November 17, 2020 | There’s No Free Lunch, But There Are Healthy Choices

In our world of sub 1% interest rates on guaranteed deposits and government bonds, many people have moved their savings into principal-insecure assets in the hopes of picking up more yield nickels in front of oncoming steamrollers.

In the process, corporate asset prices have been bid to record highs once more.  As in similar fateful periods like the late ’20s, ’60’s, ’90s, and 2007, this price-indiscriminate behaviour has bought the perverse opportunity set of high capital implosion risk and still-low yields–since the higher the price paid, the lower the investment yield inherent–that’s just the math.  As shown below, global stock markets this week reached a record market capitalization (price x shares) of $95 trillion–the highest in history.

We should also note here that the one-month-meltdown between February and March 2020 returned global markets to the same level they had peaked at in 2007–13 years earlier.  And, although secular forces of gravity were stalled by central bank backstops since, a retest of March 2020/December 2007 price levels remains probable ahead.

A vaccine can’t fix any of this, but history assures us that much lower asset prices eventually will.  We should all look forward to and prepare for that opportunity.

There’s no free lunch.  Presently most items on offer at the financial product buffet offer negative health effects. Like highly processed junk food, they may look easy and attractive but will leave us in worse shape over time.

There are many healthy, life-sustaining choices, though, and they include:

• Doing everything possible to make our mind and body healthy and productive.
• Spending less than we make at every life stage.
• Living debt-free.  If we need to borrow for a home or our business, getting back to debt-free as soon as possible thereafter.
• Actively earning an income well into our 60s to cover expenses and build savings.
• Keeping principal security as our dominant savings’ objective even when yields are low.
• Knowing what attractive investment value looks like and not wagering our capital unless the risk-return odds are solidly in our favour.
• Deferring Canada Pension Plan withdrawals until after 65, where possible, because we will receive 36% less income for the rest of our life if we take it at age 60 versus 65 and 42% more if we can wait until age 70. (CPP is permanently reduced by 7.2% for each year if taken between 60 and 65, and permanently increased by 8.4% for each year that collection is deferred between 65 to 70).
• Where we need or wish more reliable retirement income than our pensions and principal-secure assets can provide–rather than betting money we can’t afford to lose in casino-like markets and schemes--we can consider using some non-registered savings to buy a life annuity with a guarantee period.  Although annuity yields are also linked to interest rates, when buying them after age 60, the guaranteed after-tax income-for-life can still be more than 4% (yes, you do have to give up the principal to buy one).

These are tangible steps that really add up over time.  As always, personal discipline is the highest yielding investment and, fortunately, it’s mostly within our control.

Danielle Park November 17th, 2020

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