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Carl's Comments
Housekeeping later this month - CMG
Worldsource will change its name to Worldsource
Financial Management Inc. Clients often wonder what
our relationship is with Worldsource. Worldsource is
our mutual fund dealer and it is licensed in most
provinces in Canada. Worldsource has 70 branch
offices and we are one of those branches. Worldsource
has more than 900 advisors and is well funded. It is
owned by Guardian Capital, with its head office in
Markham, Ontario. I have been affiliated with
Worldsource since its inception in 1988. It is a great
relationship. Economies of scale would make it
extremely cumbersome and costly for me to have my
own dealership due to compliance requirements,
technology costs, printing, staff, etc. I place my
business through them, they keep a percentage of my
overall compensation and I am able to run my practice
independently as I see fit.
I recently read an article in which an investment
consultant stated that 90% or more of investor
portfolio rates of return were directly linked to investor
behavior. There is no doubt in my mind that this is a
true statement. I see it on a daily basis. The recent
Bear has provided a glorious opportunity to purchase
undervalued stocks or mutual funds. However,
investors have liquidated equity holdings and fled to T-bills or bonds. Since the tech wreck, many investors
have done a full 360 and they now run the risk of being
too conservative in their choices. Against our advice,
one of our clients transferred everything to bonds the
day before the Iraq War began. Since then, worldwide
equity indices are up more than 20%. What he failed to
realize is that the decision to move to bonds was
lagging the market. If you were considering bonds or
trust units, you are too late. You have already missed
the boat.
What investors must do now is to take a deep
breath and think long-term. No doubt this requires a
tough stomach. To be successful, investors must hold
themselves back from their impulse reactions to the
market. In fact, a saying I heard years ago is still
applicable today, "Successful people do what
unsuccessful people don't." Ask yourself how many
equities or mutual funds have you purchased during the
biggest sale in the last five years. Keep in mind, the
only thing we can control is our behavior. We have no
control over the equity markets.
Chasing performance is seldom rewarding.
History has shown that, whether you are chasing an
Asian equity, American technology, stocks, bonds or
T-bills, your long-term returns are diminished, not
improved. I compare this rearranging that investors
feel they must do to a child with its first gold fish. The
goldfish ends up floating on top not because the child
didn't love the fish but that the child did too much. In
sports, we often hear the best trade is often the one you
didn't make.
What has helped me with investment decisions
is that, when I look at a potential investment, I ask
myself, "Does this have greater upside potential or
greater downside potential?" The same question may
help you in the future. Generally, the investments with
the greatest upside potential are not the ones being
discussed in the media or at cocktail parties. The
investments being discussed at cocktail parties are the
ones which usually have downside risk.
|
|
Chasing Performance Portfolio |
Objective Portfolio |
| Period |
Year |
Portfolio
Allocation |
Investor Rationale
Based on Previous Year
Performance |
Annual
Return |
Market
Value |
Portfolio
Allocation |
Annual
Return |
Market
Value |
| A |
1993 |
100%
Cash |
Cash performs strongest in
'92 after low Growth returns
and negative returns in Value |
5.5% |
$10,549 |
50% Growth /
50% Value |
31.7% |
$13,172 |
| B |
1994 |
100%
Value |
Value returns over 32% in
'93 attracting investors back
to the equity markets |
2.4% |
$10,802 |
50% Growth /
50% Value |
0.5% |
$13,237 |
| C |
1995 |
100%
Cash |
Rising interest rates and flat
markets lead investors back to
cash, the top performer in '94 |
7.4% |
$11,602 |
50% Growth /
50% Value |
14.8% |
$15,199 |
D |
1996 |
100%
Value |
Move to value after is a top
performer in '95 |
36.2% |
$15,797 |
50% Growth /
50% Value |
29.1% |
$19,619 |
| 1997 |
100%
Value |
Stay in Value after another
year of outperformance in '96 |
28.6% |
$20,323 |
50% Growth /
50% Value |
16.3% |
$22,821 |
| 1998 |
100%
Value |
'97 marks the third
consecutive year that Value
outperforms, stay invested |
-1.6% |
$20,001 |
50% Growth /
50% Value |
0.3% |
$22,882 |
| E |
1999 |
100%
Cash |
Return of flat markets and
uncertainty in Asia cause a
movement back to cash, the
top performer in '98 |
4.7% |
$20,932 |
50% Growth /
50% Value |
22.8% |
$28,095 |
| F |
2000 |
100%
Growth |
Technology boom, Growth
outperforms Value by over
40% in '99 |
-5.7% |
$19,743 |
50% Growth /
50% Value |
13.0% |
$31,750 |
G |
2001 |
100%
Value |
Growth bubble pops, Value
outperforms in '00 and
investors return to Value |
5.1% |
$20,741 |
50% Growth /
50% Value |
-8.2% |
$29,156 |
| 2002 |
100%
Value |
Growth continues to struggle,
investors chase modest Value
returns |
-11.5% |
$18,359 |
50% Growth /
50% Value |
-12.3% |
$25,574 |
| Federal Budget Note: Retirement Savings |
| The February 18, 2003-federal budget increases the
maximum dollar limits for contributions to registered
retirement savings plans (RRSPs), money purchase
registered pension plans (RPPs) and deferred profit-sharing plans (DPSPs) for 2003 and subsequent years. |
| The new limits are: |
|
RRSPs |
RPPs |
DPSPs |
| 2003 |
$14,500 |
$15,500 |
$7,750 |
| 2004 |
$15,500 |
$16,500 |
$8,250 |
| 2005 |
$16,500 |
$18,000 |
$9,000 |
| 2006 |
$18,000 |
Indexed |
Indexed |
| For RPPs and DPSPs the amounts will be indexed to
average wage growth for years after 2005. RRSPs will be
indexed for years after 2006. |
Getting to Your First $Million
The good news for most Canadians who are close to
retirement is that they likely will not need that magical $million
in capital when they hit the pasture. The bad news is that Stats
Canada says as many as one-third of the families are behind the
eight ball when it comes to saving for their retirement.
Determining how much money you need to save is like trying to
chart the weather. The outcome is dependent on many
variables.
|
Getting To Your First $Million |
|
Years
to
Invest |
Annual Investment Needed |
Total
Invest-
ment |
| @4% |
@6% |
@8% |
@10% |
| 5 |
$184,627 |
$177,396 |
$170,456 |
$163,797 |
$1,000,000 |
| 10 |
83,291 |
75,868 |
69,029 |
62,745 |
$1,000,000 |
| 15 |
49,941 |
42,963 |
36,830 |
31,474 |
$1,000,000 |
| 20 |
33,582 |
27,185 |
21,852 |
17,460 |
$1,000,000 |
| 25 |
24,012 |
18,227 |
13,679 |
10,168 |
$1,000,000 |
| 30 |
17,830 |
12,649 |
8,827 |
6,079 |
$1,000,000 |
| 35 |
13,577 |
8,974 |
5,803 |
3,690 |
$1,000,000 |
| 40 |
10,523 |
6,462 |
3,860 |
2,259 |
$1,000,000 |
Many of my clients think they need a million or more
to achieve success at retirement. There is no one number that
works for everyone. The object is to have life after retirement
comparable to the life you have before retirement. Retirement
strategies are not designed to make poor people suddenly rich
and rich people suddenly poor. It is merely an attempt to
determine how much to save. I have come to theconclusion
that early retirement for most people is a fantasy unless you start
saving very early in life and live well within your means. You
must stay focused and disciplined. One rule of thumb is that, in
retirement, you need 70 percent of your annual income. That
number could be lower because your house and car could be free
and clear and the childrens' education has been looked after.
The chart (Getting to Your First Million) can do one of two
things: (1) It can motivate you to begin saving or (2) It will
totally discourage you from ever starting to save. We hope that
it encourages you to get on track sooner than later
Where Are Things Headed
Well, we remain cautiously optimistic about the future
and we are hoping that the worst of the bear market has come
and gone. Nevertheless, we are realistic in knowing that few
bear markets have ended so calmly. It would not be surprising
to see markets test new lows again and shed a little more blood
before it ends.
Some believe that the recent rally is a rally inside a
bear market, which is not uncommon. The overall trend is still
lower. We know the markets have risen 20 to 30 percent since
October 2002. This is a lot in a short time. It would not be
surprising if the markets blow off steam. I guess what I am
trying to say is to know your own pain threshold and not to get
overly optimistic that the bear market is completely behind us.
Now, for the positive spin...the war is behind us and
this means cheaper oil prices (as depicted in the chart below).
This means consumers and corporations have more disposable
funds after fueling up. They will get off their couches, away
from CNN and back to the malls. Housing starts are still strong,
inventories low, corporations lean, interest rates low, corporate
accountability is much higher and corporate fraud is being
punished. These are all positives. Perhaps the biggest positive
is the upcoming U.S. election. The one thing George W. Bush
doesn't want is to suffer the fate that his father
suffered...winning the war and losing the election. Senior lost
because he took his eye off of the economy. Jr. is determined to
do everything within his power to recharge the U.S. economy
prior to the election. Markets generally do well leading up to an
election.
It would not be surprising if this bear market took a
few more prisoners and inflicted more pain before it is over.
However, our long-term outlook is extremely positive.
Click to see this month's Fund Report
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