Will all the gold that glitters glitter less?

Warren Buffett tossed some nuggets of wisdown into the stream again recently.

In “Gold Riot”, I discussed gold bullion, gold stocks and Buffett’s opinion on the metal.

Despite gold’s excellent performance of the last ten years, it’s been one heck of a ride. Soaring and then plummeting, gold has shown investors that when it corrects, it corrects with a vengeance.

Buffett sees gold as an unproductive asset. He believes stocks are the more “productive” assets and will “prove to be the runaway winner” trumping bonds or gold over an “extended period of time”.

He also says stocks will be “by far the safest” of assets.

Bonds, says Buffett, need a “warning label”. He believes they’ll fall victim to inflation and taxes.

Risk is a slippery slope. While many investors don’t realize it, so-called “safe” investments like GICs or U.S. Treasuries have risks, too. At the moment, Buffett sees bonds (including other currency-based assets) as “dangerous”.

Still, portfolios need some bonds depending on the investor’s risk tolerance. Buffett’s company, Berkshire Hathaway, holds bonds for liquidity issues.

Investors who have been heavy in bonds have had a great year, but such returns may be harder to come by in the future.

Buffett says:

… owners [of gold] are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future … bubbles blown large enough eventually pop.

To see Buffett’s interesting metaphor on gold, see my blog from last December, “Gold Riot”. Famously, Buffett compared gold to stocks and farmland.

Fondling the cube

Buffett again emphasizes his position on gold:

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

If you didn’t check the link above, do it now for a more complete picture of Buffett’s philosophy.

Buffett highlighted the mania in gold near it’s peak. Gold has recovered since it dropped, but Buffett’s still not a big fan.

In “Gold Riot”, I pointed out, agreeing with Buffett, that it would be wise to be cautious.

The new boss different from the old boss?

Famously, Buffett called the tech bubble early over ten years ago. Many made light of his opinion then, saying the “new economy” no longer needed to play by the old rules.

But the “new bosses” turned out to be wrong and the “old boss” turned out to be right.

Hype and speculation eventually led to a blow out. Buffett was early, but he was right.

With respect to gold, if an investor interested in gold had held off during its spike last year and waited for the correction, they would have:

• Had a great buying opportunity

and/or

• Avoided a big downturn

Gold has its place in a portfolio, but there are some great points to remember about investing in bullion or gold stocks.

As with any other investment – perhaps even more because of its volatility – hype and value are part of the equation.

Gold will play its part in the next few years, but do investors understand the risks associated with investing in gold?

See Buffett’s article in Fortune

Sprott diversifies:

Sprott, volatility and gold

Click here for more about bonds and fixed income investments

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

Follow @JohnRondina

A recent survey dealt with this question. The biggest changes in tactics were:

To blog or not to blog?: It’s no longer even a question

Blogs were the big winners as shown below. Videos shared the limelight:

• Blogs (27% increase)
• White papers (19% increase)
• Videos (27% increase)

Blogs and videos showed huge increases, and tactically, top the list when it comes to usage.

The 7 sites of the SocMed army

You can almost hear relentless guitar chords announcing these increases:

• YouTube: 47% increase
• LinkedIn: 39% increase
• Twitter: 35% increase
• Facebook: 30% increase

Twitter is king. But when it comes to usage, it will be interesting to see how Twitter, LinkedIn and Facebook march on through the year.

Marketers are increasingly confident in their content marketing.

They are ramping up their content marketing spend: 60 per cent plan to spend more on their content marketing budgets over the next 12 months — an increase of about 10 per cent.

Great content is what it’s about. And the (social) media keep messaging.

Study: CMI, MarketingProfs

You can find links to the results here.

Well …

Markets the world over made solid gains in January.

Have a look at this recent article. Negative investor sentiment is occurring at the same time as the best January in the markets since 1987.

The markets often climb significant walls of worry. Sometimes, it pays to focus on bad investor sentiment and use it as a contrarian indicator.

In “Wait a minute. There’s some good news re the markets?” I blogged about how investors often miss the good news flying below the radar.

Many people have been burned by the excesses of credit mania, culminating in the market implosion of the financial crisis.

Humans in all walks of life sometimes give in to greed. Exuberance and fear are flip sides of a coin forged at the beginning of time.

I posted some stark stats in “Why you should consider new investments now”.

Why post negative stats? Because, while end-of-the-world scenarios might sell bytes of information in the short-term, they don’t do much for the average investor who’s trying to be strategic about long-term investing.

The starkness of information can be helpful.

Ask yourself a simple question:

When the market takes a substantial dip, generally, is there more chance that it’ll rise or keep falling on average?

Bad news gets the big, black ink (or bytes)

There are always going to be onslaughts of bad news. Good news rarely gets the big, black ink of the headlines until the story’s over. In between, you need to manage your fear.

You need to think strategically.

In “Don’t Panic”, I went into greater detail about managing fear while investing. Learning to harness your fear as an investor will go a long way toward helping you create an intelligent plan of action when it comes to investing and financial planning.

Again, in “The grand parade of future dividends “, I discussed how corporations were increasing dividends (good news for investors) and ended with the question:

“What happens if the world doesn’t end?”

While Canada is experiencing higher unemployment, the U.S., recently written-off as a basket case, just posted strong employment numbers.

What people keep forgetting, is that business, economic news, and the process of investing is fluid. Some get so used to bad news that they forget good news exists.

Until January, there wasn’t a big focus on the positive. But whispers of good news were there if you read between the lines (or read more than just the headlines).

Now, was it really a good idea to sit on the sidelines as an investor during all that bad news? And is the bad news over?

Well, here’s the thing:

We’ve come through a tough time. We’re not out of the woods yet, but if you’ve been sticking to a sound investing plan, you’ve taken advantage of the weakness in the market.

The bad news about being an inactive investor in 2011

If you’ve been sitting in cash only:

• You’ve missed a very nice rise in the bond markets

and

• A great opportunity to reallocate investments to stocks

Risk applies to low-paying GICs just as much as it does to equities or real estate.

In this case, low-paying GICs weren’t much of a safe haven when compared to the Altamira Income Fund, or even the broad Globe Fixed Income Peer Index.

Sitting in GICs can cost you.

So, when you consider the past year would’ve been:

• A great time to buy equities at lower prices

and

• That bond funds significantly outperformed the GIC index *

… it pays to ask this question again:

What happens if the world doesn’t end?

The case for bonds against ...

... GICs. (Over five years)

Click here for more about bonds and fixed income investments.

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

* Many criticize bond funds for their higher fees as compared to ETFs,but for many average investors they are the easiest way to get a diversified bond portfolio since not every investor has a trading account.

* You should also note that since bonds have significantly outperformed, they may not perform as well over the next few years. A balanced portfolio is the best way to ensure consistent outperformance while minimizing risk.

Note: Fund/funds used here are only for illustrative purposes.

Chart source: Globe Investor

I don’t think Chris Dodd is.

After the firestorm unleashed when Dodd made his MPAA statement, after Twitter’s tweet reckoning, it’s hard to ignore the explosive immediacy of social tools. This digital wave moves like a tsunami.

Woe unto he (or she) who doesn’t understand its potential.

Behold the social media army at work

You can watch it come at you, too late. Dodd and the MPAA did. Helpless, MPAA brass could only blink as Twitter users reloaded and fired off salvo after salvo, millions of tweets into a universe that decided Dodd’s language ignored too much, and that the freedoms associated with the Internet were sacred cows worth fighting for.

If you’ve followed this story, does any of the MPAA’s messaging resonate with you? Where’s the conversation demonstrating the validity of the MPAA’s opinion?

If good research defending the MPAA’s cause exists, why don’t we know about it? The anti-SOPA forces got their message out in a timely, effective way, and the conversation they initiated was believable and became important to stakeholders within minutes.

The MPAA’s press is more about its “blunderstatement” in a very new year than it is about persuading, informing or influencing.

And what of some of the important stakeholders that were ignored?

SOPA is dead. Long live SOPA.

SOPA may have expired through the ire of digital revolutionaries who know how to get their message heard, but there’s sure to be a Son of SOPA. Dear MPAA: Take greater stock of all stakeholders and address audiences in their own language instead of insulting stakeholders with a confused, paternal rant.

I mean, “corporate pawns”? Really?

Who came out looking unfocused and ill-prepared, hanging on a pseudo-”fight the power” statement? The MPAA was playing in the court of the digitized, where “alternate” and “alternative” are fairly normal lifestyles.

Did the MPAA consider the different levels of its audience at all? Did it forget about secondary or tertiary audiences?

It was the old world meeting the new world. No contest. The MPAA scolded everyone. It looked like the representative of a defunct business model. Not good.

Was Dodd trying to prove critics of the entertainment industry correct?

Writers have been criticizing entertainment industry decisions since Napster rose like Godzilla from the sea. Did no one at the MPAA consider that their statement might blast through cyberspace reinforcing what critics have been saying about the old business model?

The MPAA obviously didn’t know the extent of or the attitudes of a large segment of its audience. That audience just reacted with one, big techno-slap.

2.4 million tweets in a day. That’s a big chunk of your target audience to miss.

As they used to say in the Batman episodes:

Zowie!

TwitterForce: The ability to send a salvo of millions of messages in the space of a day. A social media lesson for dummies.

We live in interesting times.

Don’t touch that dial!

Follow @JohnRondina

Dodd’s going to succeed in doing nothing but further alienating individuals from supporting the MPAA.

You’d think the Netflix and News of the World debacles would cause some to pause and think as they strive to create dialogue.

From a public relations perspective, the MPAA deserves to have its say about what it sees as its side of the story, but, calling protests “pranks” and lumping in Wikipedia users (and others) as “corporate pawns” is utter madness.

Wikipedia’s embraced the protests and this undermines Dodd’s accusation of corporate Big Brothers’ manipulating naive users for their own greedy ends — as does the support of one of the founding fathers of the Internet. Vint Cerf sent an open letter to congress opposing SOPA.

One reader on the TechCrunch Website posted the following (and you can also see the MPAA’s statement here):

I’m the rightful copyright owner of the phrase “corporate pawns”. MPAA is illegally using this phrase and I demand their website … be removed from DNS and blocked from the Internet. (Failing) to do so will cost me greatly and I will not be able to hire (the) 100,000 U.S citizens that I have promised.

Touche!

The problem the MPAA has is, if they believe furthering open and honest communication with stakeholders occurs through berating, name-calling, and out-and-out subterfuge (investigate the sweeping powers of SOPA and PIPA, and you’ll discover their Draconian dangers), then someone’s mind is plainly misfiring.

While Dodd’d like all parties to work cooperatively, his language is an affront to that happening. The MPAA avoided addressing the invasive aspects of SOPA and PIPA.

Big mistake.

In a world where information travels through portals at the press of a button, and information is accessed at speed, it’s harder and harder to persuade audiences if you’re using less than honest communication.

In fact, substandard practices do more harm than good.

The entertainment industry has been heavily criticized for acting like a dinosaur in the face of immense, rapid change.

Dodd’s indignant approach to conversation on the subject will lead to nothing more than severe reputational damage for the MPAA.

The MPAA will undergo (is undergoing) serious criticism because of this news release. Good luck to them in recovering an already tarnished brand.

Also: Check out the explosion on Twitter over SOPA – 2.4 million tweets and counting

Follow @JohnRondina

Just before Christmas, I was sitting around with a few friends discussing technology. Talk turned to smartphones and tablets.

“It’s all about the apps,” someone said.

But a recent survey says it’s all about Websites and mobile sites.

There’s an app for that, but right now only 4% of smartphone/tablet users are using branded apps

Smartphone and tablet apps are not consumers’ preferred channel for browsing or shopping:

• Just 4 per cent of connected consumers like to use branded apps, whereas 87 per cent prefer to use Websites and mobile sites

• 60 per cent choose to shop via digital or print catalogs

Connected consumers’ tablet use and spending activity is on the rise:

• In the 2011 holiday season, 87 per cent of tablet owners did their holiday shopping using their tablets, spending $325 on average

In addition, 49 per cent expect to shop more on their tablet over the next year.

So, while people are using smartphones and tablets and plan to use them more, they’re not engaging with branded apps much, says a Zmags survey.

You can find the survey here.

Consider: Apps need to be downloaded.

While it may be fun to poke around and see what kind of apps are out there, will the extra effort required to use branded apps turn out worthwhile in the long-term?

In “App(le) fatigue: It’s not just users — many businesses aren’t keen on a big cut for Apple” and in “Three digital considerations for the year(s) to come” I blogged about the app phenomenon and HTML5, which might turn out to be the biggest challenge to apps over the long-term.

The need for foresight

Kodak’s decline has hit the news hard recently. Without doubt, companies have to be flexible in today’s business environment. They need to forecast and invest in what’s coming.

While branded apps seemed to be everywhere in 2011, people weren’t using them as much as most of us thought or were led to believe according to the study.

Companies are using apps as vehicles for marketing, awareness raising, instruments for monetizing digital media or channels for movie and music sales.  Developers are increasingly developing apps for Android.

Still, will apps remain a peripheral channel if people begin to suffer “app fatigue”, or will apps  start to close ground on Websites and mobile sites?

The rise of HTML5

Meanwhile, HTML5 is raging ahead:

• 58 percent of regional Web developers are using HTML5 in the Asia Pacific region
• 43 percent in the U.S.
• 39 per cent in Europe, Africa and the Middle East

Some other considerations regarding “app mania”:

• Will efforts to encourage users to download apps be cost-effective in the future?

• Could these same efforts be better-used elsewhere?

• The genius of HTML5  is it arms developers with a way to create browser-based sites. These sites store data locally if a mobile device loses its connection. The device still gets real-time data and creates rich mobile sites that download faster.

• Developers can also create mobile Websites that look and act very much like an app using HTML5. Will this make apps redundant?

• What will the focus for apps be in the short-term, and how will that affect long-term marketing and communications strategy?

We need more research on the app environment while strategic business decisions need to take into account that other technology may replace apps.

Apple is one in a long list of companies proving technology never sleeps.

And, as ever, when it comes to app mania, the threat of HTML5 is growing. According to results on how consumers prefer to browse and shop (using Websites and mobile sites), apps may experience some challenging times.

Thought leaders would do well to stay on top of the HTML5 phenomenon.

Follow @JohnRondina

What should the average investor focus on? The parade of companies increasing their dividends, or the end of the world scenarios that continue to make headlines?

Here are some of the names increasing their dividends:

Disney, Chevron, GE, BCE, Ford (resumes paying dividend), Agrium, Enbridge, Iamgold (by 25 per cent), National Bank of Canada, Laurentian Bank … the list goes on.

Does this return of shareholder cash signal a more optimistic future? Shouldn’t we reward these companies with positive press for doing something that will contribute to shareholders and the economy ultimately?

Income-lovers jump on dividend-payers. Why?

When a company’s increasing dividends, and some have increased more than once this year, management’s saying, “Hey, our operations are strong enough to keep this dividend going for a long time.” Companies are careful about cutting dividends, and so, this makes them cautious about raising them.

When a company cuts its dividend, it becomes kind of a corporate leper. Confidence is lost. Reputation takes a whack. Investors run for the hills.

Because of this, most companies don’t trifle with raising their dividends. They do some hard forecasting before making increases.

The dividend parade continues

While people focus on bad news, opportunity sits there. Why do investors focus on daily bytes that create a horrorshow of headlines?

The bottom line is:

• Corporations continue to pay shareholders
• The news is what it is

Investors may have some suspicion regarding the business intelligence they get, but, are they to believe that the managements of all these corporations raising their dividends are so out-of-touch with the world economy that the opportunity these same managements see is misguided?

Fact over fiction

• The U.S. economic news is improving
• The S&P 500 is a bargain
• So, too, is the S&P TSX 60
• Historically-speaking, the markets look full of potential if you’re focused on dividend-payers that consistently grow their dividends
• Dividend-payers allow you a margin of safety regarding a recession in Europe and what it might do to the markets while allowing the average investor the opportunity to participate in good news

While the future’s unwritten and it’s difficult to predict markets or economic activity consistently, following a diversified strategy brimming with dividend splashes is one that you can have some long-term confidence in.

Brian Wesbury of First Trust Advisors says, stocks are “the cheapest we’ve seen since early 2009 or the early 1980s … equities have priced in the end of the world.”

What happens if the world doesn’t end?

CN is the latest to increase dividend with management sounding confident about the Canadian economy

Follow @JohnRondina

Easy as ACB revisited

I stressed that such benchmarks only reveal how your investment would have done if you invested all of your funds at the beginning of the period. These benchmarks assume you were inactive during the time period you’re measuring, and you did zero rebalancing during 2008-2009 or other significant market corrections — exactly the periods of time when you should be (or should have been) more active.

While investors should have been rebalancing during 2009, research shows average investors freeze up during these times, or worse, sell.

The worst case scenario is that they sell heavily.

Let’s say you had a large cash position in your portfolio near the bottom in 2008-2009. New cash, profits you’d taken, whatever …

Now, let’s say you used that cash and bought equities around that time, which turned out to be the bottom or near the bottom of the correction. Your return would be considerably different. And this is why rebalancing is so important to the success of your investments, portfolio and retirement plan.

If you’d been following a sound rebalancing strategy, you would have bought during the downturn in 2008-2009 because your asset allocation would have drifted away from your plan.

Let’s use a simple illustration:

• You bought 50 shares (or units of a mutual fund ) at an average cost of $7

• Then you bought 10 shares at $5 (you were brave and when the market dropped 50 per cent in panic selling, you saw opportunity)

• You then continued to deploy your cash while the market was cheap and bought 10 shares at $6 (because of your rebalancing strategy, which you follow automatically. You bought while prices were cheap because your asset allocation had changed.)

• The market rose dramatically after this period and your asset allocation reached your target. You stopped buying.

So, your adjusted cost is:

50 @ 7= 350
10 @ 5 = 50
10 @ 6 = 60

Your total cost was $460. The price now is $7.
7 x 70 = $490

You now have profit of $30, called a capital gain.

In reality, your transactions will be more complicated, and there will be dividend payments in there somewhere. But the simplicity of this example shows us how following asset allocation strategies with your investments will help you lower your Average Cost Base (ACB).

Your equity component would have been, percentage-wise, less than it had been. Your allocation plan would have kicked in, and you would have bought the underperforming equity investments.

Even if you did this more gradually, before, during, and after the correction, it would have lowered your average cost.

One way for Joe and Josephine Average to get a leg up is to take advantage of what’s available to them. Tax-preferred or (deferred) investments and plans, and sound portfolio strategies included.

But research shows they don’t. Volatility spooks them, and sadly, this will cost the average investor over the long-term.

When I was a kid …

An older colleague I used to work with said the following, loosely paraphrased, about his lack of savings and investments in his youth: “When I was a kid, I was convinced I wouldn’t make it to forty.”

Heavy pause.

“I was wrong …”

I had asked him why he didn’t have an RRSP because I wanted to understand how he thought. He later added that he had lost a ton of money in real estate (Canadians seem to have forgotten the real estate crash that happened in 1989-1990 – Americans have had a harsh reminder).

Looking at real estate in this context reinforces my point of view on buying assets when they’re low. While it took residential real estate a long time to recover from ’89-’90, today’s real estate prices (supported by an extended period of low interest rates) prove that buying assets when they’re cheap is rewarding.

Yet nobody wanted residential real estate in ’89-’90, and many developers lost their livelihoods during that time.

Raising awareness, being startegic

Raising awareness about the investing habits of Joe and Josephine Average will help them over the long-term. They need to better educate themselves about market volatility and be more strategic in their approach to it.

While this is easier said than done, it is one of the reasons the Warren Buffetts do better than the Joe and Josephines when it comes to investing and financial planning.

Market volatility, understood properly, is your friend. Reminding yourself of this completely reframes the way you look at the market, your investments and corrections.

Maybe your friend goes a little berserk once in a while. Maybe he’s a little impatient or a little irrational at times, but he’s still your friend.

You know you can count on him when you’re down. Looking at market events this way, despite difficult times, puts you in control.

Just make sure the relationship is a long, diversified one.

Follow @JohnRondina

How do the 1 per cent differ from the 99 when it comes to market volatility? Is there something the average investor can learn?

I’m not trying to defend the 1 per cent. What I am trying to do is point out that the market is public and that market volatility leaves no one untouched. No stone unturned.

I’m not here to talk about tax inequality or to defend either side. People like Warren Buffett have done that. There have been arguments for and arguments against Buffett.

What I’d like to focus on is:

While the 1 per cent have better intelligence and more powerful networks when it comes to investing, there are strategies the 99 can use to get ahead. Strategies Warren Buffett and the 1 per cent have been using for a long time.

If you’re a long-term investor, you can own a lot of the same assets. Granted, you may not get these assets at the same transaction costs due to scale, but you can own assets that should enrich you over time.

Have the wealthiest people sold all of their assets? Doubtful.

Do they sell them after market declines?

Well, let’s look at this rationally.

• You need to find a buyer in order to sell your shares (the sheer scale of owning billions in assets means it’s harder to find a buyer when you sell)¹

• Liquidating such assets might cause some significant tax implications²

• Because of professional counsel, the 1 per cent are exposed to more and better research than average investors, leading to fewer knee-jerk reactions in the face of market events

There would be barriers to the 1 per cent selling their assets.

Taxes …

You can see at least three articles above discussing whether taxes on investments and the 1 per cent are too low. There is definitely a movement afoot to examine these issues.

Let’s set the 1 per cent aside for a minute.

Remember, Joe Average gets a break on taxation for certain investments, too. So does his partner, Josephine. They may not get as big a break, but they do get a break.

They get a deduction for contributing to an RRSP. They get tax-free earnings in a TFSA. If they’re invested in dividend-paying equities outside of an RRSP or TFSA, they get tax-preferred income from those dividends.

Advice

Because the wealthy have the means to get good counsel when it comes to their investments and financial planning strategies, we can assume that those professionals counsel their clients:

• To avoid panic selling

• To rebalance regularly and systematically

• To take advantage of market volatility through rebalancing strategies

Joe and Joe and Market Volatility

Now, what about Josephine and Joe Average? Are they taking advantage of the better prices presented through market volatility?

After the 2008-2009 correction, did the average investor take advantage of some of the cheapest prices we’ve seen in a generation? Is the average investor taking advantage of cheaper prices now?

Research says no. (Like to explore this idea further? I blogged about it in “Don’t Panic”.)

People concentrate on returns over a given period of time. But such assessments assume that you invested your money all at one time at the beginning of the period. How many investors do that?

Easy as ACB

Your Adjusted Cost Base (ACB), basically, how much you paid as you bought an investment, is a much more realistic measurement of how you’re doing.

If the broad market’s down 20 per cent, and you’re ACB is showing that your investment in a broad-based mutual fund or ETF has broken even, e.g. the investment’s price is 10 and your ACB is 10, you’ve done great.

Why? Because you’ve outperformed the market over the same period.

How did you accomplish this? By using excellent rebalancing strategies.

Of course, if you’ve had a more conservative position, you have to realize that when the market turns around, the broad index may start outperforming with respect to your investment. Your rebalancing plan will help with this, and sticking to that plan will help even more.

Figuring out who you are as an investor is important.

In Part Three, I’ll continue, focusing more on long-term strategy with a simple illustration of why that focus will make you a better investor.

Notes:

¹The 1 per cent tend to buy shares of companies more than they buy mutual funds. Diversification isn’t as big a deal for them. They have the means to buy enough shares and still be adequately diversified. This isn’t true of the average investor. Some market experts say you should have at least a million dollars to invest to be adequately diversified when holding stocks. Others disagree. It’s true that the fewer companies you hold, the less diversified you are, and the more risk you’re taking on. Employees that held most of their investments in Enron or Nortel found this out the hard way when the stocks collapsed^3.

²Taxation is another reason why the 1 per cent sell their holdings, e.g., experts have suggested Steve Jobs’ heirs sell their shares in Apple to avoid over $800 million in tax liabilities.

³More evidence for diversification comes by way of Bill Gates example. While he has significant wealth in Microsoft shares, he holds a lot of Berkshire Hathaway in order to further diversify his holdings. Forbes claims that more than half of Gates wealth is held outside Microsoft stock.

Follow @JohnRondina

This year’s market volatility has rattled investors. While nobody loves market volatility, the wealthiest members of society seem to tolerate it better than the average Canadian or American. At least, they don’t seem to cash out of their investments after large market drops, and, according to studies, many investors do.

What separates the wealthy from the average investor? What is it that causes Joe and Josephine Average to be less successful as investors than they could be?

Recent research on young people and financial literacy shows that fin lit is an area where young people need help. Kids aren’t alone. Many adults don’t understand financial markets. In fact, in “Kids and money: What kind of financial legacy are we leaving our children?”, you can find some startling information on adults and financial literacy.

Investing (and financial literacy generally) is a major factor separating the poor from the wealthy in Canada and the U.S. While this is obviously not the only factor determining household wealth, it is a large contributor.

The media’s been saturated with stories about the “1 and 99”. Awareness about the 1 per cent and the 99 per cent of society in the U.S., and about why the 1 per cent hold so much more wealth than the 99 per cent is high right now. The Occupy movement has gotten a lot of attention in the media despite criticism that the movement’s message is somewhat muddled.

Some facts about the extremely wealthy in Canada (the richest 1 per cent of Canadians who capture 32 per cent of all income growth, according to StatsCan):

• They own an enormous proportion of our society’s wealth

• They are major holders of stock, bonds and real estate

• They tend to be well-informed when it comes to investing, or they seek out experts to assist them with their financial planning strategies

• They understand market volatility much better than the average investor does (again, they seek out experts more than the average investor does)

Up down and all around

Market volatility has put terror into more than one heart. Especially that of the novice investor. The danger here is that fear will stop the average investor in his tracks.

But don’t the 1 per cent face market volatility as well?

The volatility during the last five years has been extraordinary. The market has undergone two of its most extreme periods of volatility starting in 2008 and ending in 2009 and then beginning again this year. And, yes, we’re still in the midst of it. We may be closer to the end of the current period of volatility, but that’s difficult to know given the number of variables involved.

In Part Two, I’ll discuss why market volatility is your friend, and how changing the way you look at volatility leads to superior returns.

Follow @JohnRondina