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September 13, 2018 | When Crisis Comes

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.

A decade ago, when the world was ending and people still read books, I wrote one called ‘After the Crash.’ No, it was not about housing. And the crash referred to was the egg Wall Street laid after Lehman collapsed and the credit crisis swept the globe.

To this day I am not sure most people know how serious the event was, nor how near we came to the financial precipice. That was the point of my words then. The book painted various scenarios – recovery, crisis or collapse. Each had investment strategies attached. At that point, in the dying months of 2008, nobody knew what kind of life would emerge. A rerun of the 1930s? A gigantic buying opportunity? Or something in the middle?

My guess was an abrupt recovery, since it was becoming evident governments would simply not allow a reset. The actions that ensued proved this view correct. Central banks slashed rates to nothing. Ottawa took over entire mortgage portfolios. Governments poured trillions into stabilizing the economy. Banks and car companies were bailed out.

And it worked. Cheap rates encouraged people to borrow and spend (especially on real estate) again. Major corporations survived. Central banks and governments aligned their efforts as never before. But investors took a hit. The Toronto market, for example, lost 55% of its value. Volatility on American markets spiked wildly. People with cash who Hoovered up bargains (Canadian bank stocks plunged) profited wildly. Those who sold into the storm were spanked remorselessly. Ten years on, many have yet to recover.

One of them whom I know, Nance, was a sixty-something widow with $400,000 in balanced funds managed by a guy at RBC. (I knew him, too). After Tom died and she’d sold the family house, this was her complete fortune, being carefully managed to provide her with a modest, but adequate monthly income.

On the second-last day of September that year the Dow gave up 774 points in an orgy of selling that pared the index by almost 7%. The news was grim. Nance called. “I’m so scared,” she said. “What should I do? My guy says do nothing, not to sell, but I wanted your opinion.” And I agreed. Nothing. It’s too late to avoid a loss, so wait for the recovery, I said.

That afternoon Nance fired her advisor, sold her funds – crystallizing a loss of more than $100,000 – and put the remainder into a cashable GIC. She never invested again and, naturally ran out of money. At the age of 73 she was forced to declare bankruptcy after digging into her bank Visa for $47,000.

Of course, her investments had sunk along with the markets, hitting bottom about the time she sold. Four days later the $700 billion Emergency Economic Stabilization Act of 2008 passed the US Congress, and the recovery was sparked. A few days later the Dow gained 936 points, or 11%, for its greatest one-day advance ever. The second-largest gain in history came two weeks later, when the index plumped 889 points, or another 11%. Nance truly had picked the bottom, a victim of human emotion who acted against the advice of others, and paid dearly for the remainder of her life. She passed a year ago. Penniless.

I mention this story for two reasons.

First, as markets rise – we are again at record levels – so does the risk of correction. In fact a lot of people are making coin lately scaring investors into so-called ‘safe’ assets and fixed-income portfolios on the simple premise that what goes up has to come down. But they’re wrong. Things are far more complex than that.

Of course corrections will occur – and the next one could be 20% or more – but this ain’t 2008. Nor is a 2008 coming again the lifetime of anyone reading this. Too much has been learned about coordinated fiscal and monetary policy, market regulation, systemically-important banks, government backstops and international financial cooperation. Sure, the world is steeped in debt, but it’s also growing again after a decade of recovery. A low-rate, low-GDP, low-inflation, quasi-deflationary time has turned into one punctuated with rising rates, big corporate profits, job creation, expanding economies and a wage-price pop. There is no crash at hand. Trump or no Trump.

Second, if 2008 taught us anything, it was that a balanced, hands-off approach to investing works. After Nance’s portfolio dropped, it rebounded. She absorbed the losses by selling and benefited nothing from the rebound. In fact a balanced, globally-diversified portfolio of the kind this blog advocates with nauseating regularity (that does not hold individual stocks) did just fine. As I’ve mentioned, the 60/40 model lost 20% in 2008, gained it all back in 2009 and advanced 17% in 2010. So an investor who did nothing made about 5% a year in the midst of the worst financial crisis in 70 years.

That’s what balance does. Protects you when things wither. Grabs the growth when they recover.

Emotion, on the other hand, just destroys you.

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September 13th, 2018

Posted In: The Greater Fool

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