Back in 1984, Joan, Michel, and Miriam each had $100,000 to invest. They planned to reinvest whatever money they made along the way, but their personal goals and investment choices were very different.
Joan: Widowed at age 50 in 1984, Joan was an ultra-conservative investor. She wanted to keep her money safe. She knew her company pension would not be enough when she retired. Joan put all her money in GICs.
Joan's investments: 100% in GICs
Miriam: Back in 1984, Miriam was a 40-year-old teacher. She still had 20 years to go until retirement. While she had time left to grow her savings, she didn’t want to take a lot of risk. She preferred a good balance of safer, steady investments. Miriam adopted a moderate investment profile. Here's how she invested her money:
Miriam's investments: 50% in Canadian stocks (moderate risk), 40% in bonds (low risk), and 10% in cash equivalents
Michel: In 1984, Michel was a 22-year-old professional hockey player. He thrived on taking risk. He also knew he wouldn’t play hockey forever and his income might drop after he retired from the game. He wanted to grow his money quickly, and he knew he had time to recover from losses along the way. His investment style was moderately aggressive. Here's how Michel invested his money:
Michel's investments: 70% in Canadian stocks (moderate risk), 20% in bonds (low risk), and 10% in cash equivalents
The results: This table shows sample returns for Joan, Miriam and Michel, based on data from the past 20 years. Keep in mind that this is only an example. Other investors, holding other investments, might have fared quite differently over the same time period. Also, results from another 20-year period could be quite different.
Started with (January 1984)
|After 5 years (January 1989)||After 10 years (January 1994)||After 20 years (January 2004)||Average annual return:|
Many things affected our three investors’ results over this 20-year period:
- Interest rates soared in the late 1980s. The stock market, on the other hand, went through a major drop in 1987 and a slow recovery. During this time, Michel’s investments lagged. Joan’s investments grew faster and continued to do well throughout the ups and downs of the early 1990s.
- By 2000, the picture changed. Interest rates fell. The stock market was at a new high. Joan’s investments soon fell behind the rest.
- In the last five years, interest rates stayed low while the stock market went through another cycle of ups and downs. Michel’s investments continued to grow the fastest, while Joan fell further behind.
Lesson learned: In most cases, ultra-conservative portfolios will see slower, steady growth. That’s the trade-off for keeping your money stable and secure. For more growth potential, you will have to choose a more aggressive asset mix, with a higher level of risk.
Just remember: the more risk you take investing, the more likely you will see losses along the way. Make sure you have time and money to recover from those losses. If you’re not sure what asset mix is right for you, you may want to talk with a registered adviser.
Watch this video of Malcolm Hamilton, a Principal with Mercer Human Resource Consulting Limited, with Rob Carrick from the Globe and Mail discussing conservative investing.
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