Thoughts on Wealth Creation. Looking Ahead
As Audrey and I prepare to head south I have been reflecting on how it’s possible to achieve financial independence. Now, financial independence is measured in many ways, but to me, it is being able to do and live how you want when you want. In the last few months, I stated more than once at seminars and other events, that amassing wealth is pretty straightforward – over time and that proper investing is simple but not as easy as most think.
What I have seen over my career is that while most start out with lofty goals and savings plans for a comfortable retirement or other financial goal, they somehow get sidetracked. I believe this is because in many cases they don’t see enough traction in the early years. My understanding is that Warren Buffet – reportedly worth close to $100 billion USD did not reach his first billion until he was 65 years of age. He is 93 now. When I look at compounding charts, I can see how individuals may become frustrated because the laws of compounding are exponential and that means slow at the beginning. My experience tells me people become frustrated by not seeing “instant gratification” due to a market setback, poor economic times, etc.
A look at the last eight years illustrates an equity market decline of about 20% in fall 2017, a COVID-induced decline of about 30% in spring 2020, a rally in 2021, and then inflation and high interest rates dragged markets, and economies back down in 2022/23. That can discourage some people…most actually. However, if you are 25 to 45 years of age, you still have decades to go before retirement. So why worry about the present when we all know history shows that over time equity investments do very, very well? Even in retirement you likely have decades or your wealth is transferring to someone who does.
If one simply began living on 90% of what they earned when they entered the job market and consistently invested that 10% difference – never to touch it – they would become millionaires easily by age 65. However, most will tap into that segregated 10% (their long-term investments) to buy a depreciating asset (snowmobile, car, boat, take trips, etc.), setting themselves up for financial failure. The lesson here is (and I’m living proof as are many other clients of mine) that regular committed savings and investments do make you quite wealthy over time. Simply commit to setting aside 10% of all you earn invest it professionally and do it until you retire.
On the investment side of the equation, quality and proven investments are key. However, as important as this is, if you cannot stay invested all is lost. Thus, the ability to contain one’s emotions and prevent corrosion of the framework for investment success is a constant challenge for most. Even in this past year – which has not been particularly hard compared to many others we endured – many clients become fearful and concerned about remaining in equities. Fretting about a statement value decline over a month or six months is futile when invested for long-term growth over 10 or more years. Successful investors relish declines. They truly see these short-lived occasions as a chance to buy the best companies “on-sale” whether with new cash or by rebalancing their accounts. They instinctively know that declines and setbacks occur but more importantly, recognize these declines are always temporary. They take advantage of the situation instead of lamenting about it. This is why it is best left to professionals who understand markets and who do not let emotion drive decisions.
To recap, anyone can become wealthy. It is simple but not easy. Step one; obtain a written financial plan and follow it! Unwaveringly save at least 10% of what you keep from your salary – every month…year in and year out and adjust savings upwards with inflation to hit your plan objectives. For example, if you are saving $500 per month at age 25 and inflation is 3% that year, then at age 26 you save/invest $515 per month. Do this every year going forward without exception. You can spend the difference (say 90%) as wantonly as you like if you do the first part correctly. Step two; is behaving rationally which is a real challenge and very difficult for most when it comes to investing. Most investors are their own worst enemy and get “scared out” of great investments (think Global Financial Crisis, COVID pandemic, etc.) only to buy them back later at a higher price. Their emotions take control of the steering wheel and their brains are relegated to the back seat – with disastrous outcomes. To avoid this, leave the investing to your skilled Portfolio Manager. From what I have witnessed, it is far better for you to focus on your role in life (career, family, leisure, health, etc.) and leave the professional investment management to those who not only know how to do it but who will do what’s right to benefit you. If you do the above, you will find that over time your wealth will multiply and you too will be wealthy beyond what you imagined. Then you can determine how best to utilize your wealth for your own benefit and hopefully the benefit of others.
The lesson here is that if you can tolerate some volatility (and with the appropriate time horizon you can), its worth sticking with your quality equity investments, rather than switching to defensive fixed income. Volatility is the price of admission and the prize is superior long term above average returns. When retail investors try to switch back and forth, the major challenge is that you have to get the timing right on two trades. With this difficult hurdle, the old age saying “time in the market beats trying to time the market” rings true. Thus, it’s much easier and less stressful to own quality equities, rebalance and buy more when they are temporarily down in price, and have the patience to allow your advisor and time horizon to work magic for you.
As Audrey and I prepare to depart to Panama for our next chapter, I leave you in wonderful, competent, and capable hands. Adam and his experienced team won’t let you down! For our part, we look forward to traveling throughout Panama from our base in Casco Viejo (UNESCO heritage area of Panama City) and spending a month in Spain this spring and the summers in northern NY along the seaway. I’m confident our paths will cross when I visit and hopefully, I will see you at an event or two. Maybe as a remote guest speaker on expat taxation at a seminar? I’m sure the annual June family movie choice will be a good one and we will make the trip over the border to attend that. After all Adam is looking after our RRSP’s/TFSA’s so we should get an invite. What is certain, is that we will be travelling and experiencing many of the rewards other clients have enjoyed before us and I hope to share some of those experiences with you.
In the meantime, I thank you for being part of my professional life for either all, most or part of my last 37 years as an advisor. I am so grateful for all the friendship and trust you gave to me. In closing, I wish you all the best in 2024 as you continue to build or preserve your wealth and that you live well, do well and do good.
Sincerely,
Michael
