It’s over!

Well, that was some week. The Dow plunged. It crawled back. It fluctuated. Then it soared. Bonds roared and retreated. Gold jumped, gyrated and weakened. The recession talk crescendoed, then we all got distracted with Hong Kong, Putin’s insane nuke-in-a-missile explosion and Trudeau’s ethics. Or lack thereof.

If you ever wonder why a balanced, diversified set-it-&-leave-it portfolio is the best choice, just think about this week. Stress will kill you faster than anything. So forget about the inverted yield curve, climate change and Trump. Let’s focus on the micro, since we can’t change the macro.

It’s time, in other words, to address some to the plaintive cries from the steerage section…

“My boyfriend has been following your blog for a long time now and it has become his morning ritual to grab a coffee and read your posts,” says Jillian. “Thanks for the valuable information! I wanted to ask your advice when it comes to paying off our debt and how we should go about prioritizing it.

“I work full time in oil and gas, and my partner is a firefighter/paramedic here in Alberta. I graduated with a business degree and am currently working away at my masters. We are 25 and 28 years old, have 7k credit card debt, 0 car payments, share finances and have a combined income of 120k annually (in 4 years we’ll be at min 160k). Approximately 117k saved split between our home equity/savings/TFSA/stocks, and 335k left to pay on our mortgage.

“What are your thoughts on getting a HELOC, LOC, etc. to pay off the student loans? Should I keep making the monthly payments I can comfortably afford, or is there a better and faster way so I’m not paying it off until I’m in my mid 30’s? My partner has 9k right now in his stocks, but we were thinking of pulling it out to pay off a large chunk of the loans since my interest alone is significantly higher than his annual return. I think we’ve put ourselves in a pretty good financial position given our age, but what are your thoughts so we can further progress and achieve our goals to retire by 50-55 with 0 debt? Thanks for all your help!”

That’s easy, Jill. Dump the stocks and pay down the debt. That BF of yours shouldn’t be flipping equities anyway, since you two have a negative net worth – total debts far exceeding your liquid assets and equity. Losses are not justified at this point, and with volatile markets upon us, holding single stocks is a really dumb idea when your finances are thin. Didn’t he learn anything reading this blog every morning? Does he just come for the weirdo dog pictures?

No HELOC, either. You might be saving a little on the loan rate, but you’re just replacing non-secured debt with new debt locked against your home. Better to set a household budget that lets you trash the student loans as fast as possible. Don’t Starbucks. Eat at home. And don’t accelerate your mortgage payments.

Now here’s Aaron. Asking for his sister…

She is heading back to school and has qualified for a student grant and loan.  The loan is about $8,000 which she doesn’t plan on using at all.  It is interest free until after school is complete (about 2 years).  I’ve told her it’s free money to take and invest for the length of her schooling, paying back the principal at the end when required (or potentially not if the interest is very low).

I’ve got a Questwealth ETF managed portfolio set up at 60/40 with good exposure and had initially suggested the exact same for her. My question then is this; you’ve said it’s always a good time to invest… so is it in this case and is the right set up your standard portfolio?

She has an amazing chance to become an investor with this OSAP loan and see some tangible results, thus creating some life-long healthy financial habits?

No. Bad idea. A loan is a loan. If she takes the money it’ll have to be repaid in two years and there is absolutely no guarantee a portfolio of ETFs will be worth more at that time. Sure, the expectation is that gains will accrue, but what happens if there’s a temporary downturn exactly when the funds are needed? Investing for a period of 24 months is not investing. It’s speculating. And remember that we’re in Year 10 of an economic expansion, with high stock markets and low bond yields plus lots of talk about an inevitable slowdown. No reason to be a doomer, for sure. But neither should you tell her profits are a sure thing.

The best life-long lesson for sis is to eschew debt, be very careful about leverage and be beholden to noone.

Finally, Andrew has a question about those predatory mortgages aimed at wrinklies.

A friend of mine is considering a reverse mortgage & I recall you’ve posted on that subject. Can you please let me know the title of that post(s) so I can forward her your thoughts about them.

Sure. The topic has been addressed here a few times. The most recent entry is this one. Tell your friend to be highly skeptical of the marketing materials, the long-term consequences and the true costs of a reverse mortgage. The rate charged on outstanding principals is outrageous, the admin fees are substantial and the debt keeps growing – to be paid by the estate.

If you need money to live on, sell the damn house, invest and rent. If you hate your children, get a reverse mortgage.

 

Lessons

Janet was inconsolable. “Get me out,” she said a few times. “I want to be in cash.” And so it was. Another person unable to overcome emotion. One more victim of the Dow. And the media. It’s a story that’s repeated every single time a bout of volatility grabs the headlines.

As you may have noticed, if the Dow index loses 300 points the media response is “MARKETS PLUNGE!” When the Dow gains 300 points, the story is… well… there isn’t one. That’s not news.

This may be because over 70% of the time financial markets advance, people make money and are able to buy houses, raise families, pay for college and finance their retirement. Markets rise because the world grows. Growth means more jobs, economic activity, expansion, consumption and profits. That’s normal. And never in human history have people lived in more prosperous times than these.

So it’s news when stuff goes down. Even if history has proven that every single time the decline is temporary, and usually useful. It blows off the gamblers and speculators, pricks asset bubbles, brings prices back into line with incomes and, of course, provides one muddah of an investment opportunity. Every time the market seriously corrects, it has rallied about 40% over the next two years.

But some can’t see beyond the headlines. Fear is fear. The strongest emotion. It makes people do crazy things, like turning a temporary paper loss into a permanent real one.

Here at the Greater Fool Brain Trust and Dog Ranch we have two messages today: first, the Dow is not ‘the market.’ It’s a gauge of merely 30 companies trading in New York. The S&P 500 is more representative, but there are a number of other indices tracking, for example, small-cap companies (those with less in market capitalization) or the tech heavies. The US has 13 exchanges, and there are dozens more around the world just for equities (like the TSX on Bay Street). They don’t all move in harmony. Therefore smart investors have a diversified approach – exposure to Canadian, American and International markets (including emerging ones), and do it through ETFs, rather than single stocks.

So the next time you hear the TV talking head with the nice hair equate the Dow with everything financial, just smile to yourself and whisper ‘moron.’ It works.

Okay, message two: markets are not just stocks. For months now this pathetic blog has been harping on bonds, explaining why you should have some. No, not to collect interest. Nobody buys bonds for yields any more. Instead they’re assets that reduce volatility, counterweight stocks, drop risk and help preserve wealth. All you need do is look at some bond ETFs over the past month, or for the YTD.

As equities stagger and growth slows, money flows into bonds. So the price goes up and the yield goes down. That’s why we’re hearing about this ‘inverted yield curve’ all the time – so much money has found its way into the bond market that 30-year yields are now lower than what your savings account pays. But bond prices have zipped higher. If you have the right kind of bond ETFs in your portfolio, you know this. For example, the WisdomTree Yield Enhanced Canada Aggregate Bond Index ETF is worth 9% more in the last seven months. And it’s not alone. As stock-based assets have temporarily come down, bond-based ones have advanced. It’s why you should have a balanced portfolio. How is this not obvious?

Well, Janet doesn’t get it. Or care. Like many people she thinks (a) it’s different this time and history doesn’t matter, plus (b) markets can go to zero and never recover. If that happened, of course, we’d all be braiding grass and eating bugs. Financial markets reflect life, society and human labour. If you have the confidence to accept the monumental danger in getting married, having kids, starting a business, planting a crop or running an open blog attracting scores of misfits, then staying invested is a minor thing.

Remember the real risk. You know what it is. Losing money doesn’t even come close.

Now, I see that my colleague and fancy portfolio manager Ryan has just come down from the private helo pad. He appears to be carrying a big chart.

Hey, bud, have you got a technical update for us on the stock market?

Big day yesterday but no real technical damage. The SPX has broken through its 50-day MA and is now approaching the important 200-day MA around 2800. The key technical support range is 2725 to 2800, which is the combination of past support lows (blue arrows – Mar and May lows), the important 200-day MA and the 38.2% Fibonacci retracement level. When a number of technical supports converge to one key zone it increase its importance. Also we’re getting close to an oversold technical reading with just 26% of stocks in the S&P 500 above their 50-day MA (below 30 indicates oversold) and the RSI level is at 38 (needs to get below 30 to be oversold). So we could see a bit more selling pressure but my bet is the SPX bounces off the 2725-2800 technical support zone. If correct we then need to see the SPX retake its 50-day MA to then give the all clear sign.

Click to enlarge. Stand back.

Any questions? Good. Now let’s take Janet clubbing.

About the picture

A group of service dogs in training attend a performance at the Stratford Festival. On the job they’ll be expected to navigate places like this, sitting in confined spaces for long periods of time, ignoring flashing lights, food, loud noises and attending to the needs of their human companions. Source: CBC