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History beats hysteria

Don't dismiss past performance; it can be very relevant

Past investment rates of return are largely irrelevant.

Sleep-inducing mutual fund disclaimers give us a clue: "Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated." There is a reason for these disclaimers: they're true!

If past performance is so irrelevant, then why do we pay it so much attention?

Mainly because most mutual funds are less than 10 years old and consequently their results are focused within this period.

Financial researchers tell us that we need at least 50 years of data in order to see significant patterns emerge.

Your eyes may begin glazing over even at this stage, so please hang in there as these realizations could be the difference between a great or poor investment experience.

Let's compare returns for the Canadian stock market using the S&P TSX Composite Total Return Index with U.S. stocks represented by the S&P500 Total Return Index. Keep in mind that most mutual funds underperform these benchmarks. We will not even begin to delve into the huge wealth outside of this continent.

For the 10-year period spanning Dec. 1, 2001 through Nov. 30, 2011, Canadian stocks yielded a 7.61 per cent compound rate of return. U.S. stocks in this period declined by -1.45 per cent compounded. Canadian stocks did much better but, trust me, it isn't always so.

For the 55 year period from Dec. 1, 1956 through Nov. 30, 2011, Canadian stocks yielded a 10.71 per cent compound rate of return. U.S. stocks in this period yielded 11.09 per cent. That's more like it.

The past 10 years of global financial history have not been that rosy. However, we have had such 10 year periods before. The last time was from the mid-1960s through the mid-1970s and, of course, the depression of the 1930s.

We should heed the advice of Warren Buffett in the 2004 Annual Report of Berkshire Hathaway, "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful."

History teaches us and punishes our forgetfulness. Hysteria simply punishes us. The poet and philosopher, George Santayana said it best, "Those who cannot remember the past are condemned to repeat it."

So, ignore the headlines and the talking heads on the television. Their jobs are to sell advertising space. There's a fine line between information and addiction.

Recognize that stock markets work well in the long run and know that there are risks that you need to manage.

There is no such thing as a riskfree return but proper diversification, a long term perspective and professional guidance can help you toward a better investment experience.

The opinions expressed are those of Richard Vetter, BA, CFP, CLU, ChFC. Vetter is a Senior Financial Advisor and Branch Manager with WealthSmart Financial Group/ Manulife Securities Incorporated in Richmond.