My Home Run! (Part 1 of 2)

Time for something positive. I thought I'd post about my biggest investment success. Chronologically it was before my biggest loser so it seems appropriate.

Sometime in the late '90s I was lamenting about the fall off in interest rates. The perfect GIC ladder that I'd built a few years before looked like it was going to produce only half the income as interest rates had dropped from 9 or 10% to around 5%. Needless to say, finance guy had a plan. It was kind of a modified Investing 101 plan as described in my earlier post.

The Plan was to include four funds; A Canadian Large Cap (mostly financials), a US Large Cap, and two Global Equity Funds. Let's call them the Fab Four. Accepting the advice of finance guy, I dutifully cashed my GICs every three months over the next two years and wound up with 40% of my perfect GIC ladder invested in the Fab Four. The Plan was simple, put the money in and then make systematic withdraws each month to replace the GIC interest. The best part of The Plan was that I could set my own monthly withdrawal. Given that the Fab Four had been steadily churning out 8 to 10% annual gains, I had no compunction with setting my withdrawals at 7.5%. This represented a 50% premium over the banks' offering of 5% for a 60 month GIC.

The Fab Four performed as expected for about two and a half years. The first six months got us to year end and low and behold the value of the Fab Four units was greater than the original investment. I toyed with upping the monthly withdrawal figuring that I may as well take all of the investment income, leaving the nest egg in place. I decided to leave well enough alone and carried on for another two years, at the end of which, I could barely contain my excitement. After monthly withdrawals at an annual rate of 7.5% the remaining Fab Four units were worth 114% of the original investment! That was at the end of 2000.

2001 will forever be in our collective memories because of the attacks of September 11. What many will not remember is that we were in a down market for pretty much the entire year preceding September 11. On September 10, the TSX was 6,890 down from 8,690 on January 2. A drop of more than 20%. The DOW fared somewhat better. On September 10 it was 9,605 down about 10% from 10,662. After 9/11 the TSX reached a low of 6,513 while the DOW dipped to 8,235.

Sometime earlier in the year the Fab Four had reached the top of the stairs and immediately piled into the elevator for a quick ride down. The value my units had dropped well below the original investment. Suddenly those GICs that I'd cashed were looking pretty good! I suspended all monthly withdrawals having made the decision to allow (hopefully) the value of the remaining units to recover to the point whereby I could extract the original investment and put the funds back into my safe, secure GIC ladder.

As if to prove the resiliency of the US market the US Large Cap Fund recovered in a few months. I was able to sell all of the units and put the full amount of my original investment in this fund back into GICs by the end of January 2002. The recovery period for the remaining three funds was going to prove to be a test of both will power and patience.

In my next post I'll tell you how I eventually recovered the balance of the original investment in the Fab Four.