The Year of Easy Wins

Edited Photo. Source: Flickr - Rainer Schutz

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 with our dollar rising 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 will come to an end and the market 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.

Socioeconomic Problems

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 demand putting 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 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.

Follow a disciplined investment strategy that has proven to perform in down cycles. Trend investing and dual momentum strategies are reasonable choices.

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 things correct.

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!

- Daren


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Handling A Market Downturn

Edited Photo. Source: Flickr - Gregoire Lannoy
Edited Photo. Source: Flickr - Gregoire Lannoy

The masses are very skeptical about early retirement. They are insecure, their own choices reflect financial servitude, and they believe a life of forty-hour work weeks for forty years is predetermined for them.

When you run around with these mental blinders on it's easier to condemn financial freedom than make the changes in your life that open up early retirement for you.

Many people are critical of early retirement by pointing out failure with two main questions:

  • What would you do all day? and
  • How will you handle a scary market downturn?

The first question assumes that you will turn into a deviant or a useless blob if you don't have an outside commitment of forty hours a week to keep you in line. We talked about that here.

Dealing With the Markets

We all know that stock markets go up and down. Market movements often dominate media. Financial media is a narrative between market optimists and pessimists. The talking heads and the predictors who strive to provide entertainment value.

Depending on where you go and what you read, the talking heads predict roaring bull markets that will go straight up and make everyone rich. Or they make your fear investing because markets are on the edge of a collapse.

Truth is they don't know. I don't either. In the last 100 years, the U.S. stock market had four occasions where stocks crashed 50% or more (inflation adjusted). It will likely happen again at some point.

A net worth that moves like this freaks people out!

S&P500 1995-2011. Source: Yahoo! Finance

The fear of losing half your money is enough to make most people just avoid the markets all together. They huddle together and put their money in "safe" GICs, bonds, and real estate. They try pay off their mortgage.

Many don't save at all and wait for the government to spoon feed them a promised stipend sometime in the future.

Rational thinkers who pursue independent thought and understand risk know there are strategies to help deal with these massive, and generally temporary, downturns.

Saving Enough

You can't retire early if you don't have enough money. Not having enough money and hoping for outsized returns or perfect conditions is a recipe for disaster. Accumulation of investable net worth matters.

If you have 30x your annual spending needs invested in productive assets, you will virtually never fail financially in retirement. You can increase your spending with inflation every year, you can maintain various asset allocations, you can "set and forget". The margin of safety at this level is immense.

Even if you have 25x your annual spending invested in productive assets, you are very likely to avoid a financial catastrophe. But you must be broadly invested, follow a sound strategy, and watch your spending. You would theoretically be far more likely to die before running out of money.


The next easiest guard is diversification. Successful investors reduce exposure to any single market.

Way too many people have too much of their portfolio permanently in one broad asset class. It might be U.S. stocks and bonds, it could be Canadian dividend stocks, it could be rental houses. Concentration is dangerous.

Simply put, you don't want to be an infallible Japanese early retiree in 1989 fully invested in the roaring, never-goes-down Japanese stock market.

In the next two decades, you would see your portfolio fall off a cliff and plunge into the depths of the Pacific. This epic market crash might never come back; nearly three decades later, Japanese stocks are still at around half their peak level.

Nikkei225 1989-2009. Source: Yahoo! Finance

If the same Japanese retiree would have invested in a global stock portfolio (in yen currency), their investment account would have chugged along averaging 7% per year since 1989.

While others sweat a salary job and jump off buildings because they're bankrupt, the diversified retiree would be tending to their bonsai and calligraphy with nary an ulcer.

You can diversify across countries, currencies, asset classes, and strategies to guard yourself from financial failure.


Proper use of investment strategies is very helpful in preventing a market downturn catastrophe. Some strategies are complementary while others are correlated.

Buy-and-hold 100% in a stock index is probably among the most dangerous in early retirement because you can't dollar cost average into a falling price scenario. You're basically rolling the dice that you don't retire just before a market crash or high inflation period.

If you are withdrawing money from a falling asset, the effects of the fall are exacerbated. This is known as sequence of returns risk.

To limit sequence of returns risk, you can hold a cash cushion, invest in complementary assets, or you can follow a disciplined timing strategy.

Cash cushions are effective in their purpose of limiting withdrawals in a drawdown environment, but they also reduce overall returns. Big bond allocations can actually reduce your financial success rate.

Complementary assets allocations, such as mixing a hedged strategy (like long/short or managed futures) with a stock strategy, can reduce the full effect of a stock market crash.

Hedged strategies tend to do well in market downturns while holding their own in bull markets. However, the best of these are often only accessible to larger investors.

I invest in a disciplined timing strategy. I'm always trying to simply, simplify, simplify while maintaining an edge. So far it has worked out well. In the future I believe the lessons learned will mean better discipline, fewer mistakes, and better results.

Confidence in Strategy

The biggest advantage going into early retirement is having complete confidence in your chosen strategy. I don't mean blind confidence because you read a few good books and read an amateur blog or two.

Rather, I mean having experience and controlling your emotions. Ignoring market swings and sticking to a sound process is how you win the long game.

This is why I'm a huge fan of managing your own money instead of hiring a financial advisor – especially if you are young. An honest, fee-only financial advisor can do a great job of steering your investments and helping you avoid big mistakes.

But they can't outperform broad markets over the long term and they can't prevent you from overriding their advice. They're basically just there to help you make good money decisions, promote tax efficiency, and manage your investments using basic models.

Nothing is better than making your own mistakes when you are young, learning from each experience, and forging your own confidence.

It's easier to have true confidence in yourself than to rely on confidence in others.


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Comments containing promo links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.