Tag Archives: investing

How to get through a stock market crash – and benefit from it

Posted By Financial Independence Hub | March 18, 2020

By Mark Seed

Special to the Financial Independence Hub

Unless you’ve been living under a rock, the stock markets have been a terrible mess.

On our Canadian side, we triggered market circuit breakers to halt trading in recent days.

In the U.S., the stock market dropped thousands of points in rapid successive trading days and remains well into bear-market territory within just a matter of weeks. It’s as almost if the market jumped out of a plane with a faulty parachute and spiraled out of control to earth; only some mild turbulence kept it from a total free fall.

All havoc, no sanity

These market dives in very short order made me reflect on my own investing journey and how I might be able to survive this stock market crash. For today’s post, here are my ideas on how to get through a stock market crash – and benefit from it.

1.) Learn from history – reset your expectations

A sudden stock market crash is quite unnerving, but I don’t think it’s a sign of imminent full-on financial collapse. At least history tells us so. You’ll see from the chart above, recent weeks have been very messy to say the least. But over many years of investing in equities, the chart actually looks like this:

I’ve highlighted near the bottom of the 2008-2009 Great Recession for reference.

Although it’s very difficult to wrap your head around this fact and behave accordingly, stock market history consistently tells us the financial markets do eventually recover. And, after they recover, looking back through time, they continue to deliver rather predictable long-term returns. Here is what the U.S. stock market has returned by the decade and from what:

Source: https://awealthofcommonsense.com/2019/12/where-have-all-the-stock-market-returns-come-from-this-decade/

Even near-term, our Canadian and U.S. stock markets have been a very good place to be to build wealth:

Index	Proxy Fund	5-year return	10-year return	Since inception
S&P/TSX (Canada)	XIC	6.27%	6.77%	6.53% (2001)
S&P 500 (U.S.)	IVV	11.65%	13.50%	6.15% (2000)

Source: iShares site, up to December 2019.

I firmly believe this is why you need to stay invested throughout a stock market crash.

What goes down will (eventually) go back up in time.

2.) Learn from history – buy when stocks are on sale

The fact that equity markets have done well over the last decade, let alone generations (despite the occasional very scary bump) should be a reminder that stocks remain a great long-term investment to build wealth. But as we all know by now, scary bumps can and do happen. As in now.

This means selling stocks in a panic (also as in now) is probably not a wise move. Ideally, successful investing is about buying something at a low to modest price and watching that asset accumulate in value. That means staying investing like I mentioned above but that also means buying low, selling high (if you need to sell at all). When you sell after a market crash or a major correction you do just the opposite.

You and I both know by now we cannot control market swings. We can control our investing behaviour. We have no idea of when the market will swing nor by how much. We only know that it will.

The best time to buy stocks is when you were going to buy them anyway.

So, I believe, you should consider stock market crashes as a buying opportunity. I mean, a market correction or crash simply signifies stocks are on sale per se. Consider the following and your behaviours associated with these statements:

Would you panic sell your house if it dropped 20% in value in a few days or weeks?
Would you buy more gas for your car if it dropped 20% at the pumps?
Would you buy more groceries and toilet paper if it was on sale during the impending viral apocalypse?

You know your answer and I know yours too.

So why is the stock market different?

Much has been written about buying in lump sums being somewhat more favourable than any dollar-cost averaging (i.e., buying-in slowly) during a market correction. To be honest, I don’t care what you pick. Just invest.

As Jonathan Clements, a former Wall Street Journal columnist once said:

“If you want to see the greatest threat to your financial future, go home and take a look in the mirror.”

This implies that successful long-term investing is directed tied to your emotional fortitude and behavioural discipline. While poor investing decisions can and may very well occur from time to time, it’s important to learn from them. It is therefore imperative that investors recognize their behavioural pitfalls before committing to any decisions which can affect their investment goals.

One of my favourite, easy-to-read books on the subject of building wealth is targeted to millennial investors but applies equally to investors of all ages is If You Can. This book is designed for modern attention spans. It’s only 15-minutes of reading and gives you information you need to be a successful investor in a few pages.

You can read an overview of this book and download a FREE copy of it (yes FREE) here.

3.) Learn from history – continue to improve

How high your returns could be (for a long-term stock market investor) over the next 30+ years is not really up for too much debate – based on market history. A 100% equity portfolio in the broad U.S. stock market is probably going to deliver close to 7% annualized (plus or minus a bit) and likely 3-4% in real returns (after inflation is factored in) in the coming decades.

I can say with more confidence that I will not find myself wealthier if I do not learn from my own investing history and continue to improve upon it over time.

I got a few reader emails over the last few weeks and I thought I would share them before I share my next steps in this current market correction for context – what I’m doing to improve. Emails adapted only slightly for posting. Continue Reading…

Sixth Sense or Nonsense? Removing intuition from the investment process

Posted By Financial Independence Hub | December 5, 2019

By Noah Solomon

Special to the Financial Independence Hub

In a recent newspaper article, a Canadian investment executive described why he chose not to incorporate artificial intelligence (AI) into his firm’s portfolio management process. His reasoning was based on the distinctively human ability to “read a room” and gauge the sincerity of corporate management teams, which cannot be replicated by a machine or algorithm.

Even if you believe that investment professionals possess this “sixth sense,” the simple fact is that it has not enabled them to produce superior results. According to the latest SPIVA (S&P Index vs. Active) Canada report card, over the past 10 years:

91% of Canadian equity funds underperformed the TSX Composite Index
97% of U.S. equity funds underperformed the S&P 500 Index
100% of Canadian dividend-focused funds underperformed the TSX Dividend Aristocrats Index

Aside from the alleged ability to gauge the truthfulness of a person’s statements, there is another human characteristic that AI lacks. Unlike their human counterparts, AI algorithms do not have emotions or cognitive biases, which often lead to poor investment decisions.

We have met the enemy – and the Enemy is Us

The field of behavioural economics studies the effects of psychological, cognitive and emotional factors on the economic decisions of individuals and institutions. This field has produced countless studies that have conclusively demonstrated that when it comes to investment decisions, people harbour subconscious biases that result in suboptimal results. Moreover, these biases are not restricted to individual investors, but also permeate the decisions of professional managers and institutions. Continue Reading…

My Review of “A Warning” by Anonymous

Posted By Jonathan Chevreau | November 27, 2019

Based on the arrival of my library copy of “A Warning” this weekend, it’s clear that the controversial book about Donald Trump written by “Anonymous” is now in wide circulation, and hence there will soon be a new wave of reviews.

Recall that what amounted to a sneak preview of the book came late in 2018 after the New York Times departed from normal practice and published an opinion piece credited only to “A Senior Trump administration official” that gave an inside look at what those unfortunate enough to be subordinate to Trump have to endure on an almost daily basis. Talk about the worst job in the world!

At 250 pages it’s a quick read. At one level, and as a friend of mine who also got an early copy remarked, there’s not that much new to anyone who has been following this train wreck of a presidency on CNN or MSNBC.

Indeed, many of the early reviews based on pre-release copies gave us a good flavour of what you can expect in this book. My favourite passage in the book used not the imagery of a train wreck but an even more dramatic one of air traffic control. To wit:

‘The day-to-day management of the executive branch was falling apart before our eyes. Trump was all over the place. He was like a twelve-year old in an air traffic control tower, pushing the buttons of government indiscriminately, indifferent to the planes skidding across the runway and the flights frantically diverting away from the airport.’

The book includes eight chapters, beginning with the collapse of the steady state (you remember the “grownups” who were supposed to act as guard rails, many now since departed), moves on to Trump’s numerous defects in character, his Fake Views, his Assault on Democracy, his weakness for Strongmen, and a chapter on how he has divided America with a “New Mason-Dixon Line.” Then he surveys the apologists and his enablers who put ambition and fear over service to country, and ends with an appeal to the Electorate.

Surprisingly, the author isn’t that keen on the prospect of impeachment: even though the book is current enough to include the early innings of the Ukraine scandal. Instead, and perhaps sensibly, the appeal is to American voters to come to their collective senses and vote him out in the 2020 election.

Three years too late?

A cynic might quip that the very title “A Warning” comes at least three years too late. But for anyone who believes another four years of this madness will all but destroy American democracy, the title is apt if understated. Perhaps a Trumpian superlative would be an improvement: something like “An Urgent Warning.” Continue Reading…

No, passive investing is not in a bubble

Posted By Robb Engen | November 21, 2019

There have been many ridiculous statements made about passive investing over the years. None have garnered as much media attention as hedge-fund manager Michael Burry’s claim that passive investments such as index funds and ETFs are the next bubble. He said these index-tracking investments are “inflating stock and bond prices in a similar way that collateralized debt obligations did for subprime mortgages more than 10 years ago.”

“When the massive inflows into passive vehicles reverse, it will be ugly.” – Michael Burry

Such a bold claim from someone who correctly called the subprime mortgage crisis is certainly cause for concern. But when you peel back the layers, Burry’s statement doesn’t make much sense. Looking for a smarter take than that, I reached out to Erika Toth, a Director of ETFs at BMO Global Asset Management, to explain why passive investing is not in a bubble.

Take it away, Erika:

Debunking Michael Burry’s Passive Investing Bubble Claim

I may not have had Christian Bale play me in a movie, and I did not make millions during the financial crisis, but I have spent years now studying market structure and eating, sleeping, and breathing ETFs. Burry’s comments that sparked a media frenzy (and let’s all agree that the financial media loves to sensationalize) echo some of the most common myths and misconceptions I have encountered on the ETF wrapper.

This “passive investing is in a bubble” argument assumes that all the money invested in passive indices has flowed in to the same indices, that hold the same stocks, in the same proportions. However, there are many different types of passive funds and ETFs: some track the S&P 500, some track indices built around low volatility, quality, value, or momentum filters. Some track specific sectors.

Different investors have different investment objectives and motivations. Some want to buy the market. Some require higher cash flow. Some require lower volatility. Some are searching to exploit market inefficiencies in order to generate alpha. Pension funds have to make sure their liabilities are funded. Some investors are searching for companies that meet the highest environmental, social, and governance standards. Some require certain tax efficiencies or credit qualities to be met. Therefore, it is impossible that the entire world’s stock and bond markets would move to 100% passive.

It’s also important to note that individual stock ownership by households (domestic and foreign) accounts for just over half of the equity market: the largest share, by far. Mutual funds (active and passive) own about 24%; ETFs own about 6%. Pension funds would represent about 10% (government and private); and about 8% is owned in other vehicles such as hedge funds. (This is according to data put together by the Federal Reserve Board: see below).

ETFs themselves are too small a slice of the overall pie to be able to cause a crash in the prices of the stocks they hold; they simply reflect those prices. Those statistics are for the equity market. ETF ownership of the global bond market is even smaller, roughly 2-3% by most estimates.

The theory that everyone will run to the exits at the same time in the event of a major downturn is incorrect, and 2008 is a good example of that. My favourite example comes from Ray Kerzehro, who is Director of Research at independent firm PWL Capital, in the still-very-relevant white paper he published in 2016.

Kerzehro examines how high yield bond ETFs in the U.S. traded during the height of the financial crisis. Keep in mind that high yield bonds are NOT a large cap equity index made up of the largest and most liquid stocks in the world: they are a riskier asset class of lower credit quality and are less liquid as well. So, even in this riskier and less liquid asset class, there was actually no massive exodus from those ETFs.

What happened is that trading VOLUME actually spiked. Buyers & sellers of the ETF units had different views for different reasons, and the ETF structure actually provided price discovery to an asset class where many of the underlying bonds had gone no-bid. Continue Reading…

Is the political heat melting your investment cool?

Posted By Financial Independence Hub | October 17, 2019

By Steve Lowrie, CFA

Special to the Financial Independence Hub

I’ve said it before. So has American financial commentator Barry Ritholtz. Regardless of your political bent, it’s a bad idea to hitch your investment decisions to whoever is, is not, or is about to be in political power at any given time.

Given the upcoming Canadian election and all the related political storm and fury of late, it’s not impossible that we could end up with a minority government in the next election, with the NDP or Greens having the balance of power. As a side note, residents of British Columbia have been dealing with this scenario for the past couple of years. That said, this outcome is just speculation, and this post is not about how you and I may feel about that situation.

This is about the choices we make as investors. As I said in 2016, and I’ll repeat here:

“Even when political news is strongly felt, there will likely never be a good time to shift your investments — neither in reaction nor as a defense. First, no matter how certain one or another outcome may seem, how the market is going to respond to the news remains essentially unknown. Second, by the time you’ve heard the news, it’s already priced into the market anyway.”

I’ve now been a financial advisor long enough that I’ve heard this refrain many times over: “If ‘X’ is elected I’m moving out of Canada!” Over the years and through multiple conversations, “X” has represented candidates from across the political spectrum.

Ironically, a similar refrain is often heard in the U.S.: “If ‘Y’ is elected, I’m moving to Canada!”Which is why Dimensional Fund Advisors provided us with a telling graphic to illustrate how impotent political parties actually have been at helping or hindering capital markets. Continue Reading…

All havoc, no sanity

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Debunking Michael Burry’s Passive Investing Bubble Claim

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