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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

September 8, 2019 | Get Over It

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.

“I like to think I’m a smart guy,” says the kid. “I like bashing other millennials for being stupid, so I’m hoping you can keep me on the straight and narrow here so I can maintain my intellectual superiority complex.”

So far, you sound like a jerk. But do continue.

“My income is just over 100k, my wife stays home with our kids and we rent a townhouse for under 2000 a month. We like renting. Last year I determined in order to generate a sufficient retirement fund, I would need to invest a minimum of $15,000 a year for the next 40 years, expecting a modest growth rate of 5%. We’re on track to add $25,000 this year, and our expenses have been higher than average. This actually makes me worry we may be saving too much, deferring comfort for us and our kids in the present.

“Being a natural contrarian, I dumped a bunch of cash into equities back in December when everyone was panicking about the stock market. I’m very risk-tolerant when it comes to investing, so my portfolio is comprised of nearly 100% US, international, and Canadian equities.

“I realize that this isn’t a balanced portfolio, as you so often recommend on your blog, but given that I’m 40 years away from retirement and firmly not going to sell in a downturn, is it a reasonable strategy to remain exclusively in equities now, and slowly increase my weighting of fixed income over the years until I reach something like a 60/40 mix around 2050?”

A common question. Hear it a lot. This reflects a persistent myth of the investment business – that risk tolerance is the biggest factor in designing a portfolio. That logic has young achievers like this guy gung-ho on equities, while retired people are supposed to live off bond interest and KD. But it’s unwise. Risk tolerance has a lot more to do with your wussiness than your age.

Why? We all live in the same world. It contains Donald Trump, falling rates, trade wars, Brexit, Hong Kong, Iran and a whole heap of nationalist, dingbat, dangerous politicians. This stuff causes volatility, which breeds emotion. People get scared. Recency bias kicks in. Fear makes them sell at the worst moments, just as lust makes them buy badly. Everybody gets the willies sometimes. Even cowboys.

The point of having a 60/40 B&D portfolio is (a) to mitigate losses when markets fall, so (b) you will ignore the news, but (c) to grab growth when things advance.

Now, today. Where are we? Is this a good or troubled time to make portfolio changes?

First, the bad news. As we head into the autumn of 2019 things are kinda like they were this time a year ago. Trump is unpredictable and quixotic, with the power to move markets on a whim. The trade war’s worse. Volatility has increased (check out the Vix). Corporate earnings have staled. Manufacturing data’s weak. There’s recession talk in the air. And unlike this time last September, bond yields have plunged, bond prices soared and interest rates reversed.

Of course, Q4 of 2018 turned into a giant buying opportunity for those with cash and courage. It was a nothingburger for balanced investors who ignored it. And it became a disaster for those with a bad attitude who got spooked and sold into the storm.

Now the good news. So far in 2019 the US market has gained 18% (S&P) and Bay Street is ahead 15.5%. Balanced portfolios recovered all of the 2019 loss and have grown nicely, thanks in part to the big pop in bond prices. The jobs numbers are great – US is still at a 50-year-low unemployment level while Canada exploded with over 80,000 new positions last month. Wages are increasing. Crashing mortgage rates have created more real estate sales.

Suddenly the odds of extra rate cuts in the US are diminishing. Most expect a small chop next month, but half the pundits now think the Fed might rest there. What a sea change in a few days. And we hear there are high-level US-China trade talks set for Washington. Finally, Trump. As oft said, there’s no way he wants an election in 2020 in the middle of a slowdown or a market plop.

Given this, some people think the Dow (now nearing 27,000) will achieve 40,000. Trump said days ago it would be ten thousand points higher without a trade war. And he has the power to end it. Go figure. This is why the Bank of Canada didn’t cut its key rate a few days ago. It knows. In fact, a drop at the end of October may soon be in doubt.

Does this mean markets won’t have another bout of year-end, Trump-induced chaos?

Absolutely not. It’s entirely possible a new purge could take place. Traders have seen stellar returns in 2019 and may be wanting to take some gains (and risk) off the table. In fact, so long as the Trump presidency lasts, we’re prone to more big, shocking twists in sentiment and market direction.

This is the world we inhabit. Long-term sustained growth based on techno advance, economic growth, a rising and affluent middle class and a globalism that will ultimately overcome nationalism. That’s inevitable. But it’ll come with turbulence. An all-equity portfolio will be like a cork on the sea in a Cat 5 howl. Why endure such turbulence when it’s unnecessary and upsetting? For the same reason, why spend the last decades of your life counting pennies because you feared losses?

Balance. Diversity. Liquidity. Do not desert the three pillars. You will topple.

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September 8th, 2019

Posted In: The Greater Fool

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