We have met the enemy …

July 11, 2014

Those of us 50+ may remember the Pogo cartoon series and the infamous line;

we have met the enemy

Equity market risk is considered the reason most investors do not invest in, or stay invested in equities. The US firm Dalbar reports annually how equity market investors consistently underperform the equity market itself!  With long term growth of the equity market consistently positive, we have to wonder, why do most investors feel the equity market is risky and why are equities volatile?

Ibbotson and Associates completed research on the performance of different asset classes (equities and fixed income) over the longest period for which data was available (which was from the US).  The following is the average annual returns, (assuming dividends and interest was reinvested) : for the period 1926 to 2013

        Equities – Large Cap Companies    10.1%

         Equities – Small Cap Companies     12.3%  

         Fixed Income – Long-term, high quality corporate bonds    6.0% 

Ibbotson also determined that the long term Consumer Price Index (inflation), using the governments’ method of calculation, has compounded at 3%.  To get the real return from equities (after inflation)  we simply subtract 3% from the long term returns:

          Equities – Large Cap Companies    7.1%

          Equities – Small Cap Companies    9.3%

          Fixed Income – Long-term, high quality corporate bonds    3.0%

We can conclude that over the last 90 years, through two world wars, a depression and countless financial and other crisis, the ownership of companies (equities) provided an average annualized compound return after the increase in cost of living of 2 to 3 times the average return of lending to quality companies (owning corporate bonds).

So, why doesn’t everyone invest in equities given the virtual certainty (given time) that owning the shares of good companies would (over the certainty of time) net investors 2 to 3 times the reward of loaning to those companies?

The most common answer is, well, equities are riskier than fixed income and could go down!

But wait a minute, it’s true that over 90 years of data, equities have gone down and individual companies even decline to zero, but collectively a broad portfolio of equities such as would be purchased within an equity mutual fund, does not stay down!  If the definition of risk is the potential to lose your money, then over long periods (or just waiting a few years for the inevitable recovery), a broad portfolio of equities or a diversified mutual fund should not be considered risky.

A better answer to why many investors feel the equity market is risky and do not invest in equities or those that do, don’t make the historical returns is, volatility.   Volatility, however, which is a temporary decline and always results in recovery within a few months or years, is not risk, which is the chance that a broad portfolio of equities would go down in value and never recover.

Temporary declines happen so regularly we really shouldn’t be surprised. The average intra year decline is about 14% and we have experienced 13 or more declines greater than 15% over the last 40 years.

Many investors and economists prefer to believe volatility is the result of instability of the economy or corporate earnings.  Here again, when we look at longer time frames, the economy (with recessions included) chugs along at just under 3% (as measured by Gross Domestic Product) including recessions. Corporate earnings similarly average 5 to 6% growth over longer time frames.

So once again, if the equity market, economy and corporate earnings show consistent growth over longer periods, why the feeling of risk and degree of volatility in equity markets?  A recent paper from Morningstar “Optimal portfolios for the long term” found that, “investors require a larger risk premium during recessions and are more risk tolerant during an expansion.  This creates short-run volatility through regular swings in prices.”  So in simple terms, investors buy high and sell low – they pay more than they should in strong economies and won’t buy when they should in weak economies.  Given this seems to be as the result of human nature and human nature does not change, equity market volatility won’t change.

So, most investors continue to feel the equity market is risky, despite the historical evidence to the contrary and do not invest or stay invested in equites because of volatility (both up and down!)  which is created by investors who buy high and sell low.

We have met the enemy ….

Defining the “why” of your goals

Failing to reach our personal and financial goals can be both frustrating and disheartening.  And, to make matters worse, we often realize that we are our own worst enemies when it comes to sabotaging our dreams.

However, research has shown that we can dramatically increase our rate of success by first determining a meaningful and internally motivated “why” for each of our goal pursuits.

Self-Determination Theory (SDT) is a model of human motivation that is concerned with supporting our natural or intrinsic tendencies to behave in effective and healthy ways.  This widely accepted model was initially developed by Edward L. Deci and Richard M. Ryan, psychology professors at the University of Rochester, and is now researched and practiced around the world.

According to Deci and Ryan, goal pursuit and goal attainment are highly influenced by “the degree to which people are able to satisfy their basic psychological needs as they pursue and attain their valued outcomes.”  Intrinsically motivated goal pursuits such as those related to personal development, emotional relationships, or community involvement tend to be more rewarding and thus result in higher rates of goal achievement.  That is because these goals are more likely to satisfy our need for competence, relatedness, and autonomy.  In contrast, extrinsically motivated goal pursuits—such as those aligned with financial gain, image and appearance, or fame and popularity—are less satisfying to these critical psychological requirements and will result in lower levels of goal realization.

Therefore, taking time to evaluate your pursuits based on your psychological needs will increase your awareness of the “why” that underlies your aspirations.  This will form a strong emotional connection to your goals and strengthen your commitment.  In particular, consciously forming goals that will satisfy your need for competence, relatedness, and autonomy will keep you on course to achieving your goals.


As defined by SDT, competence is the need to engage in challenges and to experience mastery or effectiveness.  Goals that meet your psychological need for competence will involve activities that allow you to explore your interests, increase your knowledge or skills, and foster a sense of accomplishment.


Relatedness is the need to feel secure, develop intimate relationships, and possess a sense of belonging.  Goals that meet this need will engage you in activities that increase your connections to others, offer opportunities to share your knowledge and skills, and allow you to feel that you are a valued member of a defined group (i.e. family, social circle, community, organization).


Autonomy is the need to organize oneself, self-regulate behavior, and avoid external rule or authority.  Goals that meet this psychological need will include self-directed activities, cultivate a sense of control, address your drives and passions, and strengthen your sense of self.

In summary, goal pursuits that support your internal experience of autonomy, competence, and relatedness will enhance your performance, persistence, creativity, and life satisfaction.

Sources:  “The ‘What’ and ‘Why’ of Goal Pursuits: Human Needs and the Self-Determination of Behavior” by Edward L. Deci and Richard M. Ryan, Psychological Inquiry, Vol. 11, No. 4, 2000.  “The Independent Effects of Goal Contents and Motives on Well-Being: It’s Both What You Pursue and Why You Pursue It” by Kennon M. Sheldon, Richard M. Ryan, Edward L. Deci, and Tim Kasser, Personality and Social Psychology Bulletin, Vol. 30, No. 4, 2004.

Reprinted by permission of Money Quotient, NP

Access to your tax and social benefit info

There are two online accounts every working Canadian needs to set up to get access to important information:

My Service Canada Account – click here

This account provides convenient access to your Employment Insurance, Canada Pension and Old Age Security information.  If you are retiring soon, having this account will give you the planning info you need.

My Canada Revenue Account – click here

Everyone should have access to this account.  Lost your Notice of Assessment, wondering if your return was reviewed; want to know what installment payments you have made – this site will tell you.

If you don’t have these accounts, I recommend you start the registration process as it can take a number of weeks.

A few tips from a reader who just set them up:

Service Canada has their own data base and it doesn’t talk to Passport Canada or Revenue Canada. For women who have not notified Service Canada they have changed their name due to marriage or divorce and have their maiden or married name on their Social Insurance Number card or other ID, you likely need to visit a Service Canada office before setting up this account.  You will also need your original marriage certificate and original birth certificate.  Passports/driver licenses/tax returns will not work.  If you do this at Ottawa locations, only your info will be updated and will then have to apply for your Service Canada Account on-line and getting your Personal Access Code will take some weeks.  You could go to the Service Canada location in Carleton Place (and possibly other outside Ottawa) and get the entire process done while you wait.