Is there a Chinese proverb for everything?

There is a saying that has been credited as a Chinese proverb that goes along the lines of "The best time to plant a tree was 20 years ago. The second best time is now." Put simply, what it means is that if you wanted a tree, you should have planned ahead. If you have not planned ahead, you had better get started.

Of course, the same goes for wealth creation and planning for your retirement. If you want to retire, you had better do something well before 65. For some of us, it might seem a long way off, but rather than take that for granted, you can use this to your advantage. Small steps taken over a longer period of time can achieve the same result, with less impact on your current lifestyle. And, as important as it is to plan for later in life, there has to be some balance between future goals, and current lifestyle. So then it would appear to make sense to give yourself as long as possible to get where you want, with the smallest impact while you are getting there.

Elsewhere in the blog we have highlighted why you need to plan ahead. But, is now really the second best time to plant your retirement 'tree'.

At the time of writing, many Australians remain concerned at the events unfolding in Europe, specifically the Greek financial crisis and what this might mean for the whole of Europe. The purpose of this post is to help make sense of current financial events and offer some guarded guidance for the future.

The cause of the Global Financial Crisis was fundamentally an excess of debt in the private sector of the economy caused by interest rates kept too low for too long. When you combine too much debt (much of it was lent to people and companies that had little hope of making their repayments if they ever hit a rough patch) with debt securities even the smartest people couldn't understand, well there's a recipe for a financial crisis. When the crisis did happen governments around the world did two things. Firstly, they took on the bad private debt of troubled institutions (those that were "too big to fail") and made the governments responsible for them. This was needed to make sure that the financial system continued to operate in as normal a way as possible. Secondly, they promised that the financial system would be better regulated in the future so that the financial crisis would not happen again (we are still waiting on this one).

The current situation has a direct linkage with these events. Greece spent up big when interest rates were low and the government thought economic growth would go on forever (thereby paying back the debt from a smaller proportion of future income). Now that economic growth is much weaker throughout the developed world, they won't have a bigger economy to pay back the debt. In fact, the proportion of the economy that will be needed to pay back the debt is so big that it will, in fact, slow the economy, because of the higher cost of borrowing.

So these are a number of reasons to be concerned about investing. But, currently, we are looking at data courtesy of datastream that shows why now might just be the second best time, on the assumption that you are looking to grow your wealth over the long term. The data is a graph that shows the average return of a 'growth' portfolio (85% growth assets/15% cash & fixed interest) over the last 20 years to the end of June 2010. This is then compared torolling 12 month returns, or what an investor would have received from being invested in a 'generic' growth portfolio over the same time period.

Importantly, any time that the red line is at or below the blue line, an investor should be able to expect average or above average returns over the long term. At present, the red line, is just about on the blue line. This does not mean that there will not be short term volatility, or that returns over the next 1 year will be high, but that someone investing now can reasonably expect to generate an average return over the long term. Also of note is that this average return is ahead of the cash rate, and the current mortgage rate.

Of course, as always, the comments here are general in nature, and do not take into consideration anyone's individual position. But the principle behind the post is that waiting for the 'perfect' time might mean you get to retirement and your 'tree' is bare.