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September 17, 2018 | In Praise of 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.

If you told your diary (you have one, right?) that “2018 sucks,” it might agree. Interest rates have swollen. Financial markets have wobbled. Trade wars have erupted and NAFTA’s on life support. The real estate market’s weakening. Trump seriously dissed T2. And ten years after the 2008 crash, financial doomers abound. At least Adele  has stopped touring.

So what do we make of those who say we’re on the cusp of a recession, toppling markets, investors losses and a big rerun of the GFC? They point to inverting yields, over-valued equities, stocks and bonds no longer correlated, the impact of central bank rate hikes and the wee vibrating hairs on their necks as concrete proof.

Of course, they’ve been doing this for a few years. In that period of time (2016, 2017 and so far in 2018), a balanced and diversified portfolio of low-cost ETFs has rewarded an investor with a return of a little over 25%. If done the correct way (taking advantage of taxless TFSAs, RRSP and the lower levies on dividends and capital gains), that’s a sweet return. It beats the pants off real estate in Toronto, Vancouver, Victoria, Calgary or Montreal. It’s outsized when compared to inflation, wage gains or Max Bernier’s ego (almost).

This portfolio (40% safe stuff – a mix of bonds and preferreds plus 60% growth – global equity ETFs and REITs) gave almost 11% last year, 8.5% in 2016 and in the first eight months of this year, 4.06% (that’s an annualized 5.5% – not bad for a sucky year). This means that when you get a period of time in which things go sideways more than up, the gains of the past are retained. So the conclusion’s obvious. Stick with the plan. Ignore the short-term. Stop reading blogs. Shun books written by people who have degrees and no money.

But, I hear the rabble from under decks cry, what if we have a crash? Another 2008? A recession? Ain’t we due?

No, we’re not. Just because markets go high does not mean they will fall. The depth and length of the economic morass following the GFC dictated that the recovery period would be elongated. Asset values were coaxed higher by collapsing interest rates for almost eight years, but have since jumped based on macroeconomics. Global growth was 0%. Now its nearing 4%. Deflation has turned into inflation. US unemployment of 10% has collapsed to 4%. Corporate profits are historic, and rising. Technological advance is stunning, boosting productivity and cutting costs.

So despite Trump, trade wars, rising rates and Coke planning to add cannabis, the good outweighs the ugly. Why wouldn’t you remain invested, instead of trying to time a market that has momentum? Unless you need your money back to spend in a year or two, history shows fear is a bad advisor.

I see the eggheads at Goldman’s came to the same conclusion this week. The odds of a recession occurring within the next three years, GS says, are a mere 36% – which is actually lower than the historical average for any period of time.

Concluding their model paints “a benign picture” of what’s to come, Goldman Sachs says it “remains sanguine about the outlook,” for the years ahead. And why not? All Donald Trump needs to do to ignite big market gains is dial back his trade rhetoric, not nuke any countries with good social media and stay unimpeached. Remember this: markets go up because companies make money. So there has to be a fundamental reason for profits to reverse and erase in order for a correction to occur. Right now, there isn’t one. Certainly not central banks which are smoothly and gently goosing rates. Not the US government which has dropped taxes and costly regs. Not consumers, bristling with confidence and spending intentions.

Of course, not everything goes up at the same time in any portfolio. If you have the wrong kind of bonds or bond funds, they’ll be hurt as rates swell, for example. If a hard Brexit comes, the UK may dip your international ETF. There are always risks, and a mild recession in Canada is one of them. But in a volatile, changeable world, you collect serious points for being fully invested in a commonsense way, and tuning out the crap you are about to read in the comments section.

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September 17th, 2018

Posted In: The Greater Fool

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