At PWL Capital, we believe it’s crucial to take a long-term view of investing. That’s why I sat down recently with my colleagues François Doyon La Rochelle and Raymond Kerzérho to talk about our investing lessons since 2000 for an upcoming episode of our Capital Topics podcast.
The common denominator in our discussion was the importance of patience for successfully building your wealth over the long term.
You only have to consider the many momentous events that have occurred during the last two decades to understand why patience is so important. The list includes the bursting of the tech bubble in 2000, 9/11, the Afghanistan and Iraq wars, an extended bear market in 2001-03, the financial crisis of 2007-09 and, most recently, the COVID-19 pandemic.
Through it all, the stock market has kept going up. Since September 2001, the S&P 500 has gained an annualized 8.2% per year in Canadian dollars, while the S&P/TSX Composite in Canada is up an annualized 8.1%, and the combined MSCI EAFE and Emerging Markets index is up 6.6%.
If you had let your emotions get the better of you and bailed out of the markets in response to any of the events listed above (or the many others of lesser importance), you would have deprived yourself of those gains.
With that in mind, here are the four most important lessons to take away since 2000.
1. You don’t know what you don’t know
This phrase encapsulates the deceptively simple observation that no one knows what the future holds or what impact events will have on the markets. For example, no one could have predicted the terrorist attacks of September 11, 2001, or the devastation of the global pandemic.
Howard Marks, co-chairman of Oaktree Capital Management, summed up the importance of intellectual humility when investing this way: “No amount of sophistication is going to allay the fact that all of your knowledge is about the past and all your decisions are about the future.”
2. You can’t forecast the future, but neither can anyone else
This lesson is a corollary to the last. Despite the impossibility of predicting the future, many economists, analysts and active investment managers earn their money trying to do just that.
All the noise they create can lead you astray from your investment plan with dire consequences for your wealth.
3. Investor behaviour and discipline are crucial
To avoid pitfalls, it’s essential to develop a disciplined investing mindset. This means filtering out the noise of the moment and sticking resolutely to a long-term view that’s guided by your investment plan.
A well-designed investment plan is a roadmap you can return to when times are tough and you are tempted to stray off-course. Your portfolio should be aligned with your risk tolerance and risk capacity. It should also be tax efficient and broadly diversified. These are the factors you can control.
4. Evidence-based investing works
I recall in 2003 when as a firm we made the decision to implement fully passive portfolios. My experience in the years that followed has confirmed my belief that adhering to scientifically verified principles of sound investing is the best way for our clients to have a successful investing experience.
It has produced solid investment results for them and remarkable growth for PWL Capital as more and more people have embraced the power of low-cost passive investing and the other best practices we follow. It’s an approach to investing that gives clients the confidence to stick with their investment plan through good times and bad.
Be sure to download our podcast to hear more investment lessons from the past two decades. You can also learn more about the fundamentals of evidence-based investing by downloading your free copy of our eBook, 7 Deadly Sins of Investing.