23. Time Heals All Wounds

Transcript:

Hello, and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld. Today is part four of my summer series where I'll be focusing on more frequent, but shorter episodes on the topics of investing smarter and reducing taxes. 

At times, investing can feel a lot like gambling. If you look at the stock market and you look at headlines, things are going up all the time, but then they also go down very quickly. I often say, well, I've heard it said anyways, and I share it with my clients, but the stock market often takes the elevator down and the stairs back up and it's tough to know when you're going to get on and off. So if you look at headlines, you watch CNBC or Bloomberg. They'll often talk about the market being at all-time highs, and maybe they'll have a quote from a famous billionaire or maybe Michael Burry, the guy you might remember from the movie, “The Big Short”, and they're saying this is the scariest market I've seen since 2008 or whatever it might be. 

There's a lot of garbage out there in the media and so we always need to be careful about taking buy and sell advice from people that are not in your situation or people who don't even know what your situation is like. That can be friends, family or people in the media, but all in all, because of all these different factors, it's tough to really know what's going on. 

So it can feel like a gamble. So let me build a bit of a gambling analogy here. How does gambling really work? Let's use the most stereotypical gambling mechanism that you could probably think of. Let's use slot machines in Las Vegas for an example. In Nevada, slot machines need to pay out a minimum of 75% back to the players. 

You might interpret this as thinking you'll win 75% of the time. No, it's not actually the case. What this really means is that the longer you play, the more likely it is you’ll end up losing 25% of your money. So hypothetically, if you play long enough and you've got unlimited cash and you put a million dollars into a slot machine, statistically speaking, you should expect to walk away losing $250,000 after the 750,000 or the 75% has been returned back to you as the player. 

This is true with any game when the odds are stacked against you, the longer you gamble, the less likely it is that you'll succeed. If you've ever been to a casino or you've seen it in movies, you know, when the dealer deals out all the cards or the roulette wheels start spinning.  They always say, good luck everybody, and you'll need good luck because they know that the odds are in the houses favor and the longer you play and the faster you play, the more you're going to lose. 

Now let's compare this with investing. That might feel like that, sometimes. Now for this example, I'm going to take data from something called Morningstar and Morningstar is a free, publicly available data service. I guess they probably have a paid version too, but if you go to morningstar.ca you can find a lot of this data there. But they published data on rolling period risk and return over different periods ;One-year, three-year, five-year, ten-year and 20 years.  Rolling periods just means that for a one-year period, they wouldn't just look at, say January to January, they would look at also March to March or August to August. And they would do that over every one-year period and the data that I have goes back to January of 1950, up until June of 2020 here.  So just over 70 years of data. Again, just for a disclaimer, even though there's 70 years of historical data, that doesn't mean the next 70 years are going to look exactly the same, but this is as much history as I have to go on here. So I think it's worthwhile just to take a look at history, but also assume that it may not continue this way going forward. 

So back to the data set here over the last 70 years, this report is showing 835 different one-year periods of time. Okay. So again, let's say January of 2001 to January of 2002, you know, and all those different periods of time, 835 different periods. And let's just look at Canadian stocks here. We can do this for any number of different asset classes, but let's just use Canadian stocks. 

So during all of those 835 one-year periods, 74% of them were positive. Meaning if you invested in Canadian stocks over the last 70 years, 74% of the time you made money, one year later.  You might say, well that sounds close to the statistics for gambling and slot machines. That was 75% payout, and this is 74% success rate, but there is a slight difference between those two. Also keep in mind that if with investing you still own the investment after that year, it has just decreased in value potentially if it went down. Whereas when you gamble, that money is gone, it evaporates, and it's gone forever. But let's go back and let's look at some other periods of time for investing in Canadian stocks. 

So over a three-year period of time, 90% of the time you had a positive return. So again, let's use a historical example, say January of 2001 to January 2004, that's a three-year period of time, 90%. Any of those three-year periods of time of the last 70 years you would have made money. So over a one-year period of time, 74% and then if you wait a little bit longer than your odds jump up to 90%. Okay, let's keep going.  Over a five-year period, 98% of the time you had a positive return. And then finally, over a 10-year period, historically speaking, you had a hundred percent chances of having a positive return investing in Canadian stocks. 

Now we can go longer than that, but every longer period than 10 years also includes every 10-year period. So it's going to be a hundred percent as well. So you can see here that the longer you hold your investment. The greater your chances are of coming out ahead. Again, let's go back and contrast this with gambling, where the longer you play, the greater your chances of walking away with less money. Whereas with investing the longer you hold, the greater chances are of making money. 

So investing smarter has so much to do with boring old patience. Most people don't want to hear that, but if you really want to increase your odds of success, just keep waiting as long as you possibly can. 

Thanks for joining me today on the Canadian Money Roadmap Podcast. If you enjoyed today's episode, I'd really appreciate if you left me a review on apple podcasts with your biggest takeaway. If you have questions or ideas for topics you'd like me to discuss on future episodes, please reach out via my contact info in the show notes. 

This podcast is intended to be educational in nature, and you should always consult your financial, tax and legal advisors before making changes to your financial plan. Any rates of return discussed are historical or hypothetical and are to be used for educational purposes only. Evan Neufeld is a Qualified Associate Financial Planner and registered investment fund advisor. Mutual funds are provided through Sterling Mutuals Inc.