That's Life

If you’ve worked with a financial advisor before, whether it be at a bank or an independant broker, then you’ll know most people have been taught the central tenets of good investing. These usually are something to the effect of sitting on your investments and weathering tumultuous economic times with patience. Maybe you’ve heard them tell you about the correlation between risk and return or talk of staying within your risk tolerance.

I want to tell you all a story you’ve all heard before to put this all into perspective. It’s a story about bonds and the stock market. And hopefully you’ll make the connection and realize that there’s always a first time for everything in the markets.

Bonds… The Story

A long time ago, Italy was at war with itself. The tribal leaders realized that the only way they would have enough food and resources for their people would be to invade another tribe. Take their food, sell the survivors as slaves, you know… normal everyday tribal war stuff. In order to fund this war, the Medici family invented a bond which leaders could use to get money from their people with the promise of its return with interest. The other tribal leader caught on and did the same thing.

Stock Markets… The Story

A long time ago, people wanted to make the country bigger, stronger, faster and better. They could do all that if only they had more money. So, in Italy, they set up a market where people could give money to a country or maybe even a business in the hopes of getting in on the action. If their chosen country or company made lots of money, so did they. Simple.

The End?

Bonds, considered to be some of the most conservative investments have an interesting history. Basically if two tribes are issuing bonds to wage war against each other, it’s pretty plain to see that the odds of a bond paying out are basically 50-50. How is that conservative? Now, granted the last 30 years have been quite different. The economy has seemed to be healthy for the last while.

So, let me pose a question: Is there such a thing as an infinite amount of wealth? This is an important question to ponder since we’re regularly told to be patient and that our investments will ALWAYS go up. If the answer is no, then why do we believe this rule. If the answer is yes, how is that possible?

The Moral Of The Story

Although memory doesn’t serve most Canadians, it’s important to know that our bonds have collapsed many times before. A total of six times to be exact. And the markets have had complete and utter collapses. In other words, they went up and not down by a little bit, but ALL the way down. Memory serves or not, and even if it hasn’t happened yet, our short term memory deceives us and can guide our investment decisions incorrectly.

More important than investing patiently is to invest intelligently, to rely on your interpretation of the present and not the story of the past.