I recently read a column by a local financial advisor in a local newspaper. The thesis of the article was this: The single greatest thing you can do to build wealth is to set up a regular savings plan.
Certainly, saving is important. There are other key things one should do as well. Have a plan and update it regularly. Diversify. Rebalance periodically. Stay invested when markets are poor.
I put all of these in the category of good investing hygiene.
But what do I think is the single, greatest thing that can be done to build wealth?
I say it is this. Learn to be comfortable with uncertainty.
I follow the financial media very closely. Every day, there is a fulsome discussion about what will come next from a parade of strategists and commentators.
There will be a recession. There won’t be a recession. Inflation has peaked. Inflation will be sticky. Rates will continue to move up. Rates will be coming down.
Sounds uncertain to me.
Just as often, they look at the past and say “Who would have thought?”
Who would have thought interest rates would go up so fast after years of a “lower for longer” mantra? Who would have thought the market would drop 30% in the span of a month due to the onset of a global pandemic and then go straight up, recovering the loss in only 126 days? Who would have thought we’d see a major global bank go down?
I heard a great line from Hamilton native Andrew Marchese who is the Chief Investment Officer for Fidelity Investments Canada.
“Investing is not about certainty. It’s about probabilities”.
We’ve had two bear markets in three years; one caused by the onset of the pandemic and one as a result of inflation and rising interest rates. Three-year returns are good right now because they measure things from AFTER the pandemic-related fall in stock prices. But 4 and 5-year returns look terrible. Long-term returns (i.e 10, 15, 20 years) are what you’d expect them to be and what you would use as an assumption in your financial plan. The fear that sets in at times like this is that what you see now in the short term will always be. People get worried that they won’t see a return to the long-term averages.
No one can guarantee that things will return to normal or how long it will take. Advisors look to past results to gain perspective about the future. Going back over 100 years, a balanced portfolio had negative returns in a one year period 23% of the time with losses often between 10 and 15%. That’s the uncertainty you must learn to be ok with. Stretch that out to periods over 10 years , and the return was positive 100% of the time with an average return of 7.7% before fees. Putting your faith in those long term results is investing based on probabilities.
Having a discipline such as saving regularly can be very effective, even for a conservative investor who sticks with guaranteed investments. But returns that exceed inflation and provide real growth over time are achieved by giving up the guarantees and accepting uncertainty. Use the appropriate risk mitigation tools such as structuring your investments properly, rebalancing and staying invested. These increase the probability of success. Get comfortable with the uncertainty of near-term events and results by knowing that the odds for the long term are heavily in your favour.