Recent Bluestone Memos
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Here’s a wise saying: “Wealth is not determined by investment behaviour, but by investor behaviour.”
Watching the investor behavior of our clients is deeply satisfying. Truth is, you are an inspiration. And you deserve congratulations.
Our goal at BluestoneFinancial is for all of us to calmly secure wealth in the long run. That’s a challenge in the best of times. But these days it’s a tall challenge, for all of us.
That’s why it’s so pleasing to watch our clients continue to calmly go forward, sticking to your financial plan, and sticking to your investment strategy.
Financial author, Morgan Housel just released his latest book, “The Psychology of Money.” It’s a terrific read, we highly recommend it. In the introduction he writes, “The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave.”
“How you behave.” Sounds like that wise saying: “Wealth is not determined by investment behaviour, but by investor behaviour.”
Before we dig into successful investor behavior let’s take a look at investment behavior. Thankfully, there are historic patterns that we can draw from.
The investment behavior of equity investments is a history of bull markets, bear markets, corrections, and an average annual compound return of approximately 10% over the long run. It’s easy to verify this historic pattern with a quick glance at a Morningstar/Andex chart.
In February and March of this year, stock markets fell about 35%. That’s very close to the average Bear Market decline of 33%. Historically Bear Markets occur about once every five years.
The historic investment behavior of common stock investments is clear:
A Bear Market decline of about 33% every five years. Two or three corrections every five years averaging a decline of about 13%. And long term growth of about 10%.
What about fixed income investments? What we used to commonly refer to as Bonds.
This area of investing has become more challenging. Especially for retired folks who are looking for both investment income and investment security.
Around the world, academics and money people of all sorts are trying to figure out how investors can find their way in our new world of 0% interest rates. 0%! Historically unheard of. The financial world has changed.
There are two issues here:
First, in a 0% world, Portfolio Managers and other investors are taking on riskier fixed income investments in pursuit of returns above 0%. This means that what used to be considered “safe investing” is now more volatile, more like equities.
Secondly, in a 0% world, fixed income investments have a hard time outpacing inflation. And inflation if biting hard. Look no further than the rising cost of housing. Whether one is a home renter or home owner the cost of housing has risen dramatically. That’s inflation.
So fixed income investments have become more risky, and expose investors to the risk of losing purchasing power to inflation.
That pretty much sums up investment behavior, for both equity and fixed income investments; historic patterns that we can draw on when thinking about our own investor behavior.
After all: “Wealth is not determined by investment behaviour, but by investor behaviour.”
So, the $60,000 question becomes, what is good investor behaviour? If wealth is determined by investor behavior we need to know what successful investor behavior looks like.
Please stay tuned. We’ll answer this question in our next BluestoneMemo.
For now, let’s sum up. It’s not really about economics and financial markets, bull markets and bear markets, politics and current events; it’s not even about COVID-19. It’s about how we investors behave.
Which leads to the other point of this BluestoneMemo. Congratulations! We’re proud of you. Bear Markets are nasty and frightening. And these days the news is especially negative. You calmly held on through another bear market. You are calmly securing wealth in the long run. Your investor behaviour is fantastic.
BluestoneFinancial clients are a special group of people. Thank you.
This memo was prepared solely by Terry and Patty Rempel who are registered representatives of FundEX (a member of the Mutual Funds Dealers Association of Canada and the MFDA Investor Protection Corporation). The views and opinions, including any recommendations, expressed in this memo are those of Terry and Patty Rempel. Bluestone Financial is a personal trade name of Terry and Patty Rempel.