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December 27, 2019 | Let the Dogs Out

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.

Friday was the last day to sell a security, have it settle and be able to claim a loss again gains. If you weren’t aware losses could be deducted from profits in order to reduce taxes, well, now you do. If fact, it gets even better…

Losses (usually from dog stocks your idiot BIL told you were ‘sure things’) can be carried back three years and applied against taxable wins – so taxes paid in 2017 or 2016 could be reclaimed. As well, capital losses in Canada can be carried forward indefinitely, then used to offset past or future capital gains. Sweet.

This ability to creatively use losses is a powerful argument for dumping any of the crap investments you’ve been nursing along for years. I’m constantly running into people (usually men) who can’t bear to sell something for less than they paid – so they hang on to the pooches for an agonizing period of time, during which there’s at least a 50% chance things will get worse. It’s a guy thing. If you eventually break even it’s like the bad decision never happened. Virginal once again!

Of course, it’s been hard to find losing securities in 2019. Unless it was one of the weed stocks, like Aurora. That bow-wow was sitting at close to $14 in March, now finishing the year at $2.60 – a plunge of 80%. The entire cannabis sector has been a boneyard of failed expectations, more evidence buying individual stocks is a hedonistic gamble and speculating on new and unproven companies can be financial suicide. The looming vaping crisis and the destructive potential of edibles could bring a lot more heartache to those who bought into Justin’s failed social experiment.

Despite the weed debacle, Bay Street ends 2019 on its own high. The TSX has gained 20% (plus dividends), and sits 25% above where it was a year ago – during the Santa Slaughter. That’s when my suspender-snapping, Porsche-driving, bowtied, omniscient, stones-of-steel portfolio manager colleagues moved to increase their weighting in stuff like a low-vol Canadian equity ETF that’s steadily gained all year, now ahead 22%. It’s a timeless lesson. In a storm you buy, never sell.

So here we are staring into 2020. US markets have soared about 30% despite trade wars, Boeing and impeachment. The coming year will bring a US presidential election (markets think Trump will take it), probably more trade agreements, plus enhanced global growth, inflation and even higher interest rates. All that’s good, given the fact it’s already the longest period of economic expansion in modern history. You will remember that 12 months ago the headlines were all doomy as bond yields inverted and everyone hunkered down for a recession.

It didn’t come. Now with robust corporate profits, the lowest US jobless rate in history, an easing of the China trade tensions and Brexit coming to a conclusion, things look kinda peachy. So stay invested.

But wait. Isn’t it a lot more likely, with markets so high, we could have a correction if a surprise comes along?

Yes it is. After gains of 20% or 30% investors could be tempted to take risk off the table if they see things heading south, even temporarily. If Trump loses in November, if the China deal blows up, if the Senate waffles on the impeachment trial, if Hong Kong is invaded or a string of climate-related disasters threaten global growth, expect consequences.

How much? How long?

A few pullbacks (a drop of 5%) should be absolutely expected. A correction or two (declines of 10%) are entirely possible. Remember that two-thirds of the time a drop of that size does not foreshadow the coming of a bear market (a plop of 20% or more) and even if a bear arrives, it can depart fast (as happened exactly a year ago). The most important thing to remember is to park your emotions and resist the temptation to bail when the numbers turn red. Of course, you should also have a balanced approach to investing. No equity-only portfolio. No individual stocks. Forty per cent fixed-income assets (bonds, preferreds). Diversification (use ETFs, have some REITs, not too much maple etc). And be tax-smart, putting boring bonds in an RRSP,  growthy stuff in your TFSA and dividend-producers in the non-reg account).

So declines are a fact of life. But remember 70% of the time markets advance. Thus never be too fearful, nor too greedy. If you end up with a cur of a security – the result of an emotional mistake – dump it. Unlike ex-spouses they’re good for something beyond regret.

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December 27th, 2019

Posted In: The Greater Fool

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