“The only rational measure of success for a long-term investor is total return”        

   Nick Murray

Most investors in poor stock market conditions confuse volatility of the market, with permanent loss of wealth.  Stock market fluctuations have always produced temporary periods of decline, only to go on and create new highs. 

In periods of declining markets, its quite easy to default and say, “I should have just left my money in guaranteed deposits.  I would now be better off.”    This is the “trap” to the long-term investor – sacrificing long-term security for short-term certainty and, unfortunately, long-term disaster.  Let me explain.

Total return is the value of your investments over time, and their ability to maintain your purchasing power net of inflation.  A common phrase amongst our retired clients is:  “ I just paid more for my last car than my first house!”  Consider the client, who retired when GIC rates were 10% and is dependent on the income.  With an estimated portfolio of $500,000, the income of $50,000 was more than sufficient to meet their income requirements.   Now, 5 years later, GIC rates are below 5%, cutting their income by more than half!  And this doesn’t even take into consideration the effect of inflation over those 5 years.  The incredible irony is that this strategy turned out to be the one with the highest risk.

Now, let’s look at a similar example using a diversified equity portfolio.  In order to make this even more interesting, let’s assume that our hypothetical investor had the worst luck and invested right at the top of the 1973 –74 bear market (arguably the worst so far…although today’s market seems to be trying very hard to beat it).  This illustration1 uses a $1 Million dollar portfolio invested in a conservative US diversified equity fund (MIT).  Our investor withdraws 6% a year, for an income of $60,000 per annum, that is

indexed for inflation of 3%.  As you can see from the attached illustration, the market value at the end of 1974 was worth $542, 817 or almost half of the original investment.  Note that it takes 22 years to return the portfolio to its original $1 Million. However, during that period of time, the investor has enjoyed the 6% payout hedged for inflation.  Please note that the investors’ payout has more than doubled over the 25 year period, just to compensate for inflation.
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