The Risk of Losses: 
Get Some Ultra-Safe Investments

Over the past 30 years, equity funds have generally out-performed other investments, and our funds have done even better, but our funds will go down in value from time to time, at times that we cannot predict. An investor cannot have superior returns without some risk of losses. Accordingly, if you are new to being heavily invested in equity funds and ETFs, you should bring your assets into the strategy slowly -- over a 2-3 year period, and leave a significant proportion of your retirement assets in bonds and/or GICs; or, if you are a mutual fund only investor, in money market funds.

We have developed a superior investing system which we believe will continue to give high rates of return most years — but if all of the stock markets go into a tailspin, as they do from time to unpredictable time, we will suffer losses as well. To be an equity investor, one needs to accept the risk of losses in the expectation that, -- until the majority of the baby boomers are well into retirement and selling their equities, -- equities will tend to continue to give superior rates of return, most of the time, as they have over the past 30 years. But the future may not unfold as we expect, and our recent history may not repeat. We could experience a flu pandemic or major terrorist attack which could spur economic upheaval. Even without such a drastic event, it is possible that our economy could go into a long recession which would mean that equities would generally not be good investments for a long time. Stock markets can and do drop suddenly, and sometimes unpredictably “crash”. Even when economic times and equity markets are “good” there will be losses some years, so it is prudent to get into our equity based portfolio slowly if you haven’t been significantly invested in equities in the past. In that case prudence suggests that you start with a small percentage of your portfolio, and bring more and more of your portfolio into our system over a 2-3 year time frame.

More fundamentally, depending upon your age and your tolerance for risk, most financial advisors say that no more than 1/3 to 2/3 of your retirement assets should be invested in equities. The remainder should be invested in safe GICs and Bonds. This is called prudent diversification, and is an insurance policy against the small possibility that we will be wrong in our expectation that equity funds will continue to be a good investment in the future. Again, our equity system is very good, but it assumes the continuation of an overall favourable (or at least neutral) investment climate for equities. Only liars or fools will guarantee future outcomes. Prudence requires that we hedge our bets between equities and safe fixed income investments.

Further still, as you get nearer to retirement, you should become increasingly more conservative, and increase the percentage of your assets devoted to bonds and/or or GICs, because these assets carry less risk. Dale Rathgeber is semi-retired and he therefore invests half of his portfolio (and the portfolios of his wife and family) in exactly the same way as recommended in the October Strategy, and the other half in less risky fixed income investments. A common rule of thumb is that the percentage of your portfolio which should be devoted to equities is 100 minus your age. If you are not familiar with fixed income investing, email us and we will send you a Guide to Fixed Income Investing, in order to help you become properly diversified between equity investments, and safer fixed income investments such as GICs and bonds.