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I write a lot about diversification and long term commitment.  I like to model my own personal portfolio against the best investors in the world.  No I’m talking about Wall Street or Bay Street bankers.  Nor do I find celebrities like Donald Trump and Mark Cuban as my mentors in investing.  Those individuals are flashy, public figures that like the shine of the spotlight.  I prefer to be low key, almost boring because I don’t like drawing attention to myself.  So who are the best investors?  Who actually maintains a healthy return against the worse possible economic conditions?  Quite easy.  Pension plans.

I’ve written before and I’ll write it now.  Pension plans are by far the most reliable investors because they have to ensure that future payments can be made with their investments.  The whole purpose of a pension plan is to help people fund their retirement.  Isn’t that what you want to do?  Retire early?  Those investors on Wall or Bay Street are just trying to hit home runs.  They need results now because they want to feel the glory and fame that comes with running an outperforming fund.  These people are essentially gamblers trying to take your money and using their “crystal ball” to pick you winners.  Pension plan investors are out there to make sure that, in the long run, the fund grows and is able to make payments to their contributors.

The great thing about investing in a pension fund is that their time frame for investments is infinite.  Long after you and I die, that pension fund will continue on and help fund the retirements of those that come after us.  What better way to invest knowing that regardless of bad economic times, you have an infinite amount of time to let your investments recover.  If only we had that same amount…

One amazing thing that you might not know is that public pension fund portfolios are completely available for the public to see.  So why not model your own portfolio after these successful investors.  For instance, check out the Canadian Pension Plan site.  We all love Canada, it’s a great place to live with free health care and affordable education, but when it comes to investing, it’s a really small place in this big world.   The CPP grasps this fact, and looking at their portfolio not only do you see how diverse they are in their investment holdings, but even their geographic location of investments is completely diversified.

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The miraculous statistic that you might notice is that the average rate of return for the last 10 years, even with the crash of 2008, is 6.8%.  So how well did your GICs do during that time?  How much of your net worth have you improved over that period?  Even if you take a look at the best mutual funds in the world, you will be hard pressed to find one that performed so well during such a volatile period.  If you look hard enough, you’ll probably find that most mutual funds or actively managed hedge funds that operated prior to 2008 are probably gone or folded into new funds.

Notice how I constantly preach diversification and not overindulging in debt or overextending yourself when buying a house.  Real estate is a great investment, but too much is also bad for your health.  You never know if real estate prices will suffer a long drought as it has in the United States.  That’s why even with a large pension plan that has over $192 billion dollars in assets, only 10% is allocated to real estate.  If you really think about your own house, is your house going to be worth only 10% of your net worth when you retire?  Did you think about that before buying that mansion?

Not only is asset type important, but geographic location is just as important.  Canada has only 35 million people.  This is paltry compared to other countries across the world.  What would make you think that Canada would be the only economic engine that drives the world’s economy?  Certainly there are many other countries in the world that have thriving economies.  Why would you want to limit yourself to only one country when investing?

Countries and different assets will all perform differently over any given period of time.  Sometimes real estate is the hot commodity.  In other occasions it could be gold and silver.  In the years after the financial crisis in the United States, bonds were the hottest commodities.  For the past couple of years it has been stocks and equities.  It’s almost impossible to predict what the next best investment will be for the next year, next decade, heck even tomorrow.  So the real question I ask you is why not own them all?  When things are doing well in one asset class, the other might not do as well.  Things could flip around and other asset type might outperform the next year.   By owning everything, you mitigate your risk of having your entire savings, or investment portfolio collapse because one class of investment decides to go kaput.

The corollary of investing in so many different assets is that your overall return will be muted.  Over the last year the Canadian Pension Plan only achieved a return of 10.1%, whereas the general equity markets were well north of 20% return.  On the upside of things, when thing get real bad you also won’t get hit as hard as if you invested in one asset class.  Remember when stocks dropped 50% over 2008 and 2009.   Can you stomach that.   Would you rather have a consistent 7% average return and only experience mild fluctuations in your returns or any given year or do you prefer wild roller-coaster rides with your money where one year you might get 30% return only to see 30% drops the year after?  I’m sure many of you reading this would prefer the former.

The question many of you might ask is why I shouldn’t just buy more into my pensions.  The answer is quite simple.  The pension is essentially giving you interest payouts when you retire.  It’s not returning all the capital that you invest into it.  The reason why the pension fund is so successful is that it doesn’t have to deplete all its capital investments to make future payments.  For you, this is not as good.  Why give away all your hard earned money and not see any of it back other than returns on interest.  That’s why it’s important for you to build your own portfolio that does what a pension plan does, but if you ever wanted to draw on your capital you can.   Who knows, maybe one year you want an extravagant vacation in the Fiji islands.  Perhaps interest alone can’t pay for it, but if you budget accordingly, drawing on your capital is certainly an option that you can use.

When people ask me what to invest in and what is the best way to build an investment portfolio I don’t try to invent the wheel.  I copy.  I have no shame in admitting that I use a proven successful formula.  I’m not a genie or a psychic that can predict the next Apple or Google.  If I want to be the best, I have to learn from the best.

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