This will be my last post of 2017. My next post will be in January starting with our regular monthly updates.
The Year Everything Goes Right
Let's be honest, 2017 has been another amazingly easy year to make money investing. It seems just about everything has gone up, even in Canadian dollar terms (our dollar rose a few cents on the year which reduces the gain on international investments).
U.S. stocks are up around 15%, developed markets are up 19%, Canadian stocks are up over 7.5%, emerging markets are up 21%, even bonds are up 2-3% in our rising rate environment. To top it all off, volatility has been incredibly low with the VIX below 20 for the entire year. That's unprecedented stability!
If you were starting out this year and simply bought XAW.TO, taking a stake in over 8,100 companies around the globe, you would have made an easy 17% this year! It would have been free to purchase if you used Questrade as your low-cost online brokerage.
We’ve also been hit by crypto-mania. You could have bought any number of “currencies” like Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Bitcoin Gold, Ripple, NEO, Zcash, Stellar, Waves, Qtum, and a myriad of other names and tripled or even 10x your investment in mere months. (Yes, these all and many more have market caps over $1 billion). You can't make this stuff up.
Millions of people who can barely keep their iPhone properly updated and their laptops virus-free are putting their life savings into fictional digital money. Some boldly pretend to understand the ins-and-outs of this technology and justify its value; most are just blindly chasing the crowd.
A Reality Check
All this investment dreamland stuff calls for a bit of a reality check. I don’t mean to scare people from investing, taking smart risks, or saving aggressively for retirement. But realize that it isn’t going to stay this easy.
Stock markets and bond markets go through cycles which average out to a long-term return of around 3% to 7% depending on the investment mix and corrected for inflation. It’s impossible for the broad market to give returns much higher than that for an extended period of time. A few years in a row of +10% or +20% returns are always followed by a year or more of -20% or -40% returns.
Given that we’ve had a wicked good run since the beginning of 2016, and really since spring 2009, it’s only reasonable to believe this bull market will come to an end and stocks will undergo another severe correction at some point. Right now a return to average valuations for U.S. stocks requires a 60% drop!
I’m not saying it will be in 2018. In fact, the numbers are looking so good that many “experts” are already suggesting 2018 will be another banner year. We’ve got Trumpian tax cuts, big government spending, record corporate profits, inflation and wage gains, and public legitimized trading of cryptos to propel the markets forward forever.
Of course, the experts also saw no risk investing in mortgages for bankrupt, jobless people in 2007, or investing in perpetual money-losing tech firms in 1999 based on website eyeballs.
Despite having some of the lowest unemployment rates in modern history, with historically low unemployment for some time now, many are suggesting we have just entered a new economic boom. As if things were so terrible from 2011-2016.
Some are still under the illusion that we need to have growth rates of 4% or more in the developed world. This despite low birth rates, the economic drag of an aging population, out-of-control spending, and a voting public that expects super-low tax rates but blindly dives into debt.
From the beginnings of time, parents and grandparents demanded a better future for their children. Now they put the burden of their selfish desires on the next generation. Insane public health care services, social security, OAS, CPP, tax cuts, and lucrative pensions are enjoyed by older generations today.
Meanwhile the adults of tomorrow are saddled with record student debt, over-priced housing, and trillions in government debt and future social obligations. Historically these things tend not to shake out too well.
If you are young and contributing to a defined benefit pension plan today, don’t foolishly count on it being there for you in its promised form when you are ready to retire yourself. Even the most coveted government pensions are in deep trouble. After nearly a decade of incredible investment returns, there is hardly a pension out there which is fully funded in actuarial terms. A large drop in global asset valuations would do incredible damage.
Investing With Caution
Now more than ever is a good time to invest with caution. This isn’t being fearful; it’s being smart.
You should hedge against the downside risks that are always very real. This means putting in wide stop-limit orders or tracking stops yourself to get out of your investment positions methodically if prices fall.
If you’re a more advanced buy-and-hold investor, use 0.5% of your portfolio to pick up some six-month forward out-of-the-money SPY or QQQ puts and roll them every quarter. They’re as cheap as they’ve ever been right now and a good form of portfolio insurance costing 1% or less of your total portfolio.
Having A Moose Mentality
All this said, I don't spend a lot of time worrying about these risks; you shouldn't either. It's easy to follow a plan where you check your brokerage account only once or twice a month and go on living your life for the rest with an eye to a promising future. I do it, so can you.
I believe in the importance of looking after myself first. That means being financially responsible, cutting out the frivolous crap in life, and slowing life down wherever possible. It means looking after my physical and mental well-being. Stress is a choice and I choose 'No'.
In a world where money is the biggest cause of chronic stress, hopefully the nuggets of info every week on this site have helped you say 'No' to money stress as well.
This season, commit to being generous to those you actually care about—family and friends. I challenge you to pick up the phone and cancel your regular donation to that faceless charity who knocked on your door years ago. I bet you don't know where your money actually goes and the accountability is often shaky.
Instead, look around to the people that matter to you and see where you can help. It might be a grocery gift card to the friend that was laid off, a few weekends of your time helping someone save thousands repairing their house or vehicle, bringing a warm meal to someone who is sick, or sharing a cup of coffee at home listening to a friend's concerns and showing them your love. That's the best kind of charity. Use your talents to form the community you want to be a part of.
This Christmas season my wife and I will be trekking a few thousand kilometers to be with our families. We'll share laughs and squabbles, eat like kings and regret it, drink too much and wake up lousy, be active but still gain a few pounds, enjoy the outdoors and relax.
Wishing you and your family a Merry Christmas and fantastic holiday season!
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