Last Thursday Catherine Murray (BNN Business Day PM) said to me, that there "were a lot of opinions out there of what the true risks really are..." ( http://www.highrockcapital.ca/in-the-news.html )... and we went on to discuss what some of those risks are (in my "humble" opinion, as my mother always so succinctly put it).
As we are wont to do from time to time (post interview / discussion), we go back in our minds and wonder if there was something else that we might have said that would have been a bit more poignant.
For example, actually, the "real" risk, shared by the great majority of us, is that we will, somehow, out-live our money and that between now and that time, we best do what is most prudent to ensure that we don't.
The risk that we take, from now until then has to do with preserving and in most cases growing our wealth to continue to be able to provide what we desire as an "appropriate" lifestyle (and of course this varies amongst us all).
Inflation becomes a big risk because that will erode our purchasing power. If the costs of the goods and services that we need to live comfortable lives (and provide those same types of lives for our dependents) grow at an increasing rate, then we need to take that into account in our life-long equation.
Hence we talk about the math behind present and future value.
These days, we don't talk about inflation as much as we did back in the 1970's and 1980's when it was running at annualized rates of 8-9%.
We believe that our personal levels of consumption (and they are not necessarily what Statistics Canada's "basket of goods" for the purposes of calculating CPI are) will have a cost that grows each year.
Some of our clients have actually gone to the trouble of doing this experiment, but it is a whole lot of work. Their reactions were quite interesting however (surprise and shock), because in most cases, you will find that your actual personal rate of inflation is likely to be well-ahead of the annual rates that we are provided with by the number crunchers at Stats Can. Especially if you are dealing with tuition, health care and other lifestyle costs that are more "up-scale".
So add that to the list of risks: under-estimating your personal rate of inflation.
I know that is not what Catherine had in mind when she asked me about "the risks out there", but if we are under-estimating our future cost of living, that makes us more vulnerable to the running out of money concern.
Be that as it may, we save and invest our money to try and get a rate of growth (after fees and taxes) that will allow us to stay ahead of the erosion of our purchasing power.
If our personal rate of inflation is at 2.5 - 3%, then we need to achieve a rate of growth on our money (after fees and taxes) of at least 2.5 - 3% to just stay in our comfortable lifestyle (whatever that may include).
The really big risk now, is that there is no way to get that kind of return without taking some pretty substantial risk: some banks will pay you 1% (or a little more, but there is still a little risk and the return is taxable if it is non-registered money). So for all intents and purposes the risk-free rate of return (after taxes) is somewhere between 0 and 0.5%. Then you have to add in the fees. There are always fees (there is no way a bank does anything for free), regardless of what the headline says, just read the fine print!
Basically, at this point in time, there is no way to get growth and take no risk and there is no way to stay ahead of inflation without taking some risk.
So you have to do a couple of things (to lower your risk):
1) Do not be fooled by "headline" fees, without digging a little deeper. There are safe alternatives to banks (and as my friend and business partner Paul Tepsich will tell you, banks are not without their own set of risks).
2) Understand your personal rate of inflation and what you need to achieve to stay with it. (Do a Wealth Forecast).
3) You will have to take risk (even owning a house has significant risk attached, despite what you may hear and read). So you have to have a partner (a professional) who can guide you through the minefield of risk.
4) You need to be careful who you partner with. You need to understand their motivation: are you their priority? or are they their own priority? (if it is a bank, is the client most important or is the stakeholder)? That is crucial.
Want to be the priority?
That is what we do, we make you our priority and while the financial service industry is going the other way (stakeholders first), we are not, because we believe in the "service" part.
So think about your "true risk" when you have a moment.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist