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By Boyd Erman
National Post
FP Weekend Section
Saturday, June 10, 2006
“Young investors weaned on the dot-com bust may be avoiding stocks because they fear another crash.”
At any age, investing right is like finding the perfect line on a ski hill. Take too many risks, and you'll end up in a spectacular fall. Fight the mountain by skiing too slowly, and you will tire and likely end up on your butt, though in a less showy manner.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, “Learn what works and doesn't work for you. That’s a lesson that will pay dividends in a huge way down the road.”
The key is to find the optimum line -- as close as your fear will allow -- on the hill, where gravity and your skis do the work, yet there's no real danger because you are in control. You get to the bottom faster with little effort and lots of style.
Building a financial portfolio is much the same. The more risk you're willing to take to put yourself closest to the optimum returns available from the stock market, the faster your money will grow and the less you'll have to work at saving.
For younger skiers, who heal faster, it's easier to ski right on the fall line, just as it is easier to push for more returns by putting most of your money in stocks and staying away from "safe" investments such as bonds. Those assets are too much like slowly traversing back and forth across the hill instead of aiming straight down it. They eat up your investing energy and don't really get you far because inflation erodes the value of the slow-growing money.
Still, despite their ability to recover faster from the ups and downs of the stock market, many young investors are enamoured of bonds. A U.S. study of retirement savings choices by Hewitt Associates of Illinois shows that investors between the ages of 18 and 25 are putting almost 35% of their tax-deferred retirement savings into bonds.
Apparently, they are afraid of falling. Some have suggested that young investors remember too vividly the dot-com bust and subsequent declines in stocks of 2000 and 2001, and are worried the same thing could happen again.
There's only one way to conquer a fear of falling. As any coach will tell you, you've got to learn to fall right so that it doesn't hurt too much. That's why, when you are young, it's not a bad idea to carve out some of your savings and take some risks with it. Leave the bulk in blue-chip stocks and mutual funds and use the rest to play with riskier stocks. Learn what works and doesn't work for you.
"I'd rather see that done at a young age, even if that part of the portfolio blows away and goes to smithereens," says Adrian Mastracci, an investment counsellor at KCM Wealth Management Inc. in Vancouver.
Just as young bodies heal better than old ones, so do young portfolios. For me, the lesson came from what felt like a very big stake in Nortel Networks Corp. About halfway through the company's slide from its peak, and without doing my homework, I stepped up to buy a chunk. How low could it go? After all, it was once worth more than $100 a share.
Then, after a day of skiing in Whistler in February, 2001, I turned on my car radio to learn that a third of my money had disappeared as Nortel plunged yet again. The news put a serious damper on my night's apres-ski festivities.
In hindsight, it was about two paycheques-worth of cash. But at 25, I had a lot of paycheques in front of me. The fall hurt but I learned to avoid that particular cliff the next time.
"That's a lesson that will pay dividends in a huge way down the road," says Mr. Mastracci.
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