STRATEGY SHEET
December 1995
More Lessons
from the Rich
© Talbot Stevens
Last month, I highlighted some “Lessons from the Rich”. This month, I will expand on these ideas and summarize.
Invest and Hold Long Term. The 1993 DALBAR study cited last month showed that the “buy and hold” strategy outperformed returns of the average investor by more than 3 to 1 over the 10 year period. Another study of U.S. equities from 1980-89 confirmed that market timing doesn't work.
Market timers attempt to pull out just before the market falls to avoid big losses. However, it is more important to stay invested to ensure that you don't miss out on big gains that can occur in quick bursts.
During the 80's, U.S. equities (S&P 500) averaged 17.5% per year. Through trying to time the market, if you missed the best 20 days, your annual return would have dropped almost in half to 9.3%.
The cost to your retirement funds of being out at the wrong times can be devastating. Over a 20 year period, $10,000 compounding at 9.3% becomes $59,000, versus $252,000 for 17.5% growth — more than four times as much.
Missing the best 40 days would have reduced your annual returns to a paltry 3.9%, worse than GICs and Treasury Bills.
The lesson is clear. Investing and holding for the long term is not only more profitable, it is also simpler and less time consuming.
| Lessons from the Rich |
|---|
| Use a trusted Advisor |
| Max. RRSP every year |
| Leverage conservatively |
| Invest and hold long term |
| Max. after-tax returns |
Maximize After-Tax Returns. Another lesson worth highlighting from the Canadian Economic Observer profile of high income Ontarians is the habit of tax efficient investing. Outside of an RRSP, all that matters is how much you keep, not how much you share with the government.
On a percentage basis, over five times as many high income tax filers invested for dividends and capital gains.
Dividends from Canadian corporations are the least taxed form of investment, and ideal for generating income. Capital gains are tax preferred for two reasons. First, you only pay tax on three-quarters of capital gains.
Second, the overlooked benefit is that tax on capital gains is only payable when your fund manager sells for a profit. Thus, capital gain investments have the tax-deferral benefit of RRSPs, but without the tax refund.
By simply acting on these “Lessons from the Rich”, you can make yourself richer.