Friday, January 18, 2008

A dose of reality

It's been a bit painful watching the slide in the markets over the past month. So far, my retirement investments have dropped by more than $3,000 in 2008. That's not an easy thing to watch. Granted, I likely have 30 years of market growth to get my money back, but it's hard not to cringe at such a big drop.

Until last fall, I was an extremely passive investor. That's not to say that I had any kind of diversification or strategy; quite the opposite. My approach to investing was to have 6% of my bi-weekly paycheque deducted before taxes, and used to buy my shares of my employer's stock in a group RRSP. I left the shares where they were, so technically I was a "buy-and-hold" investor, but I was really walking a tightrope by holding all of my retirement savings in my employer's stock.

In September, I diversified my investments using low-cost index funds. Since then, I've generally seen better performance than in my old, concentrated portfolio, and I'm very happy with the change. However, it's frustrating to have made a measured, informed decision, and still end up losing so much ground.

John Bogle says that anyone who can't imagine a 20% drop in the markets shouldn't invest in stocks, and my gut reaction to my recent investment performance really underscores this point. I've lost about 8% of my portfolio's value in less than three weeks, and this is turning into a great test of my ability not to panic. I'll be invested in these markets for decades, so I need to learn how to weather some bad times.

The silver lining is that, with dollar-cost-averaging through bi-weekly contributions, I can likely look forward to a period of low-cost purchases in the near future.

1 comment:

Y HAT said...


I took 25 years of data for the TSX and found that the probability of negative returns in one year is 23%. I think it's an important number to keep in your head. I find this figure keeps me grounded as it tells me that there is a relatively high probability of losing money in any given year.

I also enjoy this number as I can always look at the inverse and take comfort in the fact that 77% of the time I should experience positive returns. The glass is always half full, I guess.