By Miles Clyne
This discussion is about WHY you need performance in your investment accounts, including your RRSPs and TFSAs.
Many people are not aware that they are not restricted to GICs and savings products in these accounts. In today’s low interest rate environment, GICs, term deposits and many traditional bonds can be not much more than an oversized anchors in a portfolio if not managed correctly or used appropriately.
I loved the great debate a number of years ago with respect to the 1% crowd, in reference to the excessive concentration of wealth within the hands of 1% of the population. Negativity about these individuals was very high. But negativity is rarely of value because it is usually more about the problem than the solution. In today’s society and economy, the only person holding you back is yourself.
Investing can be confused with simply saving your money. Banks are more than happy to let your money sit in daily interest accounts where you literally go backwards with your money, but they get to capitalize on your cash as they indirectly get to loan it out at higher rates. The less they pay you, the more they make. The reason your money can go backwards, even earning a modest amount of income, is because of inflation and your loss of purchasing power.
The chart below shows the impact of inflation on your money. The basic intent of investing is to overcome inflation. Most developed countries like Canada and the US try to keep inflation between 1 and 3 percent annually. We built the chart below to reflect a 2% inflation rate. If you make next to or nothing on your money (your cash sitting under your mattress or in the bank), inflation will erode the purchasing power of your money over time. At a 2% rate of inflation, you lose almost 20% of your purchasing power over just 10 years. So to buy something that cost $100 today would cost you about $120 in 10 years.
Why I smile every time I think of the 1% debate, I also think about where I am at relative to where I want to be. All I know is that I don’t want to be at the other end of spectrum. The reality is that it is pretty easy to start climbing higher and getting closer to where you want to be. One of the best ways I know of is to start taking better care of what you have. If you have any savings at all, become very focused on the return you are getting.
The example below illustrates the benefit of earning 6% vs. 5% on your investments. On a $100,000 investment it could add up to an additional decade of retirement income. Returns can be generated a number of ways. What if you are simply paying too much in fees, or if you could shop for the best GIC rates, or get a better returning investment strategy? One percent is not out of this world. We have written blogs on how to get that 1%. But if you don’t ask, you don’t get. Getting good results is just like buying a new car or pair of shoes. You have to shop around to find what you want. If not, buyer beware.
There are challenges all of us need to overcome with money. One of the first is understanding the importance of investing and then finding the solutions that give you the best chance of getting higher performance.
Making the commitment to invest intelligently isn’t mandatory for either the rich or poor. We see very wealthy people frequently losing their fortunes. I think we should all focus on the 1%, but the 1% should be about maximizing our potential, not comparing ourselves to others.