Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

How is your portfolio holding up? How are you holding up?

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CutTheCrapInvesting: Image by Christian Dorn from Pixabay

By Dale Roberts, CuttheCrapinvesting

Special to the Financial Independence Hub

It’s possible that you haven’t looked at your portfolio. It’s possible as well that you haven’t looked in the mirror. To not look at your portfolio might be a good strategy. I’ve heard from a few readers who offer that they will not look, just yet. But it’s certainly important to be aware. Your portfolio has likely lost some value. Today we’ll frame that for you with a look at the iShares one-ticket asset allocation portfolios. How is your portfolio holding up in the recent correction? Let’s have a look at the recent performance of Balanced Portfolios.

 

If you’ve been awake the last week or two you know that we’ve had a quick and violent market correction. Here’s a wonderful post on the irrelevant investor that frames the market corrections over the last 100 years.

This chart says it’s the fastest correction ever.

That this is, the path to the initial 20% and bear market territory. Hey no worries there. If you’re going to tear off that band-aid, do it quick. And of course the chart is showing US stock market performance.

Don’t worry, markets have recovered quickly.

Of course charts are just flying around the web these days. There’s a stock chart for most everything. Of course, past performance does not guarantee future quick recovery. But …

We usually see these ‘good recovery’ charts after these ‘catastrophic’ stock market events. Why? Because stock markets mostly go up. But they deliver these shocks with regularity. But they haven’t barfed up a good one in quite some time.

Hope you don’t mind the analogy, that’s the first time I’ve used the B word on Cut The Crap Investing. And keep in mind, we have no idea if this correction is over, or just getting warmed up.

And I’ve previously stated that because the stock markets have been quite calm over the last 11 years, our risk tolerance level has drifted out of whack. That was not nice of Mr. Market to lull us into a warm place of relative calm and comfort and then crack us with the fastest correction, ever.

How did that feel?

That’s what risk assessment is all about. Feelings. Nothing more than feelings.

How did if feel to watch your portfolio decline by some 20% or so? I certainly hope that Cut The Crap Investing readers (and anyone who found this article) is OK. And it’s also OK to feel nervous and unsure, even scared. The key is to be aware of possible outcomes. We need a plan. We need the ability to stick to that plan.

Ben Carlson offers some random thoughts on a big down day in the stock markets.

These are the days when you don’t need financial advice, you need a psychologist. This is why managing people is always more important than managing investments when you work in the financial services industry. Anyone can build a portfolio. Not everyone can stick to a plan.

Ben Carlson

Lucy, as financial advisor

Ben also offered …

“Waiting for the dust to settle” is not a legitimate investment strategy. “What do I do now?” is not a fun place to be either?

More common sense from Ben

Yes investing is 90% psychology and 10% portfolio. It’s not that difficult to create a great portfolio. The other 90% is where too many get tripped up. Don’t get tripped up.

Got a plan – no sweat.

Awareness + Plan = Success

Of course that plan includes a portfolio that is aligned with your risk tolerance level.

You know stock markets can correct violently. That’s all normal and expected stock market (mis)behaviour. After all the stock markets are ridiculous as they proved recently. So you were prepared. The potential of your portfolio value to drop matches the amount you’re prepared to watch, and feel.

Of course we add bonds and other assets to work as shock absorbers. On February 1, before this coronavirus outbreak was really scaring the heck out of the asset managers who price the markets I offered up …

How to prepare your portfolio for the coronavirus outbreak.

Again, the hope was that you were already prepared. But if not, there were some options outlined in that post. Bonds, gold, long term US Treasuries, inverse ETFs and more.

So how are those traditional shock absorbers working?

We’ll look to the iShares one ticket asset allocation portfolios.

In the top two columns we see the stock to fixed income ratios.

  • XEQT down 16.4%
  • XGRO down 12.5%
  • XBAL down 10%
  • XCNS down 5.3%
  • XINC is down 0%

Yup, and XINC is up for the year. Bonds are doing their thing. That’s a bond heavy portfolio.

XINC returns YTD, 2020 to March 9.

And that rebalancing mechanism will have that fund selling bonds and buying stocks as they go ‘on sale’. If you have a lower risk tolerance level, there’s nothing wrong with a lower risk portfolio IMHO. It’s likely going to outperform cash.

Pick your risk level. There’s no guarantees on how well those shock absorbers will work, but perhaps take that stock market correction down another 20%. Take the above returns and multiply x 2. How will you feel?

Robo risk profiling.

Of course if you are investing with a Canadian Robo Advisor, your tolerance for risk was assessed. I hope you were honest. If so, you should be investing within your risk tolerance level. If you’re not sure, call in to speak with an advisor. You can call in as well if you’re with Tangerine Investments. Continue Reading…

Is USA 2020 like Japan 1990?

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Tokyo. From a high of 38,915 late in 1989 the Nikkei then fell 82% by March 2009

By John DeGoey, CFP, CIM

Special to the Financial Independence Hub

It sure looks like there’s a fair amount of hubris in the American stock market these days.  The American 30-year bond just hit an all-time low of 1.89%.  We had three rate cuts in late 2019 despite strong employment and GDP numbers.  Household debts are again high as are defaults on car loans.  Many people (and especially many advisors) continue to blithely opine that we might be the middle of a more than 20-year supercycle and that it’ll be another decade before we have a major pullback in capital markets.

I call B.S.  Perhaps more to the point, my view is that this is a clear example of groupthink / herding / motivated reasoning that will almost certainly give way to narrative fallacy justifications down the road.

What if the pundits got it exactly wrong?  I want to stop here and remind that I’m asking a question; not making a statement.  I don’t know (neither does anyone else), but … what if instead of this being the beginning of a supercycle, we’re at the tail end of a 11-year long bull market?  What if this is as good as it gets for a long, long time?

Nikkei fell from a high of 38,915 late in 1989, to low of 7,055 by March 2009

I’d like to take this opportunity to remind you of what has already happened to the second-largest stock market on the planet.  On December 29, 1989, the Tokyo Nikkei hit an all-time high of 38,915.  That high, coinciding nearly exactly with the end of the decade, has not been seen since.  Ironically, stock markets around the world also took a big tumble at the end of 1999 heading into the scare around Y2K.  Again, a big tumble coincidentally occurred at the end of a decade.  As I write this, we’re in Q1, 2020 and the roaring 2010s have just ended.

Getting back to Japan, their market dropped all the way down to a low of 7,055 in March 9, 2009 – a total drop of nearly 82%.  That’s comparable to the experience of the Great Depression.  Even now, more than 30 years after hitting that peak, the Nikkei is below 24,000.  That’s STILL a drop of well over one-third more than thirty years AFTER hitting an all-time high.  With Japan as a backdrop, we could  point to that experience as a potential cautionary tale.  I personally would not be particularly surprised if the U.S. market was trading at a lower number in 2030 than it is today.  Does your plan take that possibility into account?

John De Goey, CIM, CFP, FP Canada™ Fellow, is a Portfolio Manager with Toronto-based Wellington-Altus Private Wealth Inc. This blog originally appeared on the firm’s “Newswire” site on March 9, 2020 and is republished on the Hub with permission.

Is this 2008 all over again? Corrections, coronavirus and crisis: no time to panic

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By Tyler Mordy, Forstrong Global Asset Management 

Special to the Financial Independence Hub

Speed Read:

  • This is not a repeat of 2008.
  • Once more, with feeling: COVID-19, though a deep human tragedy, will be a transitory shock.
  • The world is now experiencing the largest stimulus since 2009. Lower interest rates, lower oil prices and loaded fiscal bazookas will lead to a V-shaped recovery.
  • Fear is a poor adviser. Selling into a panic is rarely rewarded.

Blood is in the streets. And the biggest fear over the last decade — a repeat of an economic fallout like the global financial crisis — is trending hard right now. For over a decade now, clients and industry colleagues have repeatedly asked our team about another 2008. And we have repeatedly countered that the big surprise is that this will not occur any time soon.

But does recent market action challenge that view? In some ways, this feels just like 2008. US long bonds just delivered their best 2-week performance since the Lehman Brothers meltdown (if you squint hard enough, you can see the current yield of 0.99%). Global stock markets are regularly tripping exchange circuit breakers. A meeting between OPEC and its allies collapsed over the weekend, causing Brent crude prices to plunge more than 30%. And, apparently, families are now fighting over toilet paper supplies (pro tip: don’t google the footage).

We are now in the grips of a full-blown financial market panic. The major risk is always the same: people’s reactions to panic can amplify the real economic pain, causing a vicious feedback loop into financial markets. Reflexive risks are even higher today with a spreading virus. Event cancellations, reduced travel and tourism, and other economic interruptions will produce ugly numbers in the coming months. Many businesses will remain stuck in the ICU for some time.

Crucially, the US is also set to see a steep rise in coronavirus cases in the coming weeks. The figures should be similar to Italy’s — less than 1 in 10,000 will be infected. But statistics are hardly relevant here. Fear is in the driver’s seat. And, as we have recently written, the rise of social media has allowed hysteria to be transmitted more effectively. Misinformation has gone viral and digital channels are now clogged with fake news (see “Straight Talk On COVID-19”).

Yet, the idea that this is similar to 2008 rests on a few flimsy pillars. In fact, there are crucial differences:

No major global imbalances

To start, there are no major imbalances like the ones we saw in the runup to the global financial crisis. The biggest macro story since 2008 has been the unwinding of massive private sector excesses in the two major growth regions of the world: the US and Eurozone. Deleveraging has now occurred in these regions. The household sector is in much better shape than prior to the crisis. Banks have cleaned up their balance sheets. And globally, aggregate imbalances in these economies have now diminished substantially. No credit unwinding threatens the entire financial system. This also remains true for emerging markets who have built up significant buffers to protect against another 1990s-style balance of payments crisis.

COVID-19 will be a transitory shock

COVID-19, though scary, will be a temporary phenomenon. As my colleague Wilfred Hahn wrote last week (“The End Of Civilization As We Know It?”), epidemics are transitory shocks. Of the nine major epidemics since 1983, all had stock market recoveries afterwards. The average S&P 500 surge was 16.3% within six months of the nadir of the crisis.

This is very different from credit-driven recessions which can alter the economic and financial landscape for years to come — whether this is in changes to capital spending (like the period after 2001) or changes in investor behavior (like the investor skittishness since 2008).

China is a case in point. The country has become a leading indicator of events that can follow the outbreak if dealt with correctly. What many may not recognize is that China’s response has been the most aggressive in the world (even praised by the World Health Organization). The containment strategy is now a success. The number of infected people is now falling sharply. Continue Reading…

Is now a good time to buy stocks? Look beyond the headlines to find out

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Examine The Theories That Forecasters Rely On To Predict Market Swing: And Learn Their Flaws

The universe is constructed in such a way that nothing is certain. You can always come up with perfectly rational reasons why something won’t work. But people find ways to overcome obstacles, and some businesses succeed despite risks.

Is now a good time to buy stocks? Below are a couple of factors to consider. 

Editor’s Note: This piece originally ran last July so is not specific to the current Coronavirus-induced volatility; however, the general principles still stand up nicely.

Also, see this Inner Circle hotline from Pat that appeared on Friday March 6th:

A special note from Pat…

Right now I’m working on a special report on the COVID-19 virus, which will go out to our Inner Circle Members [on Tuesday of this week.] It will tell you, among other things, that if you liked your portfolio when the coronavirus scare began a few weeks ago, you should probably hang on to it.

However, if you are like a lot of investors, you may often wonder if you should stick with your portfolio as is, or make changes.

In the upcoming special report, I’ll tell you what I’ve told our portfolio management clients what they should do in a variety of special instances that you may already be wondering about, such as:

  • How today’s market might affect your retirement plan if you’ve already retired…
  • How to decide if you should put more cash in the market…
  • What the market downturn means for the market for the rest of the year and beyond…
  • and How the “Conflict of Interest” factor can help you navigate through the “virus crisis.”

Look for Pat’s special report on COVID-19 and its impact on your investments in this coming Tuesday’s Inner Circle Q&A.

[For those not currently members, here is the link to join.]

 

Is now a good time to buy stocks? Understand pendulum theory and you will understand the past

You could sum up the investment version of the pendulum theory like this: stock prices alternate between periods of overvaluation and undervaluation; the degree and duration of each period of overvaluation is related to the degree and duration of the subsequent period of undervaluation, and vice versa.

In other words, pendulum theory says that when stocks head downward after a period of overvaluation, they won’t stop at fair value. Instead, they’ll keep dropping until they hit lows that are in some sense as out-of-whack as previous highs, or close to it.

Pendulum theory is a handy way to label the past, and it gives you a sense of how stock prices behave. But it’s useless at predicting the future or timing the market. That’s why pendulum theory generally plays a small part in successful investing. If you qualify as a “successful investor,” you probably recognize that the market never gets so high that it can’t go higher, nor so low that it can’t drop some more. This is a key part of understanding the stock market.

Is now a good time to buy stocks? Consider this valuable concept to gain another perspective

Here’s one of the most valuable things you should recognize as an investor: “A rising market climbs a wall of worry.” In other words, you need to recognize that a stock market’s rise automatically generates negative comments. The higher and/or longer the market rises, the more negative comments it generates. These are the bricks in that wall of worry.

The inevitable building of this wall grows out of human nature. Many people are instinctively cautious or conservative. When they see a stock or the stock market go on a rise, they look for reasons why the rise may falter or reverse. That’s especially true of stock market commentators. When a stock or the market rises beyond their expectations, they dig deep for hidden flaws. Continue Reading…

RRSP deadline today: Choosing between a TFSA and an RRSP

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By Micheal Davis, H&R Block Canada

Special to the Financial Independence Hub

The registered retirement savings plan (RRSP) contribution deadline is today!

Many Canadians may be making last-minute contributions before the deadline of midnight March 2nd  in hopes of unlocking a bigger tax return [if investing online; if at a physical branch, you need to act during business hours — editor.]

In fact, a recent survey from H&R Block reveals that 32 per cent of Canadians plan to contribute to an RRSP this year, a six per cent increase from last year where only 26 per cent of Canadians reported their intentions to contribute.

While RRSPs can offer tax advantages to help you reach your savings goals, it’s also important to note that they aren’t the only option available.

RRSPs vs. TFSAs

While RRSPs – a tax-deferred retirement savings vehicle in which contributions are tax deductible – can be a great investment, you do have to pay income taxes when you withdraw money, which makes this option a bit less flexible should a sudden need to access your funds arise.

Another investment tool to consider is the tax-free savings account (TFSA). Because TFSA contributions are made from after-tax income, the TFSA is a simpler tool in that it allows your investments to grow tax-free. And, since taking money out of it has no tax consequences, it can be much more flexible.

How to decide between these two investment options

The main differences between the RRSP and TFSA are their contribution limits, withdrawal restrictions, and how and when you pay taxes. Both are investment vehicles that can shelter taxes on your investments, but depending on your circumstances, one might suit you better than the other. Continue Reading…