Why Markets And Life Look A Lot Alike

It’s probably a sign of my advancing years that I’m now spending less time looking ahead, and more of my days looking back and thinking about how fast life goes by.

We pass from our university (or college, or high school) “glory days” to our working lives, and sometimes from career to career, often without stopping to think about what each step in our lives has meant to us. We get married (or not). If we have children, we watch them grow up in what seems like the blink of an eye, and before you know it, they have lives and children of their own.

Through it all, our lives are filled with some tremendous ups and downs. While we’re in them, both the good times and the bad feel like they’ll go on forever. But when we look back on them years later with the benefit of hindsight, we can see that they never really do.

The same is just as true for our financial lives. If you think about it, the markets are a lot like life. Over the short term, the markets are filled with nothing but ups and downs, each of which feels like it will never end. But over the long run, all of those highs and lows eventually pass. Looking back, we see them for what they really were all along: nothing but small bumps in a very long road.

Take the effects of inflation as an example. Who hasn’t sat around the table at a family gathering and listened to one of their elders talk about how they bought their first house for $8000, or how a handful of candy used to cost a penny and a suit of clothes cost what you or I spent on lunch?

These first-hand experiences of rising prices should teach us that currency doesn’t really mean much in the long run. While you or your parents (or your parents’ parents) might’ve bought a house for $8000, those weren’t 8000 of today’s dollars. They were dollars from another time, which held a real value of twenty to thirty times what a dollar is worth today.

That’s just one example of the impact that inflation can have over the course of an average lifetime. For the vast majority of investors, all those temporary “bumps in the road” don’t pose any real risks to their long-term wealth, no matter how painful they might feel while we’re going through them. The real risk comes when we don’t protect ourselves from the insidious march of those forces (like taxes and inflation) that can really hurt us.

If you live your financial life worried about protecting your “currency units” from the ups and downs of growth investments like stocks, one day, you’ll wake up with a dwindling stack of dollars that are worth only a fraction of what they were when you first squirreled them away in your mattress (or low-interest savings account—which pays about the same these days).

But if you focus on investing in long-term stocks for long-term growth, and are prepared to wait out all the ups and downs that will inevitably greet you along the way, over time, you can benefit from the same incredible results that inflation reveals – except in the exact opposite direction. I have several older clients, for instance, who bought only a few thousand dollars’ worth of stocks 40 years ago. Now, those same clients look on in wonder at the $200,000 to $300,000 that modest stock investment has turned into.

When we shift our gaze to what we know to be true about our lives, we realize there will be lots of good times and lots of bad times. We also know that, one day, it will be our turn to sit around the Christmas table, talking about how little houses used to cost, and how much everything else has gone up in price. It only makes sense to build our financial lives in a manner that reflects the same reality.

The stock market is the best way I know to make your portfolio act the same way as your life. The market will have all kinds of ups and downs, almost all of them unanticipated and unforeseen. But just as in our personal lives, if we stay invested through thick and thin, one day, we’ll look back in surprise and awe at the tremendous growth our investments have experienced, almost without our realizing it was even happening.

In my 30-year career, I’ve seen the U.S. stock market go up 13 times and the Canadian market go up eight times (not including dividends). I’ve also seen a lot of ups and downs, many of which felt like either the end of the world was coming, or the good times would never end.

For the most part, I’ve forgotten about nearly all of those ups and downs. But what has stayed with me over the years is the staggering long-term growth that equities provide—enough to keep inflation on its heels, and to allow confident investors to reap the rewards of a lifetime of discipline and patience.

When it comes to the big picture, the latest financial crisis du jour and the next “can’t miss” stock issue are both equally transitory and, in the final analysis, essentially unimportant. What matters over the course of an investing lifetime is simply having a portfolio that’s diverse enough to be reliable, and held onto long enough to give the markets the power to do what they do best.

We never know exactly what’s going to happen tomorrow. But in the long run, it doesn’t really matter, so long as we know what to do about it.

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. For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.

All material by Alan MacDonald, Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates. Past performance is not indicative of future results.

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.