We believe that when it comes to investing, the simpler you keep things, the greater your chances of success. As Warren Buffet says:
To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.
In other words, while you must be aware of what’s happening in the marketplace, you must not let yourself be led astray, either by over-promotion or by fearmongering. Over the years, we’ve seen far too many situations where an investor purchased or sold an investment for the wrong reason or at the wrong time, either out of fear or greed arising from short-term market fluctuations, media hype, or the latest market craze, and it cost them a lot of money.
The best way to avoid the same fate is by:
When considering where to put your money, it is important not only to understand the nature of each investment, but also to answer two questions: Why would I make this investment now? Will this investment help me attain my long-term goals?
Most of the investors we talk to want their investments to achieve three objectives:
These objectives provide a framework to guide your decision-making when you evaluate an investment you are considering. By using that framework, you’ll be more likely to make smart decisions that are based not on emotion but on facts, sound fundamentals, and common sense.
Understanding Risk
There are different types of investment-related risks. Three of these are outlined below.
Market Risk
This is the risk that the price of an investment will go up or down on any given day due to normal stock market fluctuations. No one can accurately predict which day the market will move in a particular direction. What we do know, however, is that the long-term trend has been upward for the past 30 years. Thus, it is important to base your decisions on a long-term strategy.
Investment Risk
This refers to the quality of the business or fund in which you are going to invest. Ask yourself these questions when looking at a potential investment: Is the fund or business likely to be in business a year from now? What about in five years? Or 10 years? Will it continue to grow and pay a return annually? If you can answer yes to these questions, then you have a reasonable expectation of long-term success with that investment.
Interest Rate Risk
What will happen if interest rates increase or decrease? Rising interest rates tend to depress stock prices, thus making bonds and GICs more attractive. Declining interest rates have the opposite effect. When interest rates go down, clients see a reduction in their income from GICs and a loss of purchasing power. When the effect of taxation on income from GICs is combined with this loss of purchasing power, the effect on one’s retirement lifestyle can be devastating.
Keeping all of these risk factors integrated into a single day-by-day picture is easier said than done. To understand the truth of that statement, one only needs to look at the combined effects of financial instability (for example, the sub-prime mortgage crisis of 2008–2009), low interest rates, fluctuations in the Canadian dollar, and stock market volatility (such as that caused by the COVID-19 pandemic). That is why we focus on long-term investments that have a proven history of success.
Our strategy is simple. We take a global approach and encourage investing in well-managed companies and funds that enable our clients to take advantage of some of the finest dividend-producing companies in the world today. It’s an excellent way to reduce the impact of low interest rates and market volatility. Owning quality dividend-paying companies or funds will provide you with:
The Economic Influence of Baby Boomers
Because baby boomers (those born between 1946 and 1966) make up one-third of the North American population, they have had a considerable influence on our economy over the past 40 years or so, and will continue to do so well into the future.
In the late 1970s, when boomers ranged in age from 15 to 35, a significant proportion of them were in consumption mode—buying big-ticket items such as homes, vehicles, furniture, and appliances—as they started their working and married lives. As a result, the need for mortgages and loans skyrocketed. The banks had never witnessed such huge demand for credit and were unable to keep pace. This high demand for goods, services, higher wages, and credit caused both inflation and interest rates to soar. In 1981, the prime interest rate peaked at 22.75%.
Such ultra-high interest rates resulted in an economic crisis for many people, businesses, and some governments. Debt loads that seemed manageable at 10% interest, or even 15%, became unbearable at 20%. Loan defaults and bankruptcies increased and the demand for credit began to contract. At the same time, most governments in the developed world adopted dramatic measures to reduce their deficits (and thus their demand for credit), which pushed interest rates downward. Thus, by the 1990s, interest rates were back below 10%.
As the boomers advanced into middle age, they moved into accumulation mode. They paid down their loans and began to use (invest) their money to make money. As interest rates continued to decline, boomers turned away from fixed-income investments and turned their attention to the stock market. Unlike their parents, they were not afraid of stocks or mutual funds (the crash of 1929 and the Great Depression were ancient history to them). This level of investing in stocks, RRSPs, pension plans, and other vehicles pushed markets to record highs.
THE FUTURE
In 2011, the first baby boomers reached age 65. Thanks to modern health care, healthier lifestyles, and positive attitudes, baby boomers are going to live longer than their parents. Today, a 65-year-old Canadian male has a 62% chance of living to 80 and a 22% chance of living to 90. Females have a 71% and 34% probability, respectively, of reaching these milestones.
In 2011, more than 4.9 million Canadians were over the age of 65; in 2021, that number is close to 7.1 million, an increase of almost 45%. More than 1.7 million are over 80. By 2050, the number of Canadians over the age of 80 will be close to 4.7 million.1
Because you may live well beyond the age of 90, it is essential that you have a well-developed wealth accumulation and retirement plan if you want to maintain a satisfactory lifestyle. This plan needs to support manageable, conservative withdrawals throughout all of your retirement years. As the baby boomers retire, they are entering income mode.
Traditional thinking would predict, first and foremost, that baby boomers entering or nearing retirement will shift from equities back to more conservative investments, such as bonds and GICs. In theory, this strategy reduces market volatility, increases capital preservation, and produces a greater percentage of income from the interest payments. However, this could cause them to miss out on potential continued growth in selected equities while locking themselves into relatively low rates of return.
If you are a baby boomer, it’s important to remember that your investment horizon could be 25 years or more, so you should still be willing to participate in the equity markets with a significant portion of your assets. This will help you protect your purchasing power from inflation and see your capital appreciate over the long term.
As the majority of baby boomers enter income mode, we expect the trend over the next 20 years to be the reverse of what we saw during the consumption era. Our prediction is that if most boomers adopt the traditional retirement pattern of fixed-income investing, the volume of deposits will exceed what banks and bond issuers require for their lending needs, which will drive deposit interest rates to all-time lows. Our expectation is that five-year rates will spend more time under 3% than over 5%. This will cause baby boomers to shift their assets away from low-interest investments and allocate a higher portion of their portfolio to equities, in contrast with traditional fixed-income investing strategies.
Not all equities will be of interest to boomers, as they will continue to put a strong emphasis on capital preservation and generating income from their portfolio. Thus, they will tend to favour the high-quality, large-capitalization, dividend-paying equities of companies that are based in politically and economically stable countries. Investing in such companies will generate a blend of income and growth, both of which will be required to support the long-term financial security of retirees. Dividend-paying stocks will become the investment darling of the baby boomers.
We direct our clients, both young and old, toward this developing investment trend as the core holding of a well-diversified portfolio. With current market pullbacks, based on the wall of worry created by the pandemic and other factors, there has never been a stronger case to look at adding some conservative, undervalued dividend funds to your portfolio. Quality dividend stocks provide investors with an opportunity to receive income on a regular basis, obtain favourable tax treatment, and benefit from the long-term growth of quality companies while offering reasonable assurance of capital preservation.
We strongly believe that some dividend funds and some fund managers are better than others, based on their previous track records and their adherence to a disciplined investment management style. We also believe that some funds are just too big and unwieldy to be considered. For example, because their holdings are so big, funds valued at over $1.5 billion no longer have the ability to adjust large positions (i.e., to get out of poorly performing equities) or to look beyond traditional large-cap holdings. We have developed a list of dividend funds that meet our strict requirements for reliability, flexibility, and growth potential. One of our investment advisors will be glad to discuss our recommendations with you as part of a review of your financial planning requirements.
Baby boomers have had reasonably unchallenged, progressive wealth accumulation with great job opportunities and strong real estate and market appreciation. When that changes—as it very likely will—good planning is the only strategy to ensure success.
Other Trends We Are Likely to See Over the Next 20 Years
- Increased political pressure on issues related to the environment, health care, and retirement living.
- Increased marginal tax rates for high-income individuals to support the necessary health care and government income programs for an aging population while keeping deficits under control, although we expect this to be a bigger concern in the US than in Canada. Higher taxes bring less consumption. Europeans did not experience the baby boomer effect and their markets should continue to do well with decreasing interest rates, stable consumption, and level taxation.
- As of 2019, the US accounted for about 25% of the global economy; this is expected to decrease to below 20% by 2040. The US has not gotten poorer; the rest of the world has gotten richer. This is good, as it will provide a market of rich foreigners to sell our stocks to.
- There will be increased philanthropic giving and community-based volunteering.
- Most boomers will need the equity in their homes to subsidize their retirement income. Expect to see them trade in their properties with lawns and acreage in favour of condo living. Condos will be the biggest growing class of real estate.
- Travel will increase significantly, particularly once the pandemic is behind us.
- The gap between rich and poor will continue to increase.
- The family will not provide as strong a social safety net as it did in previous generations.
- To accommodate their lack of financial preparedness for retirement and to pay for the education of their children and grandchildren, a portion of baby boomers will remain in accumulation mode into midlife and beyond as they continue to enjoy good health and wish to stay actively engaged in some form.
- The jobs of the future will focus on brainpower—not brawn. More jobs will be created in the health care sector and in government, professional, and advisory services.
Todd Campbell
President, RBA
President, RBA
- [1] Statistics Canada, Table 17-10-0057-01, “Projected Population, by Projection Scenario, Age and Sex, as of July 1 (x 1,000)”
