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January 8, 2018 | Seeking Balance

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.

On the weekend President Trump took personal credit (on Twitter) for creating more than two million jobs and propelling the Dow about the 25,000 mark. It was a remarkable brag. But it was also a part of the massive defense against ‘Fire and Fury’, the book trashing the prez, his family and every bubba with a Glock and an F150 that voted for the guy.

That was capped off with Oprah2020 Sunday night, so you can see what monumental mess we may be heading into over the next three dozen months.

Anyway, this is not about The Donald, but you. Investors everywhere are wondering how long this incredible bull market can last. As you may know, the Dow gained 5,000 points in 2017 – the first time that happened. The last thousand points came in a matter of weeks, the quickest advance ever. The index topped 25,000 and gained more than 25%. The S&P 500 (a much broader index) shot ahead 20%. The tech-heavy Nasdaq popped almost 30%.

Behind the explosion was a heady combination of job creation, romping corporate profits, global growth, corporate tax cuts and Trumpism. The US economy is growing nicely, consumer confidence is at the highest level in ages and, most importantly, tons more people are working than five years ago. Post-crisis unemployment of near 10% is now at 4%. The economists call that full employment, since about everyone who wants a job has one. There are more openings than applicants.

But it ain’t just America, Trump or the Dow. This euphoria for equities is…everywhere. According to the elves at Bloomberg, most major markets are ‘overbought’ – including the Dow, S&P, emerging markets, Nikkei, Euro and world indexes. Not since 1988, when I was an awesome, fully-invested, manly teenager, have markets been at this level. Even Bay Street, which gained 17% in 2016 and just 6% last year, seems poised for more as the economy grows and commodities rise.

Here is an incomprehensible relative strength index chart to prove the above and make this post look authoritative:

Is there more coming? Most analysts seem to think. Global growth was around 3% last year and is forecast to hit 4% in 2018. That’s impressive. Oil could add ten bucks after finally cracking sixty a barrel. After one whole year Trump has not yet imploded, which is progress. The massive drop in corporate tax will start benefitting American companies this year. If the nutbar running North Korea is serious about reducing tensions and snuggling with the south, then a major uncertainty is reduced.

But, still, record-high market levels are scary. People think anything that’s jumped must fall. They dredge up memories of their crappy bank mutual funds in 2008. Increasingly, there’s online chatter about a new stock crash. That may have propelled many ingénues into the sketchy arms of cryptocurrencies, which exemplify true risk.

Could markets decline?

Of course. Expect it. The shock would be if we get through 2018 without a correction. It might be 5%, or 10%. Maybe even 15%. But since the fundamentals are strong – robust growth, great corporate profits, modest inflation, mucho jobs, gently-rising rates and lower American taxes – the dip(s) will probably be short. That’s normal. Over the last 30 years stocks have plopped more than 10% on 24 occasions, lasting an average of 17 weeks. In other words, the people who sold when things were going down almost always bought back at a higher level. Some strategy.

So how do you invest (because everybody needs cash flow later in life, not paid-up real estate), and still sleep at night – even when assets take a hit?

Simple. Just like you should have in 2008-9 – with a balanced and diversified portfolio. During the credit crisis, when stocks tumbled 55% and took seven years to recover, the balanced portfolio shed only 20% and bounced back in a single year. The next year it advanced 17%. So someone snoozing through the worst financial storm of our lives made an average of 5% annually over the same three years when unbalanced people thought life was ending.

Now – maybe especially now – it’s the approach to take. The world is growing, so going to cash is a dumb move. Bitcoin? Forget it. Gold? Purely speculative. All-in stocks? Turmoil. Totally bonds? Rising rates will bring you down.

So, it’s probably time to remind you that over the active life of this pathetic blog, a portfolio with 40% safe stuff (roughly half bonds, half preferreds) and 60% growth assets (Canada, US and international equities, REITs), diversified by using ETFs, has returned over 7%. During that time there were some horrible markets (2011 debt crisis, 2015 oil collapse) as well as great ones (like 2017). Unlike real estate, the portfolio is always 100% liquid, does not require land transfer tax to buy or 5% commission to sell, doesn’t come with property tax, tenants, insurance or cable bills, nor does it have strata or condo fees. Instead of costing you money, it can pay you income – in a tax efficient way. And when you want to unload, there’s no realtor or Audi involved.

This looks like an important year. Continued growth, rising stocks, more record highs (there were 70 in 2017), higher rates, wobbling real estate, endless Trump, US midterm elections and, yes, Oprah2020. We’re way overdue for a market correction. Find balance, and you just won’t care.

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January 8th, 2018

Posted In: The Greater Fool

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