May 27, 2008--Follow-up to letter of May 14

Greetings again!

About a week ago, I sent out my last newsletter about how speculators differ from pension managers, and my approach to investing RRSPs for retirement. If I were to highlight one point from that article, it would be this—in managing RRSPs we have to aim for reasonable and reliable returns to reflect the importance of accumulating and maintaining a nest egg for retirement.

In 2007, we’ve experienced something that we need to expect, namely that not all our investments always go up. So “reliable” does not mean every year is a good year! This is the price one pays for growth. Take for example one of my favourite funds Trimark Global Balanced fund. It has a 5 year average annual return of 10.7% per year [which is great] but last year dropped by 12% [ouch].* But remember that the 10.7% result includes last year’s loss.

Thus we are reminded of the importance of focusing on the long-term rate of return and ignoring, or at least keeping perspective, when looking at one year results. This brings me to the message of this newsletter and I’ll stick with my example of Trimark Global Balanced fund [there are other examples I could use]. Let’s consider the following facts—

1. Over any 5 year period in history, the fund has never dropped in value. The average annual compound return for this fund over all 5 year periods is 9% per year.**

2. The fund has been around for 8 calendar years. During that time, it dropped in value in only 2 of those years. In 2002 the fund dropped by 8.1%. The next year, 2003, it gained 23.5%. In 2004 it gained 11.2%. So here are my points. Growth funds will drop in value about once in every 4 years [when averaged over the long term]. We should expect this to continue and understanding this will help us weather the bad years.After growth funds have dropped, they have eventually recovered [gone up] and often they recover quickly.Good funds over the long term provide reasonable and reliable returns. Let me finish by pointing out that Trimark Global Balanced fund dropped by 8.1% in 2007.

So what might happen next? Well, it’s already started—the fund made 4.62% in the last 3 months. And if history repeats itself, and I’m confident it will, I’m going to be writing another newsletter down the road—a year from now, two years?—and saying, yes, our patience in the aftermath of 2007 was rewarded. And what I can say right now is thank you for your patience and for trusting me to be your advisor.

Cheers!

Tom

PS—have any questions for me? Please let me know.

*for the period ending March 31, 2008. Note that 10.7% occurred at a time when GICs were paying about 4%.

** measured by a “trailing return basis” meaning that for each month that the fund has been around, you go back 5 years and measure the return.

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd