A goal of many people today is to retire from the workforce at age 55. With increasing average life expectancy, you should plan to live off your pension and savings for approximately thirty years. One of the most significant financial considerations today, is to maintain the purchasing power of your money over this potentially long period of time.

Thirty years can have a profound impact when making your investment decisions. We want to illustrate this by way of an example. Our time period spans from the great depression until today. This period saw multiple wars, political instability, double digit inflation, oil crises and many other major world events.

The figures quoted are US, but they are excellent to make our point. From the mid-nineteen twenties until today, the compound annual return was 12.4% for small cap stocks, 11.0% for large cap stocks, 5.7% for high quality corporate bonds and 3.1% was the inflation factor. When you deduct inflation, you see that stocks paid 3 to 4 times the rate of bonds.

The best explanation for this huge discrepancy is that there is no guaranteed return when investing in stocks. People were rewarded for accepting an investment that was not guaranteed.

During our example period, there was a significant stock market drop of about 30% that occurred approximately every five years. Yes, stocks can be volatile in the short term. Often we mistake volatility for risk. The real risk is not the short term volatility that you can almost predict will occur every five years, but rather the potential purchasing power loss that will occur if you do not invest money into the ownership of quality businesses.

One of our greatest challenges is to temper our psychological mood. We feel fear when the stock market goes down, and euphoria when the stock market goes up. The next time you feel these emotions, ask yourself if you are a long-term investor. We are confident that most of you will answer, "Yes".

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.