The beginning of the new year is an ideal time to update your financial plans and, if you are in a position to do so, contribute to your investments. For young people in particular, maximizing the time that your capital has to compound will make a significant difference to your wealth over time.
When investing, most people focus on the return that they earn while failing to realise the importance of a long, uninterrupted investment runway. The story goes that, when asked why he had not spent the money he had been given to get a haircut, a teenage Warren Buffett replied, “Why would I want a $300,000 haircut?” Even at a young age, Buffett understood that if, in addition to the return on your initial investment, you earn returns on your returns, the growth in your capital becomes exponential over the long run.
Here are some basic investment guidelines to assist you in maximizing your long-term wealth and your financial optionality along the way. All of them are simple, but not easy.
Start saving early and save regularly
Saving often seems difficult, particularly for young people. Starting with small, regular amounts can make it easier to begin and for it to become habitual. It might help to set aside part of your monthly salary or annual bonus. It might also help to have the savings bypass your chequing account and go directly into your investment account – the funds will not be ‘seen’ and there will be no temptation to spend them.
The sooner you start saving, the greater the power of compounding. If you invest $1,000 at age 25 and earn 9% a year for 40 years, by the time you turn 65 it will be worth more than $31,000. In contrast, the same amount earning the same return, but invested at age 35 for 30 years will be worth only about $13,000.
In addition, adding to your savings on a regular basis is powerful. Using the example above, if you invest $1,000 each year from age 25 for 40 years, the $40,000 invested will grow to almost $370,000.
Invest to match your goals and time horizon
Everyone’s investment approach should suit their personal situation and the purpose of the capital that they are investing.
If your long-term goal is to build a capital base capable of providing future cashflow and a security net, your objective should be to grow it safely at a rate that is above inflation on an after-fee and after-tax basis. Buying pieces of high-quality companies that will be around and worth more in the years to come (i.e. stocks) is a proven way to do this.
In any given year, stock market returns are random and markets regularly have down years – most recently in 2022 and 2018. However, stock market returns are relatively predictable over the long run (10 years or more). In the United States, the stock market has produced attractive annualized long-term total returns of about 10% before fees for more than a century.
Not investing appropriately, including being overly conservative by investing too much in bonds or fixed income securities, is risky, particularly for someone with a long investment horizon. A young person investing along the lines above will earn three times more from age 25 to 65 than if they decide to ‘play it safe’ and invest in a way that earns an annualized return of 5%.
Maximize your time in the market, don’t try to time the market
One thing that has not changed in the past century is that most investors tend to buy stocks when they are going up and sell them when they are going down.
Studies show that, because of buying and selling at the wrong times, investors in, for example, index funds consistently underperform the index the funds are tracking by a much wider margin than the fees they are paying.
The reason for this is because the short-term volatility of the stock market makes people emotional – both greedy and fearful. Many investors also like to believe that, when the market begins to fall, they can get out and then be smart and brave enough to reinvest when it has bottomed. Unfortunately, they only see the bottom after it has passed. No matter what anyone says and how many forecasts are made, stock markets are not predictable in the short-term. Also, the best periods in the market often follow the worst periods and have a disproportionate impact on your overall long-term return.
The solution? Only invest as much money in stocks as allows you to sleep at night and keep that capital invested through thick and thin.
Keep your costs low
Taxes and fees are forms of negative compounding on capital – in the short run, their impact may not feel material, but in the long run it can be significant.
Staying invested, and not trying to time the market, has the added advantage of resulting in lower turnover (trading) in a portfolio. Low turnover reduces the realization of capital gains and, therefore, taxes owed in taxable accounts as well as transaction costs across accounts.
Investing in low-fee ETFs can help to reduce fees. Or, if you decide to use an investment advisor, make sure, amongst other things, that their fees are reasonable.
Take advantage of your tax-sheltered accounts
Tax-sheltered accounts such as RRSPs and TFSAs allow capital invested inside of them to compound tax-free. They provide an investment advantage that should be utilized to the maximum extent possible.
If you are earning a good salary and in a relatively high tax bracket, contributing to your RRSP first will probably make the most sense, as the tax credit received will reduce income tax owed. If you are fortunate and have surplus savings after having fully contributed to your RRSP, then you should also contribute to your TFSA.
Today, the maximum annual contribution to a TFSA is $6,500 – often not large enough for people to focus on making it every year, let alone early in the year, without realizing the long-term consequences.
However, making $6,500 annual contributions starting at age 18 (the earliest year for contributing) until age 65, and assuming an investment return of 9%, the total contributions of just over $300,000 will grow to about $4.4 million. Think of it like building a pension.
For parents reading this article, helping your child make their TFSA contributions in the early years is an amazing gift. The contributions made from age 18 until 30 (12 years) will be worth more than all of those made from age 30 to 65 (35 years) due to the power of compounding capital over the longest possible period of time.
If you earn enough to save and live a long, healthy life, the ability to achieve financial independence in retirement, and to have financial flexibility along the way, is largely in your hands.
Doug McCutcheon is the President of Longview Asset Management Ltd., a Toronto based investment management firm
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
