Jonathan Chevreau, Financial Post
A disturbing trend in recent media coverage of the current stock-market meltdown is a growing indifference by younger people to saving and investing. True, those in their late 20s can look back at their first decade in the workforce as one that fraught with market volatility. Already, they’ve experienced the Tech Wreck of 2000, the 1929-like Crash of 2008, a subsequent jobless recession that appears to be their generation’s version of the Dirty Thirties, and now to top it all, we’ve had the stomach-churning losses of August 2011.
Yet I can say with all frankness, as I occasionally do to younger colleagues in the newsroom, that I envy them the chance to buy quality high-yielding stocks at these kinds of bargain prices. I recall my first financial advisor telling me that “If you’re not done buying yet, why would you want stocks to go up?”
If you’re in your 20s, time is on your side: your horizon is a good 40 years, since by the time you leave the workforce, the standard retirement age may well be 70. Anyone who’s read Jeremy Siegel’s Stocks for the Long Run — which includes most financial advisors — will tell you that over that many decades, stocks are almost guaranteed to outperform every other asset class out there: certainly cash and bonds.
But don’t take my word for it. Actuary Malcolm Hamilton, perhaps Canada’s best-known retirement expert, agrees: “Young people need to keep things in perspective. They will be buyers of equities for 40 years. Prolonged periods of disappointing performance, like the last 10 years (particularly for those investing outside Canada), should be seen as opportunities to build a portfolio at reasonable prices.”
Hamilton, a partner with Mercer, says stock markets have experienced lengthy periods of disappointment in the past, sometimes 10 or 20 years, but “those who buy near the end of these periods often do well.”
Even if scary markets have investors of all ages gun shy about investing, blaming occasional stock losses is no excuse for not saving. It’s necessary to distinguish between saving and investing. Saving involves continually spending less than you earn and directing the surplus into savings accounts: preferably through an automatic process that takes the proceeds out of daily spending temptation and into tax-deferred vehicles like RRSPs or TFSAs.
Saving is the first step but at today’s interest rates, saving alone won’t get you far. Pundits have long called for an “inevitable” rise in rates but so far they have stayed stubbornly low. This latest stock correction means rates may stay low awhile yet. On Tuesday, the U.S. federal reserve indicated it would be making no major interest-rate adjustments for at least two more years.
During the recent panicky sell-off many sought refuge in U.S. treasuries (ironic given the S&P’s downgrading of U.S. debt) but while fleeing to cash may stop the bleeding, once you consider inflation, it’s questionable if short-term interest-bearing investments will yield any “real” return.
Here again, Hamilton agrees: “Young investors should be equally careful when looking at bonds. Bonds have been good performers for the last 30 years but it’s hard to see how anyone will get rich buying a 30 year Canada bond with a 3% coupon and holding it until maturity. It’s natural for young people to set their expectations looking at the last 10 years but extrapolation doesn’t work for investments.”
To generate a “real” investment return net of inflation is the job of investing, not saving. That means embracing stocks, equity mutual funds or equity exchange-traded funds (ETFs). Yes, you could sit awhile in cash, waiting for the coast to be clear, but by the time it is, prices could be 20% higher than now. Talk to those who bought stocks in March 2009 — soon after the first TFSAs were opened — and you’ll hear them congratulating themselves for their shrewd timing.
Despite the personal anecdote revealed in the sidebar, I still don’t buy the “spend now for tomorrow we die” argument. It’s just an excuse for indulging in instant gratification. My personal motto is “Freedom, Not Stuff.” Financial assets represents eventual freedom, while a new car is just more stuff that depreciates the moment you leave the car dealership. From time to time, stocks will also depreciate in terms of their market value, but odds are that in the very long run, they will appreciate and lay the ground for eventual financial freedom.
“Investing requires work, discipline and putting off to tomorrow,” says fee-only financial planner Fred Kirby, “It’s not visible, not cool and not a prescription for having fun, instant gratification and popularity among peers.”
But it might be cool to be the first in your gang to retire!