- the source for market opinions


July 9, 2015 | Lessons

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

I’ve been a financial journalist, editor and media entrepreneur. A politician for nine years, too, in part running Canada’s tax system. I’ve written 17 books on personal finance. Spent almost a decade on the road across the nation, speaking repeatedly on investing, real estate and the economy. I’ve produced over a hundred television shows on business and investing for the networks. Written thousands of columns and articles for major newspapers and 2,054 pathetic blog posts. I also help hundreds of middle-class families with their finances.

So, what has all this taught me?

(a) People buy when others are buying and sell when everyone sells.
(b) The greatest motivator isn’t profit, but fear.
(c) We all misinterpret risk. It’s not losing money but lacking it.
(d) Nobody invests when stuff is cheap.
(e) Financial illiteracy is the norm.

It’s no surprise, then, that most Canadians have a one-asset financial strategy (their house), believe this is wise (because everyone’s doing it) and that real estate will rise without end (because it’s “low risk”). The flip side is one I’ve shown you often. Debt is epic, the savings/investing rate has plunged, most people now fear retirement and a majority live paycheque-to-paycheque.

We crave simple. We really, really, really want to pay off a mortgage and believe that’s enough to be secure. Like in the past. People don’t trust what they don’t understand, which includes the stock market, bonds, taxation and anything non-Canuck. Like China. And this: the hardest thing for anyone to do is trust someone else with their money. Spouses included.

All of this has resulted in the current situation. Most of our money is in GICs and bank deposits earning less than inflation. Over 90% of all tax-free accounts, where things grow fastest, are not full. RRSPs are dying, even when 70% of us have no corporate pensions. Your relatives think the stock market, which reflects the economy, is a casino. They believe houses bought at historic highs with 95% leverage using adjustable-rate mortgages, are rock safe.

Plus, almost everyone, I have learned, invests with their pants. They’re incapable of preventing emotion – greed or fear – from overwhelming logic. Events of the past few days involving Greece, China and market volatility have once again proven my life’s observations to be correct. Sadly.

Yesterday a dude named Noman gave us a taste, as stock markets shed 2% of their value after hitting record highs.

“Buy and hold strategy combined with buy the dips seems to be the answer from the financial community. IMO if your broker or wealth advisor is telling you ”no worries” I am afraid that is exactly why you should start worrying. The TSX is looking horrific as multiple support levels are broken and this time we could be facing a long term bear market that could last for years. Bear markets are powerful and have a habit of creating dead money for investors. Sorry Garth but I believe there are times when cash is king and I believe we are in one of those times. To hell with growth versus risk how about just plain old preservation of capital.”

On Thursday US stock markets gained ground, while the Chinese market had the biggest one-day surge since 2009. For the past 12 months the Dow is ahead 5.78%. The Toronto market, plagued by our weak economy and oil, is down slightly – 3.2%. The Chinese market (Shanghai) has a year/year gain of 86.2%.

The American economy continues to grow, and a rate increase by the end of the year is still on deck. The Greek government is proposing a new plan to stay in the European Union. We’ll know how that turns out by the weekend, but the worst is already factored in. The Chinese authorities will not allow a stock rout to continue. Global growth is glacial, but things continue to creep forward. And emotional investors, like Norman, mistake every market hiccup, correction or bump for the apocalypse.

Here are a few things Norm should remember as he stockpiles skids of Cottonelle and Chicken-of-the-Sea:

  • Corrections are normal. There have been 72 since 1945 and yet only 10 bear markets (a drop of 20% or more). Therefore 88% of the time a temporary dip is just a dip.
  • Corrections usually last a month. Bear markets average 18 months and are almost always caused by recessions. There’s no recession in the US. In fact, healthy expansion.
  • There have been only 12 recessions in the last 70 years.
  • Balanced, diversified portfolios are designed to mitigate equity declines by including fixed income and broad geographic exposure. When the TSX lost 55% in 2008-9 and took seven years to recover, this portfolio lost a fifth and bounced back in a year.
  • We need corrections. Markets can’t rise forever or dangerous bubbles will develop, with far worse outcomes down the road.
  • So maybe, Norman, you should worry more about your house.

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July 9th, 2015

Posted In: The Greater Fool

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