From the moment Derek Foster published his first investing guide in 2005, thousands of Canadians have hung on his every word. At just 34, Foster had punched out of his day job as a Radio Shack clerk and telemarketer to become Canada’s self-proclaimed “youngest retiree.” With a net worth of about $1 million, and time on his hands, he turned to writing. And his books, with titles like Stop Working: Here’s How You Can and The Lazy Investor, suggested the path to retirement bliss was alluringly simple. Buy shares in leading companies that pay healthy dividends, he recommended, and hold on to them for the long haul.
Then, in February, eight months into the stock market crash that had wiped more than 40 per cent from the value of the Toronto Stock Exchange, Foster performed a stunning about-face and sold nearly his entire portfolio of stocks and income trusts. “I held on all last year, but I’ve been doing lots of research and I don’t think we’re close to the bottom yet,” he told one newspaper in mid-March. “I don’t see the market suddenly booming,” he told another, the very same week markets launched into the most astonishing mid-recession rally in a century. So what has Foster been doing as markets surged? “I’m reassembling my portfolio,” he says. “I tried to get out and get back in cheaper. I’m now replacing some of the exact same names.”
If one were looking for lessons from the financial crisis, Foster’s U-turn would seem to offer plenty to chew on. Like don’t get wedded to any particular investing style. Or if you do, don’t panic when things turn rocky. Not that Foster, who just published his fourth book, Stop Working Too: You Still Can!, says any of that applies to him. He insists he didn’t get spooked by the crash, and says that bailing out near the bottom of the market, and then buying back in after the rebound didn’t cause him any grief, or even lose him any money. “I’m not any further ahead or behind where I would have been,” he says, thanks to a side strategy of buying put options, a complicated tool that lets investors bet on falling stock prices. Instead, the number one lesson Foster says he learned from the experience was not to share every investment decision he makes with the public.
For everyone else though, the lesson should be blindingly obvious: don’t listen to anyone who tells you they’ve discovered the path to easy riches and a carefree retirement.
There are as many lessons to be gleaned from the Great Recession as there are smashed retirement dreams. The sudden collapse of the markets took almost everyone by surprise, and spared no one. Yet not everyone suffered to the same degree. In fact, while some investors saw their life savings decimated, others managed to emerge relatively unscathed. What did the second group get right, and the first group do so wrong? In the same way that economists and government officials are raking through the ashes of the old financial system to figure out ways to avoid a repeat of the chaos, investors can learn key lessons by looking back to help them as they save for retirement.
Lesson one might be simply to recognize your own mistakes. “When it comes to personal finances, most people don’t spend the time to find out how exposed they are to a shock like this,” says David Trahair, a chartered accountant in Toronto and author of Enough Bull: How to Retire Well Without the Stock Market, Mutual Funds, or Even an Investment Advisor. “Unfortunately, a lot of them learned that the hard way.”
Long before anyone was talking about collateralized debt obligations or the credit crunch, many investors had already unwittingly loaded up their portfolios with explosives timed to go off at the first sign of trouble. And many had become convinced that the seemingly unstoppable rise in stock prices offered a one-way ticket to the good life. As many boomers moved closer to retirement, and discovered they hadn’t saved enough, they piled into investments promising high returns and low risk. Some, like the $32-billion market for asset-backed commercial paper in Canada, blew up in spectacular fashion. Canadians had also piled into income trusts for their hefty cash payouts and perceived stability. But even without the impact of a new federal tax on income trusts, which is set to take effect in 2011, many trust companies ran into trouble. As the recession took hold, they were forced to slash payouts.
Yet it wasn’t just products cooked up by the financial engineers on Bay Street that deep-sixed investors, say experts. Over the last year, Adrian Mastracci, a financial adviser at KCM Wealth Management in Vancouver, has seen a steady stream of clients come to him with shredded portfolios. One thing almost all had in common was the lack of a written financial game plan to give any focus to their investments, he says. Some of the walking wounded had their entire portfolios in equities, while others went even further and ploughed all their savings into hot sectors like oil and gas stocks. “Investors often don’t realize all the risks they’re incurring,” he says. “When you’re heavily into one sector, you can get creamed.” And that’s exactly what happened.
