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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

April 1, 2016 | No escape

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.

 

There was a time when people in thirsty underwear could smile more. The economy was swelling like a lovesick sponge. Savings accounts paid more than half a per cent. You could put your nestegg in government bonds and earn double-digits. The only challenge was to amass enough money by sex-pill age, then all was cool.

But no more. It’s a low-growth, low-rate, low-inflation, low-return world, with an aging demographic, washed in a patina of debt. As most doomers who come here continuously remind us, this is likely to remain the case. No, not a depression. Or even a protracted recession. Just torpid rates of expansion, flatlined incomes and crappy returns for any investor who needs a guarantee.

But you know this. Commodity prices are at decade lows. Central banks have trashed rates to keep growth alive. Nobody gets a raise any more. Corporate pensions are dying off. And now the new government in Ottawa has to overspend by thirty billion a year to sustain the economy.

None of this can you change. But you can certainly adapt. Smart investors will understand the old model no longer hunts. As I’ve said often, the greatest risk now is not losing money in an investment that declines, but running out of it. Given tediously-long lifespans and diminishing returns, you cannot afford to invest the way your parents did. Bond coupon-clipping is kaput. GICs are financial death rattles. High-interest savings accounts are an oxymoron. If you have no stomach for some market volatility, you’d better have a couple of million in the sock drawer by the time you quit work. If not, here’s a plan.

First, go where the growth is in order to grab some. These days, that’s south of the border.

“The US economy may be slowing relative to previous decades, but you have to recognize the country’s incredible ability to innovate,” says portfolio manager Doug Rowat. “Such innovation can instantly spur growth despite unfavourable demographics.” Of course. No mistake that the largest companies in the world, as gauged by their market capitalization, are American. Where would we be these days without Apple or Google, Exxon, GE or Amazon? The essence of Americanism is innovation. Technology rules. Be there. And did you catch the jobs numbers Friday morning? Another home run.

I’ve told you many times to be underweight maple and to never bet against America. This runs counter to the portfolios most people have, peppered as they are with Canadian banks and energy companies. But the largest holding in the growth portion of your balanced 60/40 portfolio should be US equities – about 21%, compared to a max of 17% for the beaver stuff. Ensure this is well diversified, with ETFs holding large, medium and small cap companies.

Speaking of equities, you will regret not owning them – or enough of them – in the world now unfolding before us. No, this does not mean loading up on a bunch of penny stocks your BIL heard about from his dog-walker. Nor does it mean buying a slew of expensive equity-based mutual funds from [email protected]

Given the sea of debt upon which we float, interest rates will take a long time to reach historic norms. Yeah, they’ll go up. But we are not going back to the levels the wrinklies still dream about. At least not in your lifetime. Keep some bonds in a balanced portfolio to reduce volatility and counterweight occasional equity drops, but keep the weighting to 20% of the entire portfolio, and ensure you have high-yield and corporate bonds in there as well as low-octane government debt.

Mostly, forget the old rules. Like the one that says equities should form no more of your portfolio than 100 less your age. Anybody retiring now, dependant on their assets for income and planning to live another two or three decades, would be best off with 60% in the markets. Diversified. In the right regions. In ETFs.

Finally, whatever you might think of China, India, or Brazil, you should own them. Yes, I understand things can get volatile, which is why you need a low weighting (maybe 1% for China, compared with 10% for Europe). But over time the weighting to all emerging markets should increase, because that’s where the greatest future expansion lies.

These areas are populated with legions of young people, have rapidly-growing economies (Canada 1%, China 7%), swelling populations and big appetites for stuff the rest of the world produces. The most voracious middle class is no longer in the USA, but in China. There are a few good ETFs around that will offer you an appropriate exposure. Just don’t load up on the Shanghai index unless you have danglies of steel.

The best lesson about money anyone can learn is the nature or risk. It’s everywhere, in every activity, each day. Running from it is not a strategy. Even staying in cash exposes you to currency and inflation risk. Chasing yield has proven to be a mistake. Ditto for buying things at the top, just because everyone else is.

You’ll never have a fulfilling life by avoiding risk, running with the crowd or shunning trouble. Hell, look at me.

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April 1st, 2016

Posted In: The Greater Fool

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