Investment returns are volatile. Some years returns are excellent and other years you wish you had never invested at all.
The same is true for Canadian pension plans. They have the obligation to pay retired pension holders a specific amount of money every year. Poor investment returns would make it impossible for them to fulfill their obligation.
Volatility and periods of poor returns is the way the stock markets work. It has been this way for the past two hundred years. Following a disciplined method of investing requires you to diversify your portfolio and then stay invested for the long term.
This is necessary because investment losses mean your reasons for investing will be compromised. Poor returns will hurt your chances of providing financial support for your children’s post- secondary education or your own retirement.
It is very easy to doubt ourselves when investment returns fail to meet expectations but self-doubt also is part of everyday life. Years ago I had the privilege of speaking at a graduation ceremony for Sheridan College. My message to the students was about their career and the courage needed to be successful.
I used the example of the brave cliff divers in Acapulco. When they look down from high cliffs above they can see the ebb and flow of the ocean far below. The ocean bottom is exposed at the precise time they need to push off from the security of their ledge so when they reach the water it will be at its deepest level.
This same type of courage was required by these young graduates as they ventured out into the working world and to begin their career.
Investors need this same courage to stay invested during unsettling periods of poor investment returns. We received good news last week illustrating how patience and a little courage paid off for Canadian pension plans.
Pension consultant Mercer has 607 private and public sector clients. Last year, after several years of poor returns, 60 percent of their clients were less than 80 percent funded meaning they could not fully meet their future financial obligation to retirees.
Last year was a great year for stock markets around the world and the fortunes of the Mercer clients rebounded so the average pension plan was 99.9 percent funded.
This is the highest funding level during the last 12 years. Pensions now have the financial strength to pay their obligations as opposed to the respective organizations having to use their own cash to fund their pension obligations or default to retirees that depend on pension income.
The same skill that allowed these large pensions to be successful is the same skill individual investors needed. You have to invest for the long-term and not be tempted to panic and sell investments when they have done poorly.
Investing and sometimes life is challenging. As stated above, sometimes success takes courage.