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December 21, 2018 | Almost Human

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.

Peter worked for 32 years in the same shop. Then, at 61, laid off. “Man,” he told me three months ago, “I’m actually glad this is coming to an end.” But there was a silver lining. He could commute three decades of pension contributions, moving them from a company plan that appeared to be on shaky ground into his own hands. Just over six hundred grand. Sweet.

As with most pension pay-outs, this one involved roughly half being rolled over into a tax-free retirement account and the rest payable as cash – added to his income, and taxed as such. Bummer. Given the new T2 uber-tax bracket for ‘rich’ people, it’s a big hit. But Pete can defer this to 2019, plus he has a pile of accumulated RRSP room to help mitigate the theft. The good news is instead of taking monthly payments that are 100% taxable for the rest of his life from a pension plan that might run into trouble and cut benefits, he’s now in control of his own income. Control is always good. Especially these days.

But this week P gave me a shout. “Nervous,” he said. “I want to hold off investing the money because markets have gone down.” But you have no monthly income from the funds, I said. And he replied, “I’ll just live off the cash for a while – maybe a year – until things start going up again.”

Pete was a machine shop guy his whole life. Not a financial dude. Understandably, he’s heavily influenced by headlines and peers. Both are telling him that investing his money currently is a dangerous thing. He’s so concerned that he’d rather eat into his precious retirement capital, increasing the odds he’ll eventually run out of money.

So let’s dig into this a bit. Is this a rational decision?

If you believe the guys on the shop floor, and the Internet, maybe. If you think about it, not so much.

First the economic news. On Friday came word Canada’s economy is rocking. Growth was the fastest in half a year, propelled by busier factories. Even the oil and gas business expanded. Here’s the summary:

The world’s 10th largest economy is running close to full speed and forecasters are predicting growth will remain close to a 2 percent annualized pace between October and December. Unemployment is at record lows and some companies have reported they are struggling to fill new orders with their existing capacity.

Ditto in the States. Economic growth is robust, as are corporate profits. Inflation is tame and there’s virtual full employment – the best jobs situation since people were wearing beehive hairdos instead of manbuns. This is despite the fact the Fed has raised interest rates ten times. It’s impressive.

So why have stock markets been in a funk?

Let’s remember the S&P 500 – the benchmark American index – hit 19 separate, all-time highs during 2018. Over the last two years it gained almost 25%. Corporate profits swelled by double digits. Volatility was low. Dividends increased. Investors rubbed their tummies.

So from an historic pinnacle – when financial guys worried that investors had pushed stock values too high relative to profits – markets have come down about 15%. Valuations are back into historic norms. The froth was blown off. Yes, corrections are good. They keep us from having worse events.

Corrections are also normal. They usually come about once a year, and typically last around two months. Eighty per cent of the time, they don’t turn into a longer downturn. But when a bear market develops (20% losses, lasting about eight months on average), it’s always been followed by a surge of buying which leads to a new high. So best to ignore them all. Even when you’re heading into retirement.

But, as Pete wanted to know, why the sell-off now?

The answer is simple: current events. Trump vs the rest of the world regarding trade. Brexit. French riots. A slowdown in China. Meng and Huawei. Mattis. Mueller. The Fed raising rates and jacking the US$. Oil funk. And the shutdown tonight in Washington. We now live in a world when the 24-hour news cycle has a profound effect on retail investors. Humans being humans (and therefore inherently flawed) we get excited by things rising in value and run scared when they fall. We love to pay too much when we buy – because stuff will always go up – and take a loss when we sell – because the stuff is going to zero.

All this has caused more volatility of late. That’s measured by the Vix, which provides a handy guide to how animal spirits affect markets. That index hit 28 this week – a big jump – but far off the 60 it achieved back in 2008. In fact, here’s the record for the past decade:

Volatility is up, but far from a record


So, markets have dropped from all-time highs. Assets that have fallen in value are now available at more reasonable prices than six months ago. History tells us because the world expands far more than it contracts (recessions are not the norm) that financial markets rise 75% of the time. And we know economic indicators have been so solid over the last few years that central banks have  ratcheted rates higher. Odds are those guys know more about where we’re headed than Pete. Or you. Or me.

But this never prevents know-it-alls from trying to make money or gain attention by scaring people with dire predictions. In fact the graph below from the Visual Capitalist summarizes some of the calls for stockageddon over the past few years. Every one was wrong. Every investor who heeded them suffered. And without exception, humans are better off staying invested, ignoring the noise, and living their lives.

And, so much for the financial experts...


Back to Pete. Sure, he can live off his cash, eat it up and wait for the price of a basket of assets – equity ETFs, preferreds, REITs etc. – to become more expensive. That may be emotionally satisfying, but not so prudent. The greatest threat most people face is running out of money. And the greatest reason that happens is our own fallibility.

Have faith, not fear. You’ll live longer.

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December 21st, 2018

Posted In: The Greater Fool

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