There has been a lot of hoopla in the media about why millennials are sitting on cash reserves and only 20 percent are invested in stocks, according to BlackRock Inc. Perhaps in this post I can explain my perspective of stocks, why I’m wary of them, and why they will never make up more than 50% of my net worth.
I first invested in the stock market in the year 2003, after reading David Bach’s Smart Women Finish Rich. I was 18, with a summer job, and realized that with time on my side (I was at the beginning of my career), I should start investing in my retirement. I opened an Registered Retirement Savings Plan (RRSP) and all around me, a cacophony of dissent was made know. My parents thought I should save for a house, or at least a car. Colleagues at work thought I should start saving for a wedding (um, ok). The only person I knew who shared with me that he actively invested, would check his retirement balances several times a day, because he just couldn’t wait to retire. I later learned that it was lack of control which drove his erratic behaviour (more on that to come).
After investing a modest amount over the next few years, I learned about low fee Vanguard index funds. I made an appointment to see my RBC advisor.
“Can I put all my holdings into Vanguard?”
“We don’t sell Vanguard funds.”
“How about index funds?”
“What about this Canadian balanced fund?”
It wouldn’t be the first time an advisor tried to dissuade me from having some control or say over my investments. When I described my investment philosophy 5 years ago to another advisor, she explained that I wouldn’t MAKE AS MUCH MONEY if she followed my suggestions, despite me explaining that I was fine with making less and that my choices were based on my values and ethics.
Strike One: Financial Advisors Make it Difficult to Work With Stocks
I have read between 80-90 books on personal finance. They are mostly written in the following fashion: first budgeting, then debt, then investing, then all the other stuff (finding an advisor, life insurance, estate planning). However my rational was that even if I learned one great tip from a book and implemented it, that was worth my time.
Books will often give an asset allocation that looks something like this:
20% international funds
20% cash holdings/ REITs
Did you notice something? A personal planning book presupposes that investing in securities are the only option available! But actually, your RRSP can hold varied investments such as foreign currency, gold and silver, and small business investments, including venture capital corporations and small business investment trusts. I bet this is the first time you are hearing about this option. That’s because:
Strike Two: The Securities Industry and Banks Ram Stocks Down Our Throats. They’re Not the Only Option.
Outside your RRSP, there are endless other investments you can make with your money. You can buy a franchise. You can invest in a rental property. You can start a consulting business. You can buy antiques or designer purses and sell them at a profit. You can buy the contents of abandoned storage units. Yet no personal finance will ever bring these up (except maybe for real estate) because they are too “risky.”
Strike Three: Stocks Are Risky
Five years after I started investing, I experienced my first recession in 2008. My stocks lost all value they had gined while I owned them. Picking different stocks wouldn’t have changed things. There was no way I could have foreseen it coming. It had nothing to do with what my actions. What do you call an investment that is a temporary losing game, where true insight is impossible, and I he no control over? A gamble.
Compare this with other investments. If my rental property doesn’t appreciate or I lose a tenant, I could always live there. Even if my condo is one day worth zero dollars, I would have something to show for it. If my stocks are one day worth nothing, all I have is a piece of paper denoting ownership. When investments lose money, the advice to investors becomes strangely religious: Just hold the course and continue to believe that they will increase.
If I make a risky gamble with gold, or get my currency hedging wrong, I can always recoup my loss and have a physical asset at the end of the day. If I own a small business and the market is tight and I can’t sell, then I buckle down and create more income, or look into branching off, or even selling my inventory and assets. There are risks inherent with most investments. Which is the reason I am too risk-adverse to ever put more than 50% of my investments into the stock market.
Since stocks are risky, and we have little control over their value, a key tenant of Lady Dividend’s investment philosophy is to never have more than 50% of my net worth in stocks. In future articles we will see other ways I generate cash flow.
Do you consider stocks the base of your net worth?