Taking a longer view

It’s a cliché to say investors should think long term. Everyone knows successful investing requires an ability to tune out the noise of daily market commentary and the discipline to stick to a plan. But even if we understand that intellectually, it’s still awfully hard for advisors and their clients to focus on distant targets. It might help to get some inspiration from pension funds—after all, a client’s retirement portfolio is just a type of personal pension plan designed to provide a lifetime of income.

In the investment summary document for the Ontario Teachers’ Pension Plan, the managers point out the fund “will be paying pension benefits to today’s youngest teachers 70 years or more from now. As a result, the key objective of our investment program is to help the plan meet its long-term funding needs.” That second sentence, in particular, could find its way into a client’s Investment Policy Statement. Because even if most of your clients don’t need their money to last another seven decades, their time horizon is probably a lot longer than they think.

Many investors anchor on their planned retirement date: if they’re 45 years old and expect to quit work at 65, they invest with a 20-year outlook. But that’s too short-sighted. The client may start drawing from the portfolio in 20 years, but it doesn’t end there. A pension fund’s “long-term funding needs” are calculated based on life expectancies. And today a 65-year-old Canadian can expect to live another 18 to 21 years—and that’s just the average, which means many will live much longer. With that in mind, a 45-year-old should be investing with the goal of making the portfolio last 50 years.

That kind of long-term thinking puts a lot of investment decisions into context. Take the recent rise in interest rates: as of late August, 10-year Canadas were yielding over 2.7%, up from just 1.7% in May. That’s caused fixed-income funds to tumble, and we’re on track for the first year of negative bond returns since 1997. Investors with a short-term focus will complain their bond funds have lost value. But a pension fund manager—and an advisor who thinks like one—will look at rising interest rates as a positive, because expected returns on bonds are now considerably higher than they were only a few months ago. That will make it easier to meet those “long-term funding needs.”

By framing discussions like this, you can help your clients see market events—whether it’s rising rates or a stock market correction—as short-term losses that create long-term opportunities.