Tag Archives: investing

Investing during Wartime: How does the Geopolitical Climate impact your Financial Planning?

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

Don’t let Geopolitical Strife destroy your Investment Resolve.

This month, I was planning to write about financial planning for small- to mid-size business owners, including ways to optimize your personal and corporate tax planning. I believe many of you will find the information useful, so I promise to publish that soon.

But not now. Not after Putin invaded Ukraine. It feels wrong to go about business as usual while most of us are asking important questions about this geopolitical crisis.

By no means do our financial concerns detract from the greater, human toll. That said, if I can help you remain resolute as the world justifiably severs Russia’s access to capital markets and the global economy, perhaps we can both do our part to restore justice in Ukraine.

So, let’s talk about geopolitics and investing during wartime. Here are my key takeaways:

Big picture, geopolitical events’ impact on financial markets are usually short-lived

To help you keep your financial wits about you, consider Vanguard’s historical perspective on how the U.S. stock market has responded to other geopolitical crises over the past six decades. As Vanguard’s chart depicts in the article Ukraine and the Changing market environment, the turmoil has typically translated into initial sell-offs. But markets have also exhibited remarkable resilience, delivering returns in line with long-term averages as soon as six months later. That’s not to predict the same outcome this time, but it reinforces the wisdom of betting for vs. against the market’s staying powers.

Credit: Vanguard – Ukraine and the changing market environment

In Vanguard Canada’s recent article, When the markets seem to turn against you, Greg Davis, Chief Investment Officer recommends a steadfast approach:

“A new dimension of risk has entered the financial markets with heightened tensions in Ukraine …

We know this, however, about equity markets in the context of geopolitical risks: they’ve been resilient, much as markets have always been resilient in the face of various risks. We expect the markets to work themselves out, reaching new heights over time and at varying paces …

So now is not the time to give up your fortitude. Now is the time to take it all in with a deep breath, knowing that this day would come — and knowing that it will pass.”

Speaking of predictions, ignore those who claim to know what’s going to happen next

In their landmark studies on political forecasts documented in their book, Superforecasting: The Art and Science of Prediction, Wharton professor Philip Tetlock (a Canadian, by the way) and co-author Dan Gardner found that we’re unlikely to do our net worth any favors by depending on the “expert” predictions you may be seeing on the daily news:

“People who generate better sound bites generate better media ratings, and that is what gets people promoted in the media business. So, there is a bit of a perverse inverse relationship between having the skills that go into being a good forecaster and having the skills that go into being an effective media presence.”

In other words, those forecasts you’re hearing are more likely to sound like sure (often scary) bets, and less likely to be reasoned reflections on the many ways any given event might play out. In fact, evidence suggests, the more certain an expert seems about their forecast, the more skeptical you should be about its worth.

Continue Reading…

Dealers putting Clients’ Retirements in Jeopardy

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By Nick Barisheff

Special to the Findependence Hub

Over time, most investment dealers have implemented misguided policies that will negatively affect their clients’ investment portfolios and their ability to achieve a secure retirement.

There are two main policies that have negative impacts on investors’ portfolios. One is restricting investments to a client’s original Risk Tolerance in the Know Your Client application form (KYC). When opening an account, the client will advise the dealer of their Risk Tolerance.  Most clients will indicate that they are medium risk. On March 8, 2017, the Ontario Securities Commission (OSC) implemented risk rating rules that require all mutual funds to rate their fund according to 10-year standard deviation. In 2018, I published an article entitled New Mandatory Risk Rating is Misleading Canadian investors.

Prior to the OSC’s implementation of the risk rating rules, on December 13, 2013, the OSC issued CSA Notice 81-324 and Request to Comment – Proposed CSA Mutual Fund Risk Classification Methodology for Use in Fund Facts. My comments on this policy were submitted to the OSC on March 12, 2014, along with comments from 50 other industry experts.  

I presented a paper to the OSC that argued that Standard Deviation is not an appropriate measure of risk, since the best-performing mutual fund and the worst-performing mutual fund in Canada had the same Standard Deviation.  The measure of Standard Deviation of an investment does not reduce the risk of incurring losses.

A better, more accurate methodology would have used downside standard deviation or the Sharpe or Sortino ratios which measure risk adjusted returns. Nevertheless, the OSC implemented risk rating rules requiring all mutual funds to rate the risk of their funds according to 10 year standard deviation.

As a result, if investments in a client’s portfolio exceeded the risk tolerance as indicated in the original KYC, the client was forced to redeem those investments, by the advisor’s compliance department. A number of BMG’s clients were forced to redeem their positions since our funds had a medium-high risk rating according to the OSC formula, and the clients’ KYC indicated medium-risk tolerance. A number of clients wanted to change the KYC in order to allow them to maintain ownership of our funds but were advised that, unless there was a significant change in their financial circumstances, they could not change their KYC. Continue Reading…

What investors need to understand about the Russian invasion of Ukraine

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By Allan Small,  iA Private Wealth

Special to the Financial Independence Hub

Markets are down. The Nasdaq is in bear territory and the S&P500 is in correction territory (at the time of writing).

This is the direct result of the Russian invasion of Ukraine. Not surprisingly, investors are nervous about what will happen to their wealth. I’ve certainly been getting calls from clients unsure about what to do.

Here’s what I’ve been telling them: Don’t panic. This too shall pass. The world has weathered terrible events in the past and come out the other side. We will again.

In my 25-year career as an investment advisor, investors faced Y2K, a worldwide financial collapse, and a global pandemic. In each case, downturns were followed by rebounds and even better returns.

This is temporary and stability will return

Russia’s war against the Ukraine is wrong and creating a tragic humanitarian crisis, but in terms of the markets, investors should view it as a temporary event: because it is. Yes, markets are down – for now – but they are not going to collapse. You are not going to lose all your money. Your wealth may drop for a period of time, but once the war is over, regardless of the outcome, stability will be restored and returns will tick up, in my opinion. For those fearing a global nuclear war, then market performance won’t matter.

Uncertainty causes markets to fall. Even before Russia invaded Ukraine, the markets were experiencing volatility because the central banks in Canada and the U.S. announced they would be increasing interest rates and reducing stimulus support. Higher interest rates are the primary tool to curb inflation, which is at record highs in both countries. While this made some investors nervous, it’s important to understand that the fact the Bank of Canada and the Federal Reserve are raising interest rates means the economies in both countries are strong.

Statistics Canada’s labour report for February showed just how strong. Unemployment had fallen below pre-Covid 19 levels for the first time since the start of the pandemic, down to 5.5%.[1] The Office of the Parliamentary Budget Officer projects an economic rebound and robust performance in the second half of 2022.[2] All of this is good for the markets and those benefits will be realized once the war and geopolitical tensions end.

Energy self-sufficiency will be a positive

Energy prices are high now because demand is greater than supply. Worldwide sanctions against Russia, a major global producer of oil and natural gas, mean Canada, the U.S. and Europe are looking for other suppliers and working to become more energy self-sufficient:  a positive going forward. When the Russia-Ukraine situation becomes more stable, those prices, which are also driving up inflation, will drop, in my opinion. Continue Reading…

Growth Opportunities in Challenging Times

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Franklin Templeton/iStock

By George Russell, Institutional Portfolio Manager, Franklin Equity Group

(Sponsor Content)

The first few years of the 2020s have been challenging, to say the least.

Just as optimism was building that the worst days of the pandemic may be behind us, war in Eastern Europe erupts. Hopefully the conflict in Ukraine can find some sort of resolution sooner rather than later, but it’s a worrying time for sure.

Amid the geopolitical turmoil, markets have experienced some wild swings so far in 2022. The conflict in Ukraine has created extra uncertainty for investors who were already concerned about runaway inflation levels, and what higher interest rates may mean for their portfolios. The Bank of Canada has announced its first hike since 2018, and the expectation is that more increases are to follow throughout 2022.

In this tumultuous environment, Growth stocks have had a difficult time. While the first year of the pandemic largely benefited Growth names, particularly in the tech space, there has been a reversal of fortunes in recent months. As inflation concerns increased hawkish sentiment among central banks, a Growth to Value rotation occurred across markets. The question many investors are now asking is just how much the U.S. Federal Reserve or Bank of Canada  will ultimately raise rates.

This decision will  be contingent on whether inflation continues at such a rapid rate, which won’t be helped by higher energy prices arising from the war in Ukraine.

Permanent or Temporary Change?

U.S. consumer prices were up 7% year-over-year at the end of 2021, a 40-year high, while Canada’s 4.8% annual inflation at the end of the year marked a 30-year high. In his recent paper on the subject, Franklin Innovation Fund portfolio manager Matt Moberg identified two main themes that will dictate market performance this year: which companies have experienced permanent change due to the pandemic, and the duration and magnitude of inflation. Continue Reading…

Big questions about Investing and Personal Finance

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By Michael J. Wiener

Special to the Financial Independence Hub

 

We spend a lot of time worrying about interest rates, stock markets, inflation, gold, and cryptocurrencies, and how they affect our investment portfolios and personal finance.  Here I explain how I think about these issues.

Are interest rates going up?

I don’t know.  But the answer can’t end there.  We have to make choices about our mortgages and investments, and interest rates matter.  Some will express predictions confidently, but they don’t know what will happen.

I prefer to think in terms of a range.  Let’s say that we think interest rates will average somewhere between 0% and 7% over the next decade.  This range is wide and reflects the fact that we don’t know what will happen.  Because current interest rates are still low, the range is shifted toward rate increases more than decreases.  The goal now is to balance potential downside with potential upside over this range.

With mortgages, the main concern is the downside: will we be okay if mortgage rates rise to 7%?  We may not be happy about this possibility, but we should be confident we could handle such a bad outcome without devastating consequences.  This is why it’s risky to stretch for a house that’s too expensive.

Bonds and other fixed income investments are a good way to moderate portfolio volatility.  However, long-term bonds have their own risks.  If you own a 25-year bond and interest rates rise two percentage points, anyone buying your bond would want to be compensated for the 25 years of sub-par interest.  This compensation is a drastically reduced bond price.  For this reason, I don’t own long-term bonds.  I stick to 5 years or less.

But can’t we do better?  Can’t we find some useful insight into future interest rates?  No, we can’t.  Not even the Bank of Canada and the U.S. Federal Reserve Board know what they’ll do beyond the short term.  They set interest rates in response to global events.  They do their best to predict the future based on what they know today, but unexpected events, such as a war or new pandemic, can change everything.

If we get overconfident and think we have a better idea of what interest rates will be than somewhere in a wide range like 0% to 7%, all we’re doing is leaving ourselves exposed to possible outcomes we haven’t considered.

Is the stock market going to crash?

I don’t know.  With stock prices so high, it’s reasonable to assume that the odds of a stock market crash are higher than usual, and that a crash might be deeper than a typical crash.  But that doesn’t mean a crash is sure to happen.  The stock market could go sideways for a while.  Or it could keep rising and crash later without ever getting back down as low as today’s value.

People who are convinced the market is about to crash may choose to sell everything.  One risk they take is that the crash they anticipate won’t come.  Another risk is that even if stock prices decline, they may keep waiting for deeper declines and stay out of the market until after stock prices have recovered.

Those who blissfully ignore the possibility of a stock market crash may invest with borrowed money.  The risk they take is that the market will crash and they’ll be forced to sell their depressed stocks to cover their debts.

I prefer to consider both positive and negative possibilities.  I choose a path where I’ll still be okay if stocks crash, and I’ll capture some upside if stocks keep rising.  If we could fast-forward 5 years, it would be easy to see whether we’d have been better off selling everything to cash or leveraging like crazy.  But trying to choose between these extremes is not the best approach.  I prefer to invest in a way that gives a reasonable amount of upside with the constraint that I’ll be okay if stocks disappoint.

Is inflation going to get worse or return to the low levels we’ve had in recent decades?

I don’t know.  Either outcome is possible.  Higher inflation is bad for long-term bonds, which is another reason why I avoid them.  With short-term bonds and cash, you can always choose to invest these assets in a different way without taking as big a hit as you’d take with long-term bonds.

I choose to protect against inflation with stocks.  When prices rise, businesses are getting higher prices for their goods and services.  However, this protection only plays out over long periods.  Over the short term, stocks can drop at the same time that inflation is high.  Some people like to look at historical data and declare that stocks offer no inflation protection.  These people are usually playing with mathematical tools they don’t understand very well.

All of these considerations play into the balance I’ve tried to strike with my allocation levels to stocks, bonds, and cash.  I’m trying to capture some upside from good outcomes while protecting myself from disaster if I get bad outcomes.

Is gold going up?

I don’t know.  You might think my balanced approach would mean that I’d have at least a small position in gold, but I don’t.  I have no interest in investing in gold.  It offers no short-term protections against inflation or anything else.  And over the long-term stocks have been far superior.

Gold produces nothing, and it costs money to store and guard.  Gold’s price has barely appreciated in real terms over the centuries.  In contrast, millions of people wake up every day to work hard at producing profits for the businesses that make up the stock market, and money invested in stocks over the centuries has grown miraculously. Continue Reading…