October 30th, 2014 — Book Updates — E-mail this blog post to a friend
If you ever wonder why contrarians always get the girl, read the comment section of this blog.
The moaning, drooling and quivering on display yesterday was awesome. Moments after I laid out a case for continued growth in the US economy – and solid reasons to be invested in financial stuff – it began. The dissing of America was classic. The belief markets are manipulated, government stats are rigged, governments run by morons and that central bankers can’t Google was endemic.
It’s staggering how many think the world’s going to end. Just as it’s improving. And that brings us to today’s lesson. It’s simple. Get invested. Stay that way. Stop reading blogs. It’ll kill ya.
Here’s what I mean:
The above is a 10-year chart of a balanced portfolio, with 40% safe stuff (such as bonds and preferreds) and 60% growth (Canadian, US and international ETFSs, plus REITs). This is not theoretical – it’s real. I know. The portfolio was routinely rebalanced to sell winners and buy losers and keep the weightings in line.
Note this: what was invested in 2004 has more than doubled now. The average return over that period is 7.3%. If you had a hundred grand then, you have two hundred now and enough for a new Kia.
This period of time included (a) the greatest stock market crash since the 1930s, (b) the 2011 debt ceiling crisis in the US, (c) the American real estate bubble and collapse, (d) the aftermath of the dot-com/tech plunge, (e) the Euro debt debacle and (f) everything else the doomers sweat over – debt accumulation, Ebola, Miley Cyrus, central banks, Vlad Putin, the Baltic Dry Index, ISIS, food stamps, Hamas, high-frequency trading and Goldman Sachs.
In other words, all the gnashing and flummoxing was for naught. The market timing failed. Those who freaked, selling in dips (because everything was going to zero) or buying the highs (because they were so smart) were creamed. In contrast, people who understood how to invest quietly multiplied their wealth – even through volatile times populated by fools who know everything.
Here’s another chart. Same portfolio. This time it’s about risk.
The bottom scale is risk – the further to the right, the greater. The left scale is return. The various dots, with the exception of “60-40” refer to various components of a balanced portfolio – and you can see that emerging markets (EEM) or real estate investment trusts (XRE) are higher risk-higher return than, say, bonds (XBB). The “60-40” is the actual return/risk of the balanced portfolio – averaging 7% over a decade, with considerably less risk than the US stock market (SPY) or Toronto equities (XIU).
This is what a good portfolio should do – give reasonably predictable returns without giant swings, letting you sleep at night and ignore stock market emotion and the bleatings of the nihilist, gold-rubbing losers who pray for pestilence. (By the way, bullion crashed below $1,200 an ounce on Thursday. As expected.)
So here’s the thing: investors with a good, well-built and routinely-maintained portfolio full of boring stuff were able to ignore markets for the last decade, double their money, and get on with their lives. Will this be repeated in the next 10 years? Beats me. But if we have the same events – a boom, several busts, multiple crises, wars, debt, a generational crash and confusion – there’s a decent chance.
In case you missed it, the US economy has just capped the strongest six-month period of growth in more than a decade – the best since 2003. Jobless claims there are now at the lowest level since way back in 2000. Almost 250,000 people were hired last month and the unemployment rate is down to where it was in 2008. Gas prices are set to hit a six-year low, and consumer confidence is increasing. Meanwhile the Fed has stopped its stimulus spending, and the stock market immediately gained 200 points.
So, you can moan and dribble over things you cannot control. Or you can cede life is to be confidently embraced. You only get one.
October 29th, 2014 — Book Updates — E-mail this blog post to a friend
Warning: The following post deals with explicit fiscal and monetary policy. It does not contain flogging or whipping. Jian Ghomeshi has left the site. The safe word is ‘yellen.’
Cast your mind back to the summer of 13. Fed boss Bernanke said his central bank would start to taper back on its stimulus spending, as the US economy was gaining strength. Of course, many people went nuts. Stocks turned volatile, bond prices tanked and yields spiked. Juicy assets like preferred shares and real estate investment trust fell about 15% in value. This pathetic blog was overrun by people screaming ‘sell’, while the contras said ‘buy.’
For years Washington has been soaking up massive quantities of bonds – $85 billion a month through most of 2013, for example. Why? To inject rivers of cash into the US economy so corps will create jobs, and keep interest rates low by Hoovering up bonds.
It worked. Unemployment went from over 10% to under 6%. Families paid off $1.5 trillion in low-cost mortgages. Corporate profits plumped to pre-recession levels. The stock market gained 160%. The American economy resumed growing at 4%, and inflation stayed under 2%.
After toeing to the edge of the economic abyss in early 2009, it all came back. Now the once-massive government deficit is at an eight-year low, plus consumer confidence has shot up with more jobs, affordable houses and cheaper gas. No, it’s not all ponies and rainbows. But by every measure that counts – productivity, employment, inflation, GDP (check out today’s news) – the storm is well passed.
The metalheads and bullion-lickers refuse to believe this, and were arguing up to 2 pm Wednesday that if the Yanks actually withdrew this stimulus, stocks would tank, the US cleave and the Z-times begin. Fail. Not even close.
For all of 2014 the Fed, now run by the sweet old lady, Janet Yellen, has been ratcheting back on its stimulus (known as QE, or Quantitative Easing). That $85 billion had been tapered back to just $10 billion by this week, and is now kaput. The Fed did exactly what it said it would, and this should have surprised nobody.
It’s a remarkable achievement. We’ll all benefit from it.
In an orderly fashion for a year, the tap has been turned off. Far from starving the economy of cash, ushering in recession, killing markets or precipitating a crash in bond prices and a spike in interest rates, it’s been serene. The S&P is 14% higher than a year ago this week, and the TSX is ahead 11% – even after its blow-off two weeks ago. The US dollar has surged along with the recovery, which has knocked commodities and gasoline prices lower. Over 80% of companies currently reporting quarterly profits are ahead of expectations. Over 60% have higher sales.
So, what now?
Easy. More of the same. US interest rates will rise, but not until later in 2015 when the bankers are sure the economy can take higher mortgage costs and tighter business loans. Yellen has made it clear there’s no rush. It all depends on jobs. But, without a doubt, rates will normalize. People borrowing to buy houses in Toronto or Calgary today will not be renewing at 3% or less.
As for investors, this might be a Goldilocks moment. Not too hot – with the removal of all that stimulus money and Fed hand-holding. Not too cold – with inflation expected to come back with oil prices and sustained growth. Stocks have weathered tapering just fine. Bonds, ditto. Investors who bought the dips – like REITs last summer or the TSX weeks ago – now look smarter than Jian in a frock. With a paddle.
Well, if you’ve been quivering in cash since 2009, believed the gold nuts in 2011, or haven’t built a balanced portfolio because you thought rates would rocket and stocks waver, it’s time to reassess. The US is fine. Europe is about to do its own QE, and the results will be similar. China’s weird, but unstoppable. Corporations are fat. There’ll be no pandemic, and the ISIS numbnuts are losing.
We’re running out of things to worry about. Unless you just bought a condo.