With three stock market crashes in just over a decade (the 2000 tech wreck, 2008 and the one that threatened this August), it’s worth asking why investors even put themselves through all this agony.
The holy grail presented by the financial services industry is dubbed “retirement,” the premise being that by working hard for three or four decades in your prime income-earning years, you can take a load off in one’s twilight years. I question whether ending your life with endless rounds of golf, bridge and daytime television is what people really want or need, but that appears to be the vision presented in the TV advertisements of the nation’s banks and mutual fund companies.
The baby boomers and the generation after them are, however, discovering that the Defined Benefit pensions of their parents are not likely to be around to furnish their own retirements. Forced into investing in their RRSPs or Defined Contribution (DC) pensions, they are also forced to accept stock market volatility. Yes, they can rely on government pensions (CPP, OAS and the GIS) for a moderate baseline retirement income, but odds are that they’re going to have to supplement it with a healthy investment portfolio and/or by remaining in the workforce in some capacity.
I suggest that we “retire” the word retirement. My preferred term is “financial independence” or “findependence” for short. I use the phrase “Findependence Day” to denote the point when one can, in theory, generate enough income from multiple sources that it’s no longer necessary to work in a traditional corporate “job.”
The crucial distinction, however, is that one doesn’t necessarily stop working just because that day has arrived. You may indeed continue to work to generate income but you would do it because you want to, not because you have to.
So why put up with the heartache of investing in stocks that often plunge? I’ll answer that in depth over the next six months in this space (on a weekly basis), but the short answer is that the key to financial independence is spending less than you earn (via a practice I call “guerrilla frugality”) and saving the difference.
Traditionally, saving meant putting a little money in a bank account paying small amounts of interest. Given that the U.S. federal reserve has promised to keep interest rates low for another two years, thereby dooming savings to not even keeping up with inflation, savers must take the next step and become investors, which means embracing stocks and other securities offered by financial markets.
More about this next time.
Jonathan Chevreau is the National Post’s columnist and author of Findependence Day.