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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

February 11, 2016 | Deal with It

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.

 

Market update: They suck.

Faye and Rob started investing eight months ago, moving their money out of GICs and high-fee mutual funds at the local credit union into a balanced portfolio of ETFs. He drives a bus. She’s a part-time supply teacher (music). Two kids. House a third paid off. About a dozen years from retirement. Mediocre pensions. Four hundred grand spread across RRSPs, a spousal, two TFSAs and a small non-registered account.

“We’re regular, boring people,” she told me, shortly after they’d engaged a fee-based guy. “This is money that we need to grow over the next decade, so I feel good about the decision. Thanks for the blog, because before reading that we didn’t have a clue this option existed for people like us.”

Good. Smart. GICs pay peanuts, less than inflation, guaranteeing a loss over time. Mutual funds have ridiculous management fees, not even tax-deductible. Besides, the credit union lady had stuck F&R into a maple-heavy equity fund that had been badly scorched. They had little US or international exposure, no REITS, and no plan. No guidance.

Well, guess what happened? The balanced portfolio is sitting at 5.5% less this week than it was last summer, and she’s freaking. She just told the advisor, “We want to go to cash. Yesterday. I can’t take it.”

The rest of this post is for Faye.

In the crash of 2008-9, the worst market event of this generation, the TSX lost 55% of its value from peak to trough. US banks were failing. Wall Street was in crisis. Credit seized up around the world. The car companies spiraled towards bankruptcy. Tens of thousands of layoffs took place every week. The media was filled with alarmist stories of a new depression. As volatility spiked, millions of retail investors jammed the exits. On the day the markets bottomed in the winter of 2009, a mass exodus took place.

During this time a balanced portfolio like yours, Faye, was not immune. It dropped 20% over the course of a few months. The plop in equities was mitigated by the fixed income, which continued to pump out interest and dividends. While it took somebody with only stocks more than six years to get their money back, the balanced portfolio regained all lost ground in one year. The next year (2010) it swelled more than 15%. So over the course of three years – the worst period for investors in decades – the return averaged about 5% annually. Those who bailed and sold at the bottom, however, were crushed. Thanks to fear.

Where are we now?

US stocks markets have lost 12% in a year, and Bay Street has declined 20%. Oil has shed 75% of its value. Despite that, no banks are failing. There are no Lehman-type events taking place. The US is growing, not contracting. The global economy is expanding. No recession. Over three million more jobs were created in the States last year. Canadian banks have been pumping out record profits. The car companies just had the best twelve-month period in history. Gas at 60 cents in Edmonton and a buck a gallon in some American states is a boon to consumers.

So logic tells us the selloff is probably overdone, maybe close to a bottom. Oil is ridiculously cheap for something the world devours daily. There’s no credit crisis and no deflation. Just a ton of profit-taking from the record equity levels of a year ago. And now, fear like yours.

Your portfolio is down less than 6%, and you’re desperate to get out. That makes utterly no sense unless you know things are going to fall more, and never recover. When was the last time that happened? Yes, never.

Here’s what throwing in the towel means:

  • You decide, emotionally, this is not the bottom or anywhere close. That means you’re timing the market – which never, ever works. Especially when based on fear alone.
  • You’ll sit in cash or a GIC, making less than zero after inflation and taxes. So, you’ll choose to lose money and eschew the certain potential of long-term growth. After all, didn’t you invest to have more money 12 years from now?
  • You’ll then have to determine when to invest again, since GICs are no option. More market timing. More emotion.

Over the last 20 years – which included the massacre of 2008-9, someone starting with $100,000 who stayed invested would have $654,055. The person who tried to time things and missed just the best 10 days of recoveries after corrections would have only half that amount. Like I said, fear’s a costly thing. (Click to enlarge)

CHART 1

Here’s more. Let’s imagine over 40 years you timed the market, bailing out when things got scary, and waiting to get in until they seemed more positive. If you missed hitting just the best 1% of days and were invested for the other 99%, look at the difference in your portfolio: (Click to enlarge)

CHART 2

Finally, Faye, do you consider selling your house every time things get rough and real estate loses value? Or do you tough it out and wait for better conditions? Do you appraise your home every year, or worry about whether or not it’s worth more this month than last? After all, if you’re not selling and don’t need the money, who cares?

I just hope the wusses, market-timers, ignoramuses, pantywaists and dorks in the comments section have not added to your emotional fog. Forgive them. They know not what they do.

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February 11th, 2016

Posted In: The Greater Fool

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