efforts to “time the market” usually end up causing the very losses they’ve been working so hard to avoid.

The truth is, over the long run, the overall markets will outperform about 90 per cent of all active (or market timing) strategies if they are simply unmanaged and left to their own devices.

Take the S&P 500 as an example. At the time I am writing these words, this unmanaged index of the 500 largest companies in the U.S. is at 1,311. Thirty years ago it was at 130 points. Thirty years before that it was at 22. The market, as reflected in the S&P 500, will take care of getting you a good return, if you just leave it alone and give it enough time.

So the next time you find yourself trying to anticipate where the market is headed, turn off the TV, and spend a little quality time instead thinking about the questions you can actually answer.

Enlist the help of a competent advisor. Figure out your objectives. Quantify them, and then put them into a long-term plan that is benchmarked against the only index that’s really important: your own life and goals.

Once you have your goals quantified and a plan laid out, you will find it much easier – and much less stressful – to figure out an asset mix, cash flow and savings strategy that will help you put your plan into action.

And the next time the talking heads on your television start telling you what’s coming around the next financial corner – turn the channel.

There must be an I Love Lucy rerun on somewhere.

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.