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August 4, 2019 | Get a Grip

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.

Yesterday my bud and fancy portfolio manager Ryan wrote about risk. His job is to mitigate it. He’s a pro. People who give guys like us money have two main goals. (a) Don’t lose any, and (b) make a decent return on it. Yes, there are other concerns – like reducing tax and ensuring lifelong security – but those two dominate the way most investors look at things. So Ryan gave you insights into how portfolios are gently de-risked when conditions change, while still growing the funds.

The comments this weekend have been poignant. ‘When advisors start to worry at all,’ one person suggested, ‘markets are going to crash.’ And, of course, we heard from the usual buy-land-and-gold crowd who believe the world’s going to dogpoop. In that vein, others take sustained low interest rates and high debts as a sign of impending financial collapse. Plus, let’s not forget Iran, Syria, Putin, Beijing, Boris, Trump or El Paso and Dayton. Yup. Many things could be better.

Here are some thoughts on risk.

It’s everywhere, always has been and will continue. Every investor has to accept it, and the more you shoulder the larger the gains or losses are likely to be. The idea of a balanced portfolio (with growth assets and safe ones) which is also diversified (multiple securities, different assets and regions) is to reduce risk but still have growth. When some assets (like stocks) fall, others (like bonds) rise. When the Canada’s weak, Asia may be strong. When the pound drops, the greenback lifts.

In good times of expansion and growth, the goal is to build wealth fast enough to outpace inflation and fulfill life goals (buy a house, support your family, retire in dignity). In bad times the goal is to reduce or eliminate losses. Fortunately history shows more than 70% of the time growth is the norm. But it seems many folks spend 100% of their time worrying about the 30%. So they make bad choices.

The 2008-10 financial crisis was classic. Those who panicked and sold, thinking everything would get worse, sustained great losses as markets shed half their value. People who ignored it lost nothing. All-stock portfolios regained everything in seven years. The balanced portfolios Ryan and I build were restored in one year. That’s what risk management is all about. Those burying their wealth in land or cash avoided losses, but they also eschewed growth before and after the event. As this blog has said so many times, the risk most of us face is running out of money. Not losing it.

But some things never change. One of them is this: people really want to believe they live in extraordinary times. That no society in the past has experienced these threats. That it will end badly, and they must act. It becomes a cover for fear and sometimes personal failure.

After ten years of economic recovery, a recession of some kind’s inevitable. We all know that. Markets will dip, unemployment will rise, central banks will respond and after a year or so, it’ll be over. A professional portfolio manager’s job is to blunt the drop after harvesting the gains. That’s what he’s paid for.

But get a grip. This is not the beginning of an end. The threats, risks and uncertainties of the past – world wars, a global depression, pandemics or nuclear proliferation – far outweigh an inverted yield curve or record government deficits. Or Trump’s trade war. Or Brexit. Never in human history have so many lived in such comfort with such rampant and beneficial technological advance and social wealth.

Yes, climate change is scary. And the doubling of the human population in my lifetime is shocking. We are adding systemic risks that may make your grandchildren wonder what you were thinking. But this is today. It’s like yesterday. Only better.

Did you see this blog comment? “I was born in 1950,” it read. “There wasn’t much fear taken out on my behalf, as I recall. Kids my age were still getting polio because Salk vaccine was suspect and not yet in widespread use. The Asian Flu pandemic of 1957 was ugly. Most of us got it. A lot of grandparents died.

“Cars were “coffins on wheels” with zero safety features. Even seat belts were decades away. No one seemed concerned. Adults and children alike went through windshields. The prevailing wisdom was that you were better off being “tossed clear” of a road accident. (Then, as now, a lot of folks were none too bright).

“In school we played with asbestos. I mix up a ball of it with glue and baked it in an oven. It made a dandy little puppet head. We were proud of asbestos. It was an important Canadian export. Kids were strapped regularly in school for minor infractions and then disciplined a second time at home. That was business as usual. No child’s advocacy groups cried for justice.”

Fear’s fine. It keeps you out of trouble. But today we live in a dare-I-eat-a-peach world amid a social media cacophony leading so many astray. Just invest wisely for when you need it. Until then relish the one thing you can never earn, borrow or regain.

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August 4th, 2019

Posted In: The Greater Fool

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