Using a thirty year time line, Actuaries can calculate a rate of return that will provide an income stream, to be withdrawn through to life expectancy. The longer the time horizon used in the calculation, the lower the required rate of return, and by extension, the higher the probability that the return will actually be realized.

Did you know that the average Canadian will make six moves in their lifetime. If we assume that our residential life expectancy is 50 years – i.e. we buy the first home at 25, and move up to a more expensive neighborhood and into a larger home until age 65, when we begin to look at downsizing – then we will make a move every ten years. If that assumption is correct, then the average Canadian only has a vested interest in the value of their property once every decade.

Both of these time lines are important, because they frame performance expectations. The average Canadian believes that investments made by the professionals managing their pension plan will provide the expected income stream at retirement. We also know from studies, that the average Canadian believes that the best way to create personal wealth, is to buy real estate.

In a sense Canadians are both right and wrong at the same time. They are right that wealth can be created through real estate. They are also correct to believe that most pensions will deliver the promised income at retirement. However, the assumption that real estate is the best way to create wealth, or that pension managers are always invested in the best assets, is wrong.

Now to stocks. In terms of performance, statistics tell us that stocks beat real estate hands down, over the long term. And on a long term basis, are not as risky as we might think. Yet, most investors see stocks as risky, and believe that the stock market is at best, a “crap shoot.”

The real issue is whether investor expectations jive with the reality of the marketplace. Is real estate really a better investment or does it simply seem better because of the time line used to frame our expectations. We cannot really make a value judgment about the performance of real estate versus stocks, if we are framing the results on one asset every ten years, versus a frame of reference for stocks that can be day to day.

Take that a step further, and we see that stocks are liquid assets, real estate is not. By that, we mean that stocks can be bought and sold on a moments notice. Selling real estate takes time. That too has implications as to how we value investments, and leads us to our discussion about myopic loss aversion.

Ask someone what their home is worth, and the price quoted will depend on the mood of the homeowner. The value in the mind of the homeowner has no real value, unless a transaction actually occurs at that price.

Because stocks are liquid, you have the ability to evaluate your position instantly with a market price that you can trade at. There is no way to fudge the value of your stock, because its price is clearly defined. Try looking at a stock position when it is falling in price. The more frequently you look at the position, the more distressed you become. That’s a behavior known as myopic loss aversion.

Myopic loss aversion is why most investors cannot hold long term positions in small cap stocks. From a performance perspective, small caps are considered one of the best long term investments. Yet because of the volatility associated with small caps, few people can hold them long enough to enjoy the performance benefit.

Once you get around the academic jargon used to describe investor behavior, you will note that each discussion point reflects something you have experienced in one form or another. What you need to recognize, is that each of these flawed actions prevent you from achieving positive long term investment results. Making it harder to get where you want to go, from where you are now.

And there lies the value in building portfolios. If you give the same kind of thought to building the right portfolio as you do following the latest trend, you should be able to build a package of investments that will be less volatile. Less volatility means that you are less likely to look at your portfolio frequently. More time between reviews means more time to frame performance expectations. And if you have built the portfolio correctly, there is a much better chance your portfolio will meet your long term expectations.