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This article is a continuation of my September 17th blog and a summary of the themes during my 30-45 minute presentation. Most stock investing perceptions are actually misperceptions. I outlined four common misperceptions in the previous blog. Here are another five:
- Market investing is just for the wealthy: I started my kids investing their savings in stocks when they were 13 and 16 years of age. Our youngest son had a princely sum of $1,923 and our oldest was much wealthier with $4,933. The annual returns of my youngest son have been 10.1%, 7.1%, 5.2%, 8.7%, 18.5%, 11.1%, 18.2%, and 11.3%. At 22 years of age he now has a TFSA worth over $30,000, based on this modest start and regular small annual contributions. You have to be 18 to start a TFSA so these accounts were started as in-trust accounts, then converted to TFSAs when they reached 18. Our oldest son has done even better, and enjoyed investing so much he decided to take finance in university. Online investing has brought the cost down immensely, making small transactions possible. It is easy to start a viable portfolio with $2,000.
- You have to sell to make a profit: The three companies I have held the longest are Bank of Nova Scotia purchased for $5.59 per share in 1992, Royal Bank purchased for $16.01 in 1999, and TransCanada Corp purchased for $10.95 in 2000. Today they are valued at about $70.00, $95.00 and $50.00 respectively. In BNS’s case, I have collected approximately seven times my original investment back in dividends. All three companies had 4-5% dividends when I purchased and still have 4-5% dividends on their current price, such that their dividend increases have matched their price increases. Have I not profited? If you have to sell to make a profit should I sell those original shares and then purchase them right back? That wouldn’t make sense would it? This is the most difficult of these misperceptions to convince others of, but I don’t see any logic in selling the shares to crystallize a profit. Then, because I still like all three, to buy them right back. Most of the selling “old wives tales” stem from the brokerage days when brokers had to get clients to buy and sell for them to make money. High trading activity was good for brokers, but not necessarily for their clients. Selling is only necessary when another company buys out the company owned, or when you think the shares no longer represent good value.
- A 60/40 Equity/Bond asset mix: When was this general guideline first suggested? I googled it and couldn’t come up with a date, but found an article that said it began when interest rates were around 8%. Long-term stock returns are about 10%. With an 8% interest yield, 40% allocation to bonds makes perfect sense. However, at today’s interest rates bonds make very little sense at all. I came across another article from CNBC that said since 1928 a split of 60% stocks (S&P 500) and 40% 10-year US treasuries yielded 9.0%, vs. an all stock portfolio of 11.5%. Those two rates of return sound fairly comparable until you recall the rule of 72, and use it to determine the difference. In about 28 years the all-stock portfolio would have twice the money. If you do the math (which the article didn’t do) the fixed income portion of the 60/40 split averaged just 5.25%, less than half the returns from stocks. And worse yet, if you calculate real after inflation returns the bond portion was only 2.1% real return. The stock portion had 8.4% real rate of return, four times the bond portion. And that’s during a period that interest rates were significantly higher than today! All this sacrificed return for the sake of a perception of reducing risk, whereas only volatility is really reduced (See Sept. 17th blog). Why buy a 3.0% static interest rate bond when, for example, Bell Canada shares are currently yielding 5.7%, and BCE has a habit of doubling that dividend about every 10 years?
- Bonds are safe and don’t fluctuate in value: This misperception is related to #7, but in fact bonds values go down as interest rates go up, and vice versa. If bonds are held to maturity they can be cashed in at face value. However, if you wish to sell bonds prior to maturity, their value can fluctuate significantly to reflect current interest rates. Say you buy a 2.5% 30-year bond and interest rates rapidly escalate to 5.0%, the value of that bond could drop by 25-35%. If you hold to maturity you will get the face value, but if you want to sell prior to maturity the value will be based on comparable bonds at new interest rates.
- A house is one’s most important investment: This misperception will require a separate article, which I will do at some point in the future. Personally, I think this misperception is the most dangerous of them all, and a key reason why so many people struggle financially. I maintain that owning a home is a lifestyle choice rather than an investment. I realize there will be wide-spread skepticism of what I just wrote and will clarify in the near future.
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