Perception vs reality

 

DOUG By Guest Blogger Doug Rowat

I read investment reports and publications every day. It’s part of the job. And while much of what gets reported in the financial press is accurate and helpful for investors, some of it does investors a great disservice.

So, I’m implementing a new, recurring feature for my blog posts: Perception Versus Reality. (Cue the deep-voiced announcer and echoey music.) My aim is to periodically take random, widely held investor beliefs and then outline why these beliefs are mistaken.

Perception
There’s been a terrible terrorist attack in a major city. This will create massive volatility and likely trigger a market downturn.

Reality
While tragic, terrorist attacks rarely have any lasting market impact. For instance, the Paris attacks in November 2015 that killed more than 130 and injured more than 400 resulted in global equity markets trading lower for…one day. A week after the attack, global markets were actually up by 3%. Much of the focus on terrorism also centres on its impact on the United States. But this too must be kept in perspective. In 2015, for example, there were only 58 US citizens killed by terrorist activities. A whopping 614,000 Americans died that year from heart disease.

Keep terrorism in perspective

Source: National Consortium for the Study of Terrorism and Responses to Terrorism, Centre for Disease Control, National Weather Service

Perception
Higher interest rates are negative for Canadian REITs. And in case you think this conventional wisdom doesn’t actually get perpetuated by the financial press, check out this headline last year from the Financial Post:

Source: Financial Post

Reality
Interest-rate risk for Canadian REITs is overblown. Investors only have to look to the past 13 months as proof. The Bank of Canada has raised interest rates four times since July 2017, but over this period the Bloomberg Canadian REIT Index is up an impressive 19% on a total return basis, almost double the total return of the overall Canadian equity market. In fact, Canadian REITs typically shrug off rising rates. We saw this from 2004 to 2007 when the Bank of Canada raised interest rates 10 times, but REITs still returned 18% annually. Concepts such as lease length and tenant turnover are just red herrings. It’s simple: If interest rates are rising, the economy overall is likely doing well, which is positive for fixed assets (such as real estate).

REITs can handle higher interest rates

Source: Bloomberg

Perception
I should use extreme caution when investing near retirement because an unexpected bear market could devastate my retirement plans.

Reality
Aside from being rare, bear markets are also relatively brief. In Canada, for instance, bear markets last about 16 months with a loss of 36% compared to bull markets, which average 54 months with an average gain of 124% (see chart below).

Bear markets are brief, bull markets last

Source: First Trust; The average bull market period lasts 4.5 years with an average cumulative total return of 124%. The average bear market period lasts 1.3 years with an average cumulative loss of -36%.

Naturally, I don’t know everyone’s exact financial situation, lifestyle requirements and whether such a scenario would, in fact, devastate their retirement plans, but let’s take a simple example and say an investor retires at 65 with a million-dollar portfolio, no other assets and needs to pull $3,500/month from the portfolio to top-up their other retirement income (at minimum, CPP and OAS). This unlucky person retires on the exact day that a bear market starts. If the market trends downwards for 16 months that million bucks would decline to about $576,000 including the regular withdrawals. Certainly ugly.

However, if we use history as our guide for bear markets then we have to do the same for bull markets. So, a bull market now starts and for the next 54 months the portfolio continues to grow even after withdrawals. By the end of the bull-run, the client has regained his principal investment of a million dollars, but throughout the course of both the bear and the bull markets, has simultaneously managed to extract $245,000 from the portfolio over almost six years. A bear market now starts. Rinse and repeat.

Also, consider the highly unfavourable assumptions: a retirement at the unluckiest of possible dates and an equity-only portfolio (always a bad idea) with a focus on only one region. Further, if this investor is unconcerned with leaving a legacy to his or her family, as many are, then there is even more flexibility to weather a bear market.

Until next time, this has been…Perception Versus Reality. (Cue the deep-voiced announcer and echoey music.)

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

92 comments ↓

#1 Peter McLean on 08.25.18 at 3:51 pm

Nice post Doug! Keeps things in perspective.

#2 Surf the waves of life on 08.25.18 at 4:07 pm

Good post. Beats the endless RE doomerism.

#3 Alessio on 08.25.18 at 4:19 pm

I’m confused. Garth said rising rates are bad for CAN RE. Anyhow I’m done listening to Garth, Ross Kay, Hilliard Macbeth, Danielle Park et al. Just upped my offer on a house. Time to buy and not have to read another RE prediction or article ever again. I’ve wasted over a decade already listening to this stuff. No one knows what’s what.

#4 Stan Brooks on 08.25.18 at 4:28 pm

If interest rates are rising, the economy overall is likely doing well, which is positive for fixed assets (such as real estate).

=====================

Ahem, so you are basically saying that real estate will keep going up?

There is no economy in this place expect housing, it was propped up for extra 15 years, now is facing an inevitable and horrific crash.

As for economy doing well, what are you on? I am doing Jack today and feel much different.

REITs and banks are profit extractors in this case from non existing economies.

Aside from being rare, bear markets are also relatively brief.

Let’s clarify which markets. Japan’s real estate market is down for 27 years since the big crash of 1992. Now valuations are around cut in half from the peak in nominal values.

As for

Though the Nikkei has periodically risen above 1991 values since, as of 2017 it remains below 1991 values.

https://en.wikipedia.org/wiki/Real_estate_bubble

Japan had a lost decade/in reality 3 and they were the top world exporter for most of that time, never had the equivalent of CMHC, one of the most densely populated counties in the world.

I can’t stress strong enough the severity of what we are facing but anything short of 70-80 % decline in real value would be a great surprise for me.

Most likely our real GDP will decline by 30 % +.
Stay away from risky and shaky markets.

US, Europe, development markets diversification, cheap oil energy.

Period.

#5 The Greater Cauliflower on 08.25.18 at 4:34 pm

Could you send us a link to the latest Canadian ANDEX chart.
Thank You

#6 Millennial Realist on 08.25.18 at 4:43 pm

Conservatives just voted down, barely, a challenge to current abortion laws, 53-47%. Incredibly paleo ideas to some thrive among a huge percentage of these people.

https://www.cbc.ca/news/politics/tasker-conservative-policy-convention-1.4798918

This is just one example of the many splits among neocons that Maxime will exploit, quite effectively. Plus the anti-multicultural theme will resonate powerfully in Quebec. (Do people even realize this, I wonder? Quebec City, for example has a visible minority population of only 6.4%, compared to Toronto’s 51.5%. This dog whistle theme will be powerful for anxious white boomers.)

Unless Garth decides to run, that party is utterly doomed to splinter.

GOD BLESS MAXIME!

#7 Danny on 08.25.18 at 4:49 pm

Doug………so true. Well thought out….

Yet how do you convince those Trump blind loyalists who believe Old senile Guliani….that “truth isn’t Truth”…..and who really believe Trump….who points to his head and says “There’s alot of thinking there and once I’m gone…..everybody is going to be poor “…two old geniuses!

I would believe you Doug, over Chicken Little Trump forecasting that the sky is falling …….a fable that apparently dates back to over 2,500 years!

Chicken Little, also known as Henny Penny and sometimes as Chicken Licken, is a folk tale with a moral in the form of a cumulative tale about a chicken who believes the world is coming to an end. The phrase “The sky is falling!” featured prominently in the story, and has passed into the English language as a common idiom indicating a hysterical or mistaken belief that disaster is imminent. Versions of the story go back more than 25 centuries;[1] it continues to be referred to in a variety of media.

There is an old Mafia saying….”When your mouth is shut flies won’t get in”

Obviously Don Guliani and Don Trump….may try to act like tough guys trying to scare the stock market….but they did not grow up in the real Italian Mafia of the Hills of Southern Calabria….where the Mafia had its roots of survival training.

Russian Mafia on the other hand have their own tactic….chemical warfare….which is what Manafort ( the work for free guy for Trump )is terrified about for his family….if he flips to tell the truth.

#8 Stan Brooks on 08.25.18 at 4:50 pm

Doug, I am very surprised that you downplay the risk from rising interest rates on Canadian REITs, providing investment opinion based on a very short time selected frame, i.e cherry picking.

You view is logical though ONLY in the next scenario:
Very limited future BoC rates increases, kind of top is 0.5 % away (i.e. at 2 %) combined with horrific real inflation/cost of living at 10-12 % + annually for the next 15 -20 years. Which is worse than what I em expecting (speaking about being negative here…)

And no, I am not joking here, look at the cost of living in places like GTA in the last 3 years. A horror story.
IMHO there would be no sane individuals living there in the next 3-5 years. No wonder they legalize weed, that is the future life in T2’s Canada.

And still these RAIT gains will be paper, i.e. nominal, in dying currency.

That pretty much spells the end of the economy here as we know it as consumption will be basically dead in real terms, which is pretty normal for a very severe (the worst we have ever seen, bigger than the great depression) inflationary depression which will bring the standard of living of Canada along with and even lower than some Eastern European countries like Romania or Greece (that we like to joke with and look down at) who actually experience growth lately.

Let’s not forget that our near zero growth in real terms from the last 1.5 decades was simply due to (record, the biggest on the history of the world ever total debt) debt and useless construction of mostly crappy homes.

We are 1.5- 2.5 decades away from real growth and I strongly suggest considering re-location from cities like Vancouver or Toronto to places abroad. IMHO Quebec will survive.

#9 saskatoon on 08.25.18 at 4:56 pm

dude:

after 9/11:

430,000 jobs lost in new york.
2.8 billion in lost wages
30 billion decline in nyc gdp
18,000 businesses destroyed/displaced
30 billion in insurance losses

additionally, these attacks provided the basis for subsequent violent confrontations in iraq and afghanistan…which cost an estimated 5 trillion dollars.

the fed added 100 billion dollars A DAY and the system “recovered” due to an unimaginable influx of fiat debt.

the influx continues (in various degrees) to this day.

what if there was an attack of this nature tomorrow?

can fiat money still be endlessly created to “save” the system?

what if there were two attacks?

what if there were five attacks?

what if there were 10 or more attacks?

why are you talking about heart disease?!?!

#10 crowdedelevatorfartz on 08.25.18 at 5:02 pm

@Doug

Is $3500/ month a typical withdraw rate for a $1 million retirement portfolio?
( plus max CPP and OAS another aprox. $1.5k/month)

Does that withdraw rate leave the principle investment amount alone or will that eventually draw down over 30-40 years?

#11 crowdedelevatorfartz on 08.25.18 at 5:07 pm

@#97 Vancouver Market Pumper
“Tonnes of building going on in Vancouver. This site doesn’t even list them all. Developers still think market is hot.

http://www.vancouvermarket.ca/

+++++

gee.
What else are the “developers” going to say.

“We are heavily invested in a multi year build and the markets are dropping like a rock?

I dont think so.
Keep pumping. There’s greaterfools out there that will believe you.

#12 Chelsea Honeychurch on 08.25.18 at 5:11 pm

First!! And a great article by Doug!

Q: For Doug, do you ever hold more or less cash depending on what you read, or are you always 100% in the markets?

#13 Garth vs Doug on 08.25.18 at 5:16 pm

Garth sez:

#37 Ron on 08.12.18 at 5:59 pm
Higher rates are correlated with lower home prices but also with higher economic and wage growth, which is positive for RE.

So which of these competing forces will have a stronger impact on home prices? Higher rates or higher growth?

Wages would have to double to justify prices in the GTA or YVR. How likely is that? – Garth

Doug sez:

It’s simple: If interest rates are rising, the economy overall is likely doing well, which is positive for fixed assets (such as real estate).

Who is right?

As stated. Incomes will have to rise dramatically to sustain current prices in a rising rate environment. Ain’t gonna happen. – Garth

#14 Sideshow Rob on 08.25.18 at 5:37 pm

Sounds a lot like stocks have reached a permanently high plateau.

#15 Stan Brooks on 08.25.18 at 5:49 pm

As stated. Incomes will have to rise dramatically to sustain current prices in a rising rate environment. Ain’t gonna happen. – Garth

Unless rates are not raised substantively.

I am hearing that nominal real estate prices/in’strong’ bolivars constantly rise in Venezuela and no crises can affect that trend, coming to Canada soon brought to you by Poloz&Co at BoC.

BTW the reality of real inflation of 10 % annually with salaries rising at 1.5-2 % yearly seems more and more possible for me for the next 1.5-2 decades.

#13 Garth vs Doug on 08.25.18 at 5:16 pm
Economy doing well? The only sector doing well is weed.

#16 Shawn Allen on 08.25.18 at 6:28 pm

Stan…

Stan, have you been out of the stock and real estate markets for a long time?

Something seems to have made you not only pessimistic but very very bitter. What is it?

Have your bets gone the wrong way for a long time?

#17 Postal58 on 08.25.18 at 6:39 pm

Informative, interesting, well written post. Thank you.

#18 Lost...but not leased on 08.25.18 at 6:48 pm

Terrorism/terrorists ?

Nah…

We tend to elect them…more up front and honest… hail demo-cracy !!!!

..rest have to pick a number and wait in line.

#19 FOUR FINGERS WATSON on 08.25.18 at 6:52 pm

Perception : inflation is running at about 6-8% according to most people who post here.
Reality : government numbers tell is inflation is only 2ish %.
Question : Why is reality so confusing ?

#20 Doug Rowat on 08.25.18 at 6:54 pm

#9 saskatoon on 08.25.18 at 4:56 pm

dude:

what if there was an attack of this nature tomorrow?

can fiat money still be endlessly created to “save” the system?

what if there were two attacks?

what if there were five attacks?

what if there were 10 or more attacks?

Life is hard for you, isn’t it?

–Doug

#21 tccontrarian on 08.25.18 at 7:04 pm

“However, if we use history as our guide for bear markets then we have to do the same for bull markets.” D.R.
———————————————————–

Even better, if we use (really) use history as our guide, we can perhaps avoid (the majority of) a bear market and capture (the majority of) a bull market and get stupid-rich!
But that’s only a job of (real) contrarians (like me)! LOL

TCC

#22 Doug Rowat on 08.25.18 at 7:08 pm

#10 crowdedelevatorfartz on 08.25.18 at 5:02 pm
@Doug

Is $3500/ month a typical withdraw rate for a $1 million retirement portfolio?
( plus max CPP and OAS another aprox. $1.5k/month)

Does that withdraw rate leave the principle investment amount alone or will that eventually draw down over 30-40 years?

Assuming a 6% long-term rate of return and 2% inflation rate, a $1 million portfolio can actually handle a higher withdrawal rate.

You can test it yourself here:

http://www.turnerinvestments.ca/calculators_01.htm

–Doug

#23 Doug Rowat on 08.25.18 at 7:13 pm

#12 Chelsea Honeychurch on 08.25.18 at 5:11 pm
First!! And a great article by Doug!

Q: For Doug, do you ever hold more or less cash depending on what you read, or are you always 100% in the markets?

Cash virtually always underperforms other asset classes , so there has to be considerable market uncertainty before we would raise our cash weighting much above, say, 5%.

–Doug

#24 ExtraMoister on 08.25.18 at 7:19 pm

I was too young to understand so can any dogs explain why the 2008 crash is held considered so much more severe then the tech crash in 2000? Because the banks got bailed out?

On the image Doug posted the 2000 crash looks worse.

#25 AB Boxster on 08.25.18 at 7:35 pm

Doug,

For your example you are assuming that the draw rate on the million dollar portfolio is just over 4% to get $42,000 per year.

During a bear market as you describe taking place over 16 months, the value of this portfolio is now about 1/2 million less.

During the months, and the time it takes for the portfolio to recover, (around 54 months you indicate) how is it possible to remove $42 k out of the portfolio for the retiree just to live on?

At the worst point of the bear, pulling $3500 per month from the portfolio works out to over 7% withdrawal rates.

The conundrum for the retiree is:
1. Continue to pull $42000 per year from a portfolio in the middle of a bear market, and have faith , that as you say , the bull market will come and replenish the portfolio.

2. Severely reduce the draw amount to 4% of the portfolio in the bear market (which means only pulling about $20 k per year) thus massively needing the standard of living for the retiree.

Push that reduction of income out over the start of the bear until the bull begins to rebuild and you may have retirees living on vastly reduced incomes for several years.

And for for retirees on fixed incomes and with issues such as health costs etc what is the recommendation?

Do they continue to pull the same income amount from the portfolio (or higher to account for inflation) , and pray to some greater power that the bull returns, as history suggests it will, or do they reduce their withdrawals and hope they can survive on a vastly reduced income?

This is the great fear of all on the fixed incomes with investment portfolios. And is one reason that retirees may invest in more secure investments such as GICs even though they may lose spending power over time due to inflation.

For a 70 year old senior the risk of reduced income due to recession and bear markets, is higher for them than the risk of living to 90 and outliving their money due to effects of inflation.

Thoughts?

#26 akashic record on 08.25.18 at 7:36 pm

#20 Doug Rowat on 08.25.18 at 6:54 pm

#9 saskatoon on 08.25.18 at 4:56 pm

dude:

what if there was an attack of this nature tomorrow?

can fiat money still be endlessly created to “save” the system?

what if there were two attacks?

what if there were five attacks?

what if there were 10 or more attacks?

Life is hard for you, isn’t it?

–Doug

====

Doug, you do realize that you conveniently picked the easy to ridicule perception part and failed to even acknowledge the reality part of the comment.

Perception vs reality… hard, eh?

430,000 jobs lost in new york.
2.8 billion in lost wages
30 billion decline in nyc gdp
18,000 businesses destroyed/displaced
30 billion in insurance losses

additionally, these attacks provided the basis for subsequent violent confrontations in iraq and afghanistan…which cost an estimated 5 trillion dollars.

the fed added 100 billion dollars A DAY and the system “recovered” due to an unimaginable influx of fiat debt.

#27 Goldie on 08.25.18 at 7:41 pm

Nice column today sir.

#28 Nonplused on 08.25.18 at 8:01 pm

Except… inflation.

I know that official inflation numbers are around 2%, which is bad enough already, and I don’t believe. They use too many tricks to arrive at that number. But before we explore a few features of the hedonic adjustments, lets keep in mind that 2% inflation is horrific enough as it is. At 2% the price of everything doubles every 35 years. And it doesn’t do so all at once, every year you need more money than you did the year before. A person who retires with $1 million and is taking out $3,500 per month in year 1 of retirement would need to take out $7,000 per month in year 35, if they live that long. Here’s how it works out:

Year Monthly Draw
1 3,500
2 3,570
3 3,641
4 3,714
5 3,789
6 3,864
7 3,942
8 4,020
9 4,101
10 4,183
11 4,266
12 4,352
13 4,439
14 4,528
15 4,618
16 4,711
17 4,805
18 4,901
19 4,999
20 5,099
21 5,201
22 5,305
23 5,411
24 5,519
25 5,630
26 5,742
27 5,857
28 5,974
29 6,094
30 6,215
31 6,340
32 6,467
33 6,596
34 6,728
35 6,862
36 7,000

And this does not account for the fact that drawing $7,000 a month will incur much higher taxes than $3,500 a month, so the state of things is actually much worse.

So you can’t do retirement planning without including inflation. You can’t calculate anything without including inflation. Even at 2%.

So now lets loot at some of the hedonic adjustments and how they are complete crap when looking at your actual out of pocket expenses.

The first, and most egregious, is “owners equivalent rent”. A simple man might thing the cost of housing is included in the inflation numbers because it’s something most people want to buy. Nope. They include the market “rent” for your house. So this is why you can have Vancouver real estate go up 20% per year but the inflation rate is only 2%. The rents didn’t go up. Cheap financing meant landlords could charge less rent on a house they paid more for. Hence, we could have a spectacular housing bubble in Canada, the US and across the western world, and none of it went into the inflation numbers. House prices doubled in less than 10 years and they saw no concerning inflation! But it was because they were driving the cost of financing down! When the single most expensive asset most people own doubles in 10 years inflation should read 7%, not 2%. I don’t even want to put 7% into my table above but let’s do it anyway, for space I’ll just show year 1 and 36.

Year Monthly draw
1 3,500
36 37,400

Yep. You read that right.

If house prices were included in the inflation number rather than homeowners equivalent rent, the central banks would have had to raise rates long, long ago and very aggressively. They could have stopped the bubble, but they chose not to.

Now let’s look at autos. In 1967 you could get a new Mustang for $2,500. Today it costs $27,000 for a base model. It’s gone up 10 times!!! Does that look like 2% inflation to you? Because if it does I think your calculator needs new batteries, and so does your brain. But what the wonder brains at the department of statistical manipulations do is more hedonic adjustments. “You see”, they figure, “the modern car has air bags and a CD player and Blue Tooth. You couldn’t get that on the ’67 so no inflation.” But you still have to pay 10 times more to get from point A to point B. And of course the insurance has gone up by a similar amount to reflect the wreck value of the vehicle in a crash, which all these anti-lock brakes and traction controls don’t seem to be preventing, although the car gets hedonic adjustments for those too. All anti-lock braking did was make people drive faster. All traction control did was make people drive too fast on ice. There should have been no hedonic adjustment. People still crash just as often. They adjusted their behavior to the new risk environment.

So, let’s leave it there for hedonics and briefly cover technology creep. Remember when you had a land line and that was it for phones? Well I do, although if you were born after the Challenger disaster you probably don’t. $26 bucks a month. Now everybody in the family over the age of 12 needs a $700 phone and a $100/month plan, and the phone only lasts 3-4 years. Don’t get me going on computers you pay $1,000 for and 5 years later they are garbage. And you need internet and that’s going to be on top of cable. Your kid can’t even play soccer unless you have internet because you won’t get the notifications for practices and games. How much of this goes into the inflation number? None of it.

Carbon taxes? Not in the inflation number.

Environmental charges for old tires and batteries? Not in the number.

Tax increases? Not in the number?

Energy and food prices? Smoothed out so essentially not in the number (too volatile the math-wises tell us).

What is in the number is the fact that you tee-shirt, which is all you have left after all this inflation, is cheaper, but that was made in China and there is no hedonic adjustment for the fact it isn’t made here anymore.

Real inflation is not 2%. It’s about 7% on many things. Put that in your retirement calculations. We are a pot of slowly boiling frogs.

#29 Bell Customer on 08.25.18 at 8:12 pm

Does anyone understand why if you go over your data limit the phone companies charge such usurious rates? Bell just charged me $50 because my son was watching YouTube on his phone for 2 hours. That’s $25 an hour! Was he crashing the system or something? Why do they need to charge so much more per MB when you go over than they do when you don’t? Why is there a limit? I realize video takes a lot of data but the cable company doesn’t do this no matter how many videos I watch. Free Porn! Not on your phone though. Even the old pay-porn sites never charged $25/hour. Not anywhere near.

#30 The Real Mark on 08.25.18 at 8:12 pm

All RE is highly correlated. When builders stop building condos, if there’s any excess returns to be had in building commercial RE, they’ll move to that. And vice versa. The argument that REITs will be relatively immune to a Canadian RE meltdown driven by overvaluation and interest rate spread expansions seems pretty weak to me. Although certainly the argument that commercial real estate is not as hyperinflated as residential RE certainly has plenty of support in evidence due to the lack of CMHC subsidy for commercial RE finance.

My personal view is that someone who owns residential RE has no business owning even a single Canadian REIT in their portfolio until they have a net worth >$2M. Simply to maintain a reasonable level of portfolio balance.

I personally don’t see CAD$ interest rates rising much further over the next few years as the deflationary impact of falling RE prices and an otherwise weak economy hit consumers hard. But spread expansion, which appears to be a major driver of bank profitability growth, will likely continue as credit-worthiness declines along with personal equity.

There is certainly the possibility that something rises out of the ashes of the Canadian economy though. Apparently speculative positioning in the precious metals markets and miners is at statistical extremes, which usually is predictive of future outsized returns.

#31 Fish on 08.25.18 at 8:16 pm

Why investors should worry about market liquidity, a dividend-buying strategy that works, and the case for Japanese stocks

https://www.theglobeandmail.com/investing/investment-ideas/article-why-investors-should-worry-about-market-liquidity-a-dividend-buying/

#32 Protea on 08.25.18 at 8:19 pm

Doug is this a precursor to what will happen to the market within the next 18 months. Just a way of conditioning your faithful followers to what will probably happen.

#33 [email protected] on 08.25.18 at 8:24 pm

#3 Alessio on 08.25.18 at 4:19 pm

Graphs clearly show RE(IT) is correlated to interest rates, at least in that time period. How would it look like in a larger time frame? I think RE has been continually increasing.

#34 SoggyShorts on 08.25.18 at 8:26 pm

Doug: Do you make quick buys when the market dips after something like a terrorist attack? Or the Brexit vote?
More generally, do you have any discretion with clients money? I mean my FA needs email/verbal confirmations for every single trade, but I wouldn’t mind it if some of it (like any cash) was available for quick calls.

#35 FOUR FINGERS WATSON on 08.25.18 at 8:34 pm

#25 AB Boxster on 08.25.18 at 7:35 pm
Doug,

For your example you are assuming that the draw rate on the million dollar portfolio is just over 4% to get $42,000 per year.

During a bear market as you describe taking place over 16 months, the value of this portfolio is now about 1/2 million less.

During the months, and the time it takes for the portfolio to recover, (around 54 months you indicate) how is it possible to remove $42 k out of the portfolio for the retiree just to live on?

At the worst point of the bear, pulling $3500 per month from the portfolio works out to over 7% withdrawal rates.

The conundrum for the retiree is:
1. Continue to pull $42000 per year from a portfolio in the middle of a bear market, and have faith , that as you say , the bull market will come and replenish the portfolio.

2. Severely reduce the draw amount to 4% of the portfolio in the bear market (which means only pulling about $20 k per year) thus massively needing the standard of living for the retiree.

Push that reduction of income out over the start of the bear until the bull begins to rebuild and you may have retirees living on vastly reduced incomes for several years.

And for for retirees on fixed incomes and with issues such as health costs etc what is the recommendation?

Do they continue to pull the same income amount from the portfolio (or higher to account for inflation) , and pray to some greater power that the bull returns, as history suggests it will, or do they reduce their withdrawals and hope they can survive on a vastly reduced income?

This is the great fear of all on the fixed incomes with investment portfolios. And is one reason that retirees may invest in more secure investments such as GICs even though they may lose spending power over time due to inflation.

For a 70 year old senior the risk of reduced income due to recession and bear markets, is higher for them than the risk of living to 90 and outliving their money due to effects of inflation.

Thoughts?
………………………………………………………….

Invest in dividend paying blue chips such as the BIG SIX. Never touch the principle, only take the dividends. DRIP what you don’t need. Live within your means.

#36 David Paquette on 08.25.18 at 8:53 pm

It is with trepidation let this comment go.

I am not a 1% but I do have 1 cent opinions. I don’t know what good karma is but sitting on your ass watching doesn’t feel right to me. Make no mistake, I will do ugly things and challenge. Let karma grind me down to a better person over lifetimes. I know that is weird but it is the path I have chosen and will not back down.

My perception of Emerging Market EFT’s valued in us$. If the us$ rises against all other currencies then I would expect the NAV (net asset value) of the ETF to fall and there would be an outflow bias from the fund. Then there is the low yield subject to withholding tax plus currency exchange bank fees. I am waiting to see what the reality is before buying an EM ETF. The US dollar index (dxy) of 95.2 looks low to me from looking at charts and I do not see a downward trend.

My perception says stay away from Emerging markets for now as the odds of lower future prices are high in my opinion. In other words, I suffer from FUD (fear, uncertainty, doubt) when thinking about the currencies of China, Russia, Brazil, South Africa, Turkey, Argentina, Venezuela …

#37 Anna on 08.25.18 at 8:54 pm

Hi Ryan, do you recommend/or have thoughts regarding using trailing stop limit orders to try and minimize your losses when a bear market happens for ETFs? I do know that it’s not a guarantee that the trailing stop limit would even work during a crash. Thanks for your thiughts

#38 Doug Rowat on 08.25.18 at 9:00 pm

#25 AB Boxster on 08.25.18 at 7:35 pm
Doug,

For your example you are assuming that the draw rate on the million dollar portfolio is just over 4% to get $42,000 per year.

During a bear market as you describe taking place over 16 months, the value of this portfolio is now about 1/2 million less.

During the months, and the time it takes for the portfolio to recover, (around 54 months you indicate) how is it possible to remove $42 k out of the portfolio for the retiree just to live on?

Math.

–Doug

#39 Doug Rowat on 08.25.18 at 9:05 pm

#26 akashic record on 08.25.18 at 7:36 pm

Doug, you do realize that you conveniently picked the easy to ridicule perception part and failed to even acknowledge the reality part of the comment.

There was a reality part?

–Doug

#40 Zen on 08.25.18 at 9:10 pm

Cash virtually always underperforms other asset classes , so there has to be considerable market uncertainty before we would raise our cash weighting much above, say, 5%.
———–

5% cash is so insignificant in terms of overall return. Why even bother?

#41 AB Boxster on 08.25.18 at 9:11 pm

#28 Nonplused on 08.25.18 at 8:01 pm

Inflation

–————————-
Good analysis of effects of inflation.

And while I’m certainly agree that the actual rate of inflation is much higher than official stats , I also think that the effects of inflation can be managed in many ways.

For example, your car example is fair.
But it is still possible to buy a good car (not the Mustang you describe) for $15k.
This is still higher than 3% inflation but is far less than the $27 k .

For retired people especially, the ability to reduce costs is far easier.
They can go without you best internet as they do not need it for work.
They do not need large or newer cars as they do not have large families and do not need reliable transportation for communting to work. So they can run that car for 5 more years than someone who needs reliable transportation and puts on 30+ k per year.

They should have a paid off house so are not subject to whims of rentals.

And they often have the time to do basic repairs and maintenance themselves?( note:. I just started doing my own oil changes again as I was getting tired of spending over $100 for a synthetic oil change, when the cost of oil and filter on sale is about $35.)

Those most at risk for the effects of inflation are younger people, especially those with young families.

Costs for everything increasing substantially, and people are in their consumption years.

Utility costs (internet, gas, electrical ) carbon taxes, municipal taxes,
school user fees, gasoline taxes, daycare, grocery costs, etc. etc.

Now I do think also that many families of today believe that it is normal to eat out 3 times a week, or spend $7 a day on a latte, or buy vehicles that are far more luxurious than required , or buy ‘starter homes’ that are far larger and more expensive than the best home their parents ever owned.

Owning a new smart phone every 2 years on a $120 monthly data plan, so you can instagram all day long is not a basic human right or a necessity.

So, for retired, there are more options to offset the effects of inflation.

But, the basic fact that inflation is rising far more than incomes, for certain parts of society, is a huge issue, that your government pretends is under control.

#42 Anna on 08.25.18 at 9:13 pm

Sorry …I meant Doug! Not Ryan this week!

#43 AB Boxster on 08.25.18 at 9:27 pm

35 FOUR FINGERS WATSON on 08.25.18 at 8:34 pm

Invest in dividend paying blue chips such as the BIG SIX. Never touch the principle, only take the dividends. DRIP what you don’t need. Live within your means.

———————————

I agree that dividends in a portfolio are great.

But…
As this blog recommends about 20% of your portfolio in dividends ( usually through ETF) this will only go so far income in a bear market.

Total portfolio returns are based upon dividends, fixed income, capital appreciation.

In the bear market bonds go up, so rates go down. Share values are down so capital capital appreciation goes away, and yes you have dividends but only on 20% of your portfolio.

Even Derek Foster (the self proclaimed 35 year old millionaire and dividend investigation guru) got cold feet during the financial crisis and sold his positions.

Are you suggesting 100% of your portfolio in Canadian banks?

#44 chuck on 08.25.18 at 9:33 pm

Thanks Doug Sir
Very calming words keep up the great work

#45 Dwight on 08.25.18 at 9:47 pm

Bears. Beets. Battlestar Galactica.

#46 Breaking News on 08.25.18 at 9:59 pm

“while much of what gets reported in the financial press is accurate and helpful for investors” …you lost me there….

whatta you mean???? it’s all FAKE NEWS with the market numbers. If it was accurate we’d all be billionaires!

#47 Remembrancer on 08.25.18 at 10:05 pm

#25 AB Boxster on 08.25.18 at 7:35 pm
#35 FOUR FINGERS WATSON on 08.25.18 at 8:34 pm

Good call FFW, AB I’d also mention your example seems to be ignore the other side of the equation – investment income in the plus column for example…

#48 Al on 08.25.18 at 10:24 pm

“It’s simple: If interest rates are rising, the economy overall is likely doing well, which is positive for fixed assets (such as real estate).”

Our host tells us that real estate prices and interest rates are inversely correlated (rising interest rates negatively affect real estate price), how do you square this (see what I did there)?

#49 akashic record on 08.25.18 at 10:48 pm

#39 Doug Rowat on 08.25.18 at 9:05 pm

#26 akashic record on 08.25.18 at 7:36 pm

Doug, you do realize that you conveniently picked the easy to ridicule perception part and failed to even acknowledge the reality part of the comment.

There was a reality part?

–Doug

Most people’s perception is that there was a reality part of 9/11, the historically most relevant sample of contemporary “terrible terrorist attack in a major city”.

Strange that you don’t. Like your chart, that plots financial impact by death toll numbers.

Maybe the dollar figures are insignificant for you to cross your reality threshold.

430,000 jobs lost in new york.
2.8 billion in lost wages
30 billion decline in nyc gdp
18,000 businesses destroyed/displaced
30 billion in insurance losses

additionally, these attacks provided the basis for subsequent violent confrontations in iraq and afghanistan…which cost an estimated 5 trillion dollars.

the fed added 100 billion dollars A DAY and the system “recovered” due to an unimaginable influx of fiat debt.

#50 Buttonbox42 on 08.25.18 at 10:49 pm

A great article. Thanks for including the calculator. Really an eye opener.

#51 Ray on 08.25.18 at 10:54 pm

Pres Trump has said that if he is impeached, the markets would crash. I think Trumps personality is such that if he thought he was close to being impeached, he would start an ugly war just to distract attention from the impeachment process. A market crash might be cheaper in the long run.

#52 Smoking Man on 08.25.18 at 11:08 pm

RIP John McCain.
You where one of a kind. That’s for sure.
Your family will miss you…

#53 Interstellar Old Yeller on 08.25.18 at 11:17 pm

Enjoyable read tonight, thanks Doug. The bear/bull market chart was visually very helpful.

#54 FOUR FINGERS WATSON on 08.25.18 at 11:25 pm

#43 AB Boxster on 08.25.18 at 9:27 pm

35 FOUR FINGERS WATSON on 08.25.18 at 8:34 pm

Invest in dividend paying blue chips such as the BIG SIX. Never touch the principle, only take the dividends. DRIP what you don’t need. Live within your means.

———————————

I agree that dividends in a portfolio are great.

But…
As this blog recommends about 20% of your portfolio in dividends ( usually through ETF) this will only go so far income in a bear market.

Total portfolio returns are based upon dividends, fixed income, capital appreciation.

In the bear market bonds go up, so rates go down. Share values are down so capital capital appreciation goes away, and yes you have dividends but only on 20% of your portfolio.

Even Derek Foster (the self proclaimed 35 year old millionaire and dividend investigation guru) got cold feet during the financial crisis and sold his positions.

Are you suggesting 100% of your portfolio in Canadian banks?
………………………………………..

I like the 3 federally regulated sectors, banks, pipelines, and telecoms. Government reulations are like a safety net. RB has not missed a dividend payment since 1832. Existing pipelines are like gold, very hard to get new ones built. I don’t like bonds or preferreds or metals. I am not a fan of “ balanced portfolios” as described here on this blog. Not a fan of ETF’s. I buy good stuff on sale and hold forever.

#55 Stan Brooks on 08.25.18 at 11:34 pm

#41 AB Boxster on 08.25.18 at 9:11 pm

Inflation by definition is about how much cost of living increases, if you maintain the same lifestyle and expenses, it is directly correlated to rise in prices of essential items – housing, energy, food, transportation, clothes, education.

Hedonistic are wrong, tomorrow they will start calculating in the inflation and income the pleasure of watching the maple leaf (suckers) score a goal against New York Rangers (despite losing 1-7) or Raptors making the playoffs or how fluffier the toilet paper has become, and how much pleasure we derive using the one with Trump’s face on it.

Real inflation sounds more in line with:
#28 Nonplused on 08.25.18 at 8:01 pm
around 8-10 % annually lately.

As for substitutions: We all can live in tents, eat worms and leafs and use the streets as toilets, then we need no money at all.

My understanding is that inflation ‘statistics’ utilizes both hedonistic and substitution along with exclusion of ‘volatile’ items from their baskets to the extreme, along with applying exceptional creativity in varying dynamically the items in it, including measuring the price of a ‘meal’ at Restaurant or a food court, without defining what is in it or the size, box of noddles or chocolates without defining weight, quality, etc.

‘Volatile’ items comprise most of what we consume – housing, energy and should be average weighted, there are very simple statistical methodologies to achieve that.

The unwillingness of statistics to use real price measures turns them into cheap lairs who facilitate the theft from the retirees and savers.

If inflation statistics was correct and the real inflation of 8-10 % was reported, there would be no way for the incompetents at BoC to be able to keep interest rates that artificially low for that long.

Every person with CPP, disability, OAS, savers who depend on fake CPI calculations will be a victum, that includes pretty much all Canadians.

Now that even the fake CPI shoots up lately and they continue to be creative and introduce new ‘preferred’ measures that would probably include something never ever consumed by the average consumer, like the price of 2nd hand condoms or reused needles for drug addicts in order to convince us that the ‘inflation’ is sub 2 %.

These people have zero credibility in my opinion.

#56 AB Boxster on 08.25.18 at 11:41 pm

38 Doug Rowat on 08.25.18 at 9:00 pm

Math

—————-
Gee, what is this Math thing you talk about Doug?
Is this something really smart people know?
Do you think the rest of us can learn how this Math works too?

Note to self:

1. Learn Math
2. Skip the blog on the weekend.

#57 Ponzius Pilatus on 08.25.18 at 11:45 pm

Perception will always trump reality.
That’s how the brain is wired.
Cognitive dissonance.
Just ask any magician.
Price of one burger is 1.99. 2 burgers for 3.98. A deal.
People are idiots.

#58 Al on 08.26.18 at 12:08 am

“This unlucky person retires on the exact day that a bear market starts.”

The risk of portfolio failure is starkly higher if one encounters a bear market at the beginning of the draw down period or enters a period of extended of stagflation . Especially if the portfolio need to last more than 30 years. Not something to be brushed aside. Although the following chart does not explicitly show portfolio failure percentage based on certain assumptions, its implied from the drastically varying safe withdrawal rates which coincide with bear/bull markets and inflation periods. It visually displays the drastic effect the beginning period (and associated bear/bull markets etc..) of your draw down has on your portfolio.
https://retirementresearcher.com/trinity-study-updates/.

#59 Nonplused on 08.26.18 at 1:21 am

#41 AB Boxster

Well, what you basically described is another trick the dorks at the government use to distort the inflation number down: “substitution”.

So what they conclude is that if the price of steak rises, people will switch to ground beef so if that hasn’t risen they adjust the weightings. If ground beef goes up too then they substitute chicken. If Dog forbid chicken is also up then they put in tofu. But I don’t want to BBQ tofu I want to BBQ steak, so I totally disagree with “substitution”. Tell me how much steak has gone up compared to steak and I’ll believe the inflation number, and it’s a lot more than 2% per year.

Same with the car example. Sure, you can buy a Hyundai Accent and spend half as much money as you would on a Ford Mustang. But again it’s substitution. To get the real inflation number you have to compare “like” items, and an Accent is not near as cool as even the ’67 Mustang. It’s not the same car.

Even you doing your own oil changes is “substitution”. What it indicates is that it is getting so expensive to have simple work done to your vehicle that you are resorting to doing yourself. Well, that is a different thing than driving through the Minute Lube so it’s substitution.

I disagree with using substitution in the CPI numbers, but they do by adjusting the weightings. To me, to get the real number, you have to compare the price of the same product, steak for steak over time, not steak for ground beef. Mustang for mustang, not Hyundai Accent for Mustang.

I agree that cell phones are not a birthright, but technological creep is a real part of life. If it isn’t something so totally irresistible like a smart phone, then the government forces it on you through all their regulations. I have an example for you, the glorious motorcycle that is the KLX 250. Thing gets 70 mpg on the street. Eat that Prius, you can’t compete. But for years the thing needed to be upgraded to a fuel injection system and they kept making them with carburetors. Know why? If they changed the design, the new design would have to comply with the most recent emissions standards, whereas the old design just had to comply with the standards in place at the time of the original design. So they couldn’t upgrade a vehicle that already got 70 mpg. And all this stupidity arises from the fact the government measures emissions in parts per million rather than grams per mile, which would make much more sense. So a KLX 250 can’t have any more as a percent of the exhaust gas of say CO than a Hummer, even though it gets 7 times the millage and couldn’t possibly emit the same amount of pollutants per mile traveled unless it was running on Round Up. This is your government in action. They just make everything worse.

Yes, some things need to be cleaned up. Leaded gasoline was a disaster. But the MTBE that replaced it was even worse. Now that’s been replaced with ethanol, but when you consider the effects on the farm it’s not clear that is any better either. But it all costs more. But those extra costs don’t appear in the inflation numbers because we get a hedonic adjustment when lead gets replaced with MTBE and again when MTBE gets replaced with ethanol. It still costs more though.

#60 Where's The Money Greedo? on 08.26.18 at 2:55 am

Re: #101 Shawn Allen on 08.25.18 at 3:22 pm
Trump Witch Hunt?

Number 86 Cory opines:

Mueller is not sticking to the Russia probe but now trying to find financial dirt to bring him down (and we know there is a lot of dirt to be found)in this massive witch hunt.

**************************************
Questions: Is it okay to have a witch hunt if it is acknowledged that witches are present? (dirt)?

Was Mueller’s mandate EVER restricted tot eh Russian probe? Apparently it was not and he is free to investigate any and all crimes he comes across.

2016 was a weird election in which it seemed both candidates might just as easy end up in jail as in the White House. Trump especially could be jailed for various frauds including charity fraud,
++++++++++++++++++++++++++++++++++++++++
What about the Clinton Charity fraud that high-tailed it to Switzerland just before the last election.
Now how many houses has this charity built in Haiti, that collected over $2 billion…I count 1 shack.
https://www.mondialisation.ca/clinton-disaster-fundraising-in-haiti-predatory-humanitarianism/5526496
“Here we are talking about a fraud whose declared scope exceeds $2 billion — but when you count related frauds involving the Global Fund, the Interim Haiti Recovery Commission, UNITAID, American India Foundation and other such criminal activities, you are talking about a global set of frauds bigger than Madoff’s that likely approaches $100 billion, possibly more.”
At least there isn’t widespread rumors of dead bodies littering the Trump history, just a little peckering.
Google Clinton body count and you will see even close friends of the Clintons getting murdered, even their closest friend, Vince Foster who gave Killary her first job right out of law school and was about to testify about Mena Arkansas, the airport where they delivered huge amounts of Colombian cocaine while Bill was governor and land fraud.
I would take a little fraud and boning over those psychopaths, if I had to choose and I think the US has chosen.
Also Bill opened the door wide for the Asian Triads in Washington, proof is abundant.

#61 Dolce Vita Re: #75 IHCTD9 on 08.25.18 on 08.26.18 at 3:24 am

To Doug:

Good you are finding your own voice and being thematic about it. Tough trying to emulate “The Big Guy’s” tone. In that, he is one in a million.

A “Know Thyself” moment. Good on you Doug.

– – – – – – – – – – – – – – – – –

Yesterday: #75 IHCTD9 on 08.25.18

I really, did, howl out loud when I read this:

“Most of the time, the click bait ads on the bottom of the page have more appeal than the headlines do.”

That, was GOOD and ditto.

Good to read that I am not the only one that has concluded bias rules the day in MSM and it’s a slog trying to find reason instead.

I think they believe if they shout loud enough and are outrageous to the point of hysteria, more will listen (advertising mindspace trick used to great effect by firms such as “The Brick” years ago on TV).

Slipping reader/viewership says otherwise.

I much prefer YouTube where so the so-called “IDW” will have a civilized discourse about an issue that is longer than a biased 10 sec. snippet on TV or an insipid rant in “print” (usually short, full of conjecture) – often lasting a few hours.

Again IHCTD9, thanks for letting me know I am not the only one that thinks this way.

Explore YouTube, you will find the sources of common sense, balance and reason soon enough.

Podcasts are also an excellent “IDW” source (so they say, I would not know). I hate Podcasts as I cannot see the expression of the person (intuit the tone of voice not what I like, nice to stare into their eyes instead).

Few can Podcast in the tone that Garth writes and understand completely where he stands. Why I prefer “IDW” YouTube.

#62 Wrk.dover on 08.26.18 at 7:31 am

#60 Where’s The Money Greedo? on 08.26.18 at 2:55 am

Also Bill opened the door wide for the Asian Triads in Washington, proof is abundant.

————————————

Repeal of the Glass Steagall bill is the Clinton legacy which all retirees will pay for with their imploding retirement funds until death do them part.

That one act of terror was the mightiest of all.
The entire world will pay for forever it looks like by now.

#63 reynolds531 on 08.26.18 at 9:20 am

#59 non pluses

If you can find me a vehicle that runs on Roundup I will pay folding money for it.

Bravo sir

#64 crowdedelevatorfartz on 08.26.18 at 9:21 am

@#29 Bell Customer
“Even the old pay-porn sites never charged $25/hour. Not anywhere near.”
++++

Ick !

#65 Doug Rowat on 08.26.18 at 9:42 am

#58 Al on 08.26.18 at 12:08 am

“This unlucky person retires on the exact day that a bear market starts.”

The risk of portfolio failure is starkly higher if one encounters a bear market at the beginning of the draw down period or enters a period of extended of stagflation .

Yep. And retirement planning is a complex task that requires constant review. However, my point was that it’s imprudent to automatically default to a ‘defensive shell’ strategy simply because the moment of retirement is upon you.

–Doug

#66 Gravy Train on 08.26.18 at 9:56 am

#28 Nonplused on 08.25.18 at 8:01 pm
#41 AB Boxster on 08.25.18 at 9:11 pm
#55 Stan Brooks on 08.25.18 at 11:34 pm
#59 Nonplused on 08.26.18 at 1:21 am

“The Consumer Price Index (CPI) is an indicator of changes in consumer prices experienced by Canadians. It is obtained by comparing, over time, the cost of a fixed basket of goods and services purchased by consumers. Since the basket contains goods and services of unchanging or equivalent quantity and quality, the index reflects only pure price change.”

Rather than spewing your ill-informed opinions (read: inanity or asininity), you could simply do some research to determine the data sources and methodology, error detection, imputation rules, quality evaluation, data disclosure, data accuracy, estimation and calculation of price indexes. Here, let me help you:
http://www23.statcan.gc.ca/imdb-bmdi/document/2301_D64_T9_V1-eng.htm

Gosh, I hope that none of you are statisticians, economists, econometricians, or the like—and that none of you plan to become one.

#67 Ponzius Pilatus on 08.26.18 at 10:11 am

Perception
I should use extreme caution when investing near retirement because an unexpected bear market could devastate my retirement plans.

Reality
Aside from being rare, bear markets are also relatively brief. In Canada, for instance, bear markets last about 16 months with a loss of 36% compared to bull markets, which average 54 months with an average gain of 124%
——————————
Remember that the negative psychological effect of losses is three times the positive effect of gains.
36% times 3 is pretty close to 124.
Simple psychological, emotional arbitrage at work

#68 Ponzius Pilatus on 08.26.18 at 10:23 am

#28 Nonplused on 08.25.18 at 8:01 pm
#41 AB Boxster on 08.25.18 at 9:11 pm
#55 Stan Brooks on 08.25.18 at 11:34 pm
#59 Nonplused on 08.26.18 at 1:21 am

“The Consumer Price Index (CPI) is an indicator of changes in consumer prices experienced by Canadians. It is obtained by comparing, over time, the cost of a fixed basket of goods and services purchased by consumers. Since the basket contains goods and services of unchanging or equivalent quantity and quality, the index reflects only pure price change.”

Rather than spewing your ill-informed opinions (read: inanity or asininity), you could simply do some research to determine the data sources and methodology, error detection, imputation rules, quality evaluation, data disclosure, data accuracy, estimation and calculation of price indexes. Here, let me help you:
http://www23.statcan.gc.ca/imdb-bmdi/document/2301_D64_T9_V1-eng.htm

Gosh, I hope that none of you are statisticians, economists, econometricians, or the like—and that none of you plan to become one.
—————–
Obviously, this must be tongue in cheek.
If not, I must say that questioning Government data should be a should be a virtue that every citizens should strive for.
Otherwise, we’d all just be sheeple.
Oh, I forgot we are. As the poster clearly demonstrates.

#69 Ronaldo on 08.26.18 at 10:43 am

#51 Ray on 08.25.18 at 10:54 pm
Pres Trump has said that if he is impeached, the markets would crash. I think Trumps personality is such that if he thought he was close to being impeached, he would start an ugly war just to distract attention from the impeachment process. A market crash might be cheaper in the long run.
———————————————————–
That is about as far from reality as it gets. Trump has no interest in starting wars. You must have him confused with the Clinton’s. If Hillary had gotten in we would likely be at war with North Korea by now.

The more of your words I read the more I think you have a man-crush on the guy. Astonishing sycophancy. – Garth

#70 Damifino on 08.26.18 at 10:43 am

I retired in the spring of 2007 (age 56) with a reasonable amount invested. The global financial crisis hit in the late summer of 2008. I lost (on paper) about a third.

I called my advisor exactly once. “The worst thing you can do is sell into a falling market” said she. So I did not. In just over a year, all my ‘losses’ were recovered. I now have much more than my original investment in spite of pulling out monthly living expenses, something which has carried on, as usual, since that time.

Looking back, it seems like it should have been a much more traumatic experience. Today, I barely remember it. And it was the worst meltdown in decades.

BTW, I had friends and associates who DID sell into that falling market. They never really recovered and remain bitter, disillusioned and financially paranoid.

#71 David on 08.26.18 at 11:03 am

Great insight Doug. Thank you. Like a lot of people I wish I had learned to see the headlines and market reactions better in previous years instead of being just one of the sheep. I see most of the language used in the headlines is by people sounding like they are saying and stating something when they really aren’t. It’s just a tease. When (hoping not if) Trump is dethroned will be another perception vs reality opportunity.
By the way, similar to your headline I had a Risk vs Return episode driving our rented 25 foot RV through Mahone Bay to Lunenberg a couple of weeks ago. Arrived too late in the day to find any poor soul still at the office. A very nice town in a beautiful province. David from the other coast.

#72 Shawn Allen on 08.26.18 at 11:36 am

Inflation Measurement

Stan Brooks at 55 posted the following false belief:

My understanding is that inflation ‘statistics’ utilizes both hedonistic and substitution along with exclusion of ‘volatile’ items from their baskets to the extreme,…

*****************************
That is 100% false. Statistics Canada’s main official inflation number has NEVER excluded volatile items. They do report various ALTERNATIVE measures of core inflation that do exclude certain items. That part is pretty transparent. The press is free to focus on on the overall inflation or a core measure.

There are valid criticisms of inflation measures such as the way housing costs are measured and what is in the basket. (Stan apparently lives on only essentials and unlike most of us does not spend on the finer things in life. Sad.) But believing utter nonsense, and worse, spreading it, just because a person wants to believe that is not a very valid approach.

And I notice that whenever core inflation is HIGHER than the main measure, which is not that rare, the critics go into radio silence.

Gravy Train at 66 makes the same point about spouting nonsense.

#73 jess on 08.26.18 at 11:47 am

Perception will always trump reality. as does enlightenment.

Nell Irvin Painter’s title, “The History of White People,”

https://www.nytimes.com/2010/03/28/books/review/Gordon-t.html

#74 Phylis on 08.26.18 at 12:08 pm

Does CPI include the taxes on the items? 53 54 and 55 are heavily taxed (prob others too)

#75 Fluorine on 08.26.18 at 12:25 pm

Great post, Doug!

One thing I’ve always wondered… why do the distributions of preferred ETFs (like CPD, XPF, and ZPR) go down over time? Is it due to the issuers calling the high paying shares and they have to buy ones with less yield? Does it have to do with the interest rates at the time? It seems to me that it shouldn’t matter…

Thanks for your time! Keep it up.

Fluorine

#76 Shawn Allen on 08.26.18 at 1:08 pm

Inflation Perception vs Reality

Imagine a scenario where all prices rise an even 2% per year for 20 years. That’s (perhaps surprisingly) a 49% increase in all prices over 20 years. Imagine also in this thought experiment scenario that all wages rise 4% per year. That’s a 119% increase in wages. In our ideal scenario here imagine the wage increase was due to improved technology and higher productivity. In real terms after inflation, wages are 70% higher.

Now, as a result would people consume the same basket of essentials and save the excess 70%? Of course not. The typical person would spend more. The typical lifestyle would involve more eating out, more travel, better vehicles and on and on.

It would basically cost 70% more in real dollars and 119% more in nominal dollars to live the typical lifestyle (which has improved in real terms by 70%) People would be living a better and more luxurious life.

Now, what should we say the inflation rate was over the 20 years? 2% annually for the unchanged basket totaling 49% in 20 years? Or 4% for the constantly improving typical basket totaling 119% more expensive in 20 years?

I think Stan and others may be making the point that if a retiree wants to keep up with the typical wage earner in this particular scenario he needs to spend 4% more annually even though inflation on the unchanged basket is 2% annually. That is indeed something to think about.

And should Statistics Canada be vilified if they say inflation was 2% in our ideal scenario here?

The above was an ideal scenario but it may not be that far from reality of what happened in many 20 year periods in the 1900’s. Typical standards of living increased drastically and at a much faster pace than inflation on an unchanged basket of goods. To keep up with a typical lifestyle took wage growth a good bit higher than inflation. And indeed that wage growth occurred on average.

#77 Stan Brooks on 08.26.18 at 1:20 pm

#66 Gravy Train on 08.26.18 at 9:56 am
#72 Shawn Allen on 08.26.18 at 11:36 am

You are extremely naive, so typical in this place, never questioning the official narrative.
This is exactly the reason for the dire situation we are in.
They screw you up, you say thank you and they keep going, figuring it out: what the heck, it just works!

No one (OK, probably very few) dare to question the bull crap we are bombarded with.

Just look around, prices of everything in GTA from rent to food, energy, gas, have increased on average of at least 15 % annually in the last 2 years and yet ‘inflation’/read CPI bull crap indicator reads mostly sub 2 %, lately around 3%.

What exactly do you do besides eating, living, driving to make that CPI belivable?

Did you even read their methodology? It sounds scientific and trustworthy but it is not.

1. It is a ‘survey’.
2. It measures not prices of the same basket of goods but consumer behavior, i.e. how much you spent on particular CATEGORY of goods/this is not the same goods.

Example: What does ‘meat’ mean? Prime Beef, pork, chicken feet?

Enter the magic of substitution: If quality beef increases at 10 % they make the ‘assumption’ that customer will switch to pork, chicken, then start to measure that.

In essence the CPI measures the spending power of the population, what you can buy with your disposable income.

You can calculate it easily, it requires some basic intelligence:
2 % wage increases lead to 2 % increase in spending so ‘inflation’ is 2 %. With wages stagnating there is a virtual guarantee that ‘inflation’ always will be tame while prices in reality skyrockets.

You eat less, lower quality, spending 2 % more each year, so inflation is 2 % right?

Buzzzz… Wrong!
Inflation means the price of the same quality and quantity of goods. You can call it cost of living and it has increase by at least 7-8 % annually in the last decade.

#78 Stan Brooks on 08.26.18 at 1:26 pm

#76 Shawn Allen on 08.26.18 at 1:08 pm

And I thought you have CFA. So sad.

2 generations ago people were able to support a family of 3 kids with wife not working without university degree, buy a house in a big city and run their kids through university. And actually retire.

A generation ago wife and hubby had to both work to support somehow 2 kids.

Now it is an absolute mission impossible with 2 working parents to raise a single kid in a major city, buy a house, save for retirement.

What exactly is luxurious in that life?

Why do you think they ask for more immigrants, because economy is booming?
No, they need more debt slaves to keep the Ponzi going somehow. Your role is to work until dead and leave nothing.

#79 IHCTD9 on 08.26.18 at 1:27 pm

All I can say about inflation is that, at least for the IHCTD9 compound, it is elastic and highly malleable. I regularly change things up along the lines of what AB Boxter outlined, which enables me to keep my cost of living down – and even reduce it.

Pretty much every mainstream consumer good is cheaper now than it has ever been. Costs that are spiraling up and affecting everyone are all forms of energy, anything supplied or controlled by government, government itself, real estate, taxation/fees, and education. These things are very hard to avoid living in a first world economy, so we all get hammered by just about every one of them.

Yet, even as we must pay these costs, we still have a lot of control over our consumption of these things. Energy costs can be offset by using less, taxes can be offset and avoided in a great many ways, RE costs are largely self inflicted, there are plenty of options for a rational individual. Things like education costs and government fees can be minimized and further offset in other areas.

A guy really only need focus on the expensive handful of areas of life – everything else is cheap as dirt and is going to keep getting cheaper as Global manufacturing and technology continue to drive prices through the floor.

#80 jess on 08.26.18 at 1:30 pm

4% unemployment
Leuthold Group

https://www.businessinsider.com/next-stock-market-crash-wall-street-layoffs-foreshadowed-by-low-unemployment-main-street-2018-8

#81 Stan Brooks on 08.26.18 at 1:34 pm

#76 Shawn Allen on 08.26.18 at 1:08 pm

If you believe that the wages grew by 4 % annually in the last last 20 years and inflation was 2 % then you need professional mental help and I can be only of limited use, I can definitely diagnose you but I am afraid I am not capable of prescribing treatment.

All the ‘growth’ also happens in the upper tax brackets so it is most likely taxed at 40 – 50 % .

My numbers for the last 10 years:
Wage growth at 2 %, net at 1.2 % (considering progressive taxation)
Inflation at 7-8 % which requires an enormous amount fo debt to subsidize ever decreasing quality of life.

Go to the government web site and check the debt stat for the last dedace, total + private debt for a proof.

If what you say is true, i.e. wage increases higher than inflation, debt should not be growing but shrinking, saving should be growing.

The problem with half intelligent/or simply brainwashed people (this is why sometimes they are worse than the plain stupid) is that no matter the situation they find more and more ‘evidence’ (opinion, made up manufactured data, ‘statistics’) to support their viewpoint, without paying much attention to the alternative opinions.

#82 Long-Time Lurker on 08.26.18 at 1:34 pm

#24 ExtraMoister on 08.25.18 at 7:19 pm
I was too young to understand so can any dogs explain why the 2008 crash is held considered so much more severe then the tech crash in 2000? Because the banks got bailed out?On the image Doug posted the 2000 crash looks worse.

>2008: Global. Systemic. Global banks got bailed out because they had bad US bank debt. (Sub-prime mortgage crisis and derivatives -collateralized debt obligations.) Tech crash: dot.com stock market bubble burst in North America.

#36 David Paquette on 08.25.18 at 8:53 pm
It is with trepidation let this comment go.

I am not a 1% but I do have 1 cent opinions. I don’t know what good karma is but sitting on your ass watching doesn’t feel right to me. Make no mistake, I will do ugly things and challenge. Let karma grind me down to a better person over lifetimes. I know that is weird but it is the path I have chosen and will not back down.

My perception of Emerging Market EFT’s valued in us$. If the us$ rises against all other currencies then I would expect the NAV (net asset value) of the ETF to fall and there would be an outflow bias from the fund. Then there is the low yield subject to withholding tax plus currency exchange bank fees. I am waiting to see what the reality is before buying an EM ETF. The US dollar index (dxy) of 95.2 looks low to me from looking at charts and I do not see a downward trend.

My perception says stay away from Emerging markets for now as the odds of lower future prices are high in my opinion. In other words, I suffer from FUD (fear, uncertainty, doubt) when thinking about the currencies of China, Russia, Brazil, South Africa, Turkey, Argentina,
Venezuela …

>The rising US dollar because of rising US interest rates is causing EM debt loans taken in USD to expand larger. Their debt cage is closing in on them.

#83 Leo Trollstoy on 08.26.18 at 1:35 pm

Doug, why is gold sucking?

#84 Karma on 08.26.18 at 1:36 pm

Thanks Doug.

The REIT one is an interesting contrast to perception. I have a couple of thoughts on the issue:

1) As rates rise, the market value of their mortgage debts on the property likely fall faster than the annually appraised valuation of the real estate. This would benefit the equityholders in the short-to-medium term until cap rates “soften” (aka de-compress) to mean revert to a long-term spread over 10-year GoC bond.

2) The starting point of the relative valuation of the real estate in the REIT matters at the commencement of rising rates. For example, if the REIT has most of its assets in, say, Alberta where the oil shock crushed capital values and the assets are relatively undervalued due to poor investor sentiment, then the impact of rising rates won’t likely hurt capital values as much as a REIT that has a lot of real estate in relatively overvalued markets (at the start of the rising rate cycle), such as Vancouver and Toronto multi-family assets (where cap rates are often sub 3% despite limited redevelopment potential). A good example of an outperformer, IMO for the example above, is Boardwalk. It’s up like 25% y/y pre-dividend.

3) It would be interesting to see the return on REITs broken out by property type (i.e. office REITs vs Industrial REITs vs Retail REITs vs Multi-Family REITs) to see what the market is rewarding for the risks taken.

#85 Damifino on 08.26.18 at 1:57 pm

#76 Shawn Allen

Now, as a result would people consume the same basket of essentials and save the excess 70%? Of course not.
———————————-

If I were a young man, I’d probably save the excess. In fact, as a young man, it’s exactly what I did. As the economy in which I lived was growing, my list of needs and wants tended not to grow commensurately along with it. The result was an amassing of wealth that has served me beyond the daily grind I finally escaped.

But it was more than that. It became clear to me, at quite an early age, nobody beyond my mother (bless her kind soul) was particularly interested in my long term health, wealth and happiness.

Thus, I made it my business never to live from pay check to pay check and always retain a healthy lump of ‘exit money’ to escape intolerable situations. Over time that grew to be quite large and I’m thankful to have grown up in a time and in a country where such things were possible, and that I had the sense to realize it. (A few bad employment situations helped a lot in that regard).

But again, that’s just me. You’re correct that most people will blow their income as fast as possible. People who have done so all their lives now surround me. They’re tired, unhappy and anxious about the future. But they do have some great stories to tell.

#86 Doug Rowat on 08.26.18 at 2:14 pm

#75 Fluorine on 08.26.18 at 12:25 pm
Great post, Doug!

One thing I’ve always wondered… why do the distributions of preferred ETFs (like CPD, XPF, and ZPR) go down over time? Is it due to the issuers calling the high paying shares and they have to buy ones with less yield? Does it have to do with the interest rates at the time? It seems to me that it shouldn’t matter…

The reset spreads for preferred shares have been compressing for some time. The reset ‘gross up’ equates to the yield premium preferred-share holders receive over the GoC 5-year bond yield at the time of reset. Last year, I believe, the gross up was something like 3%. This year that has dropped to about 2.5%. In other words, dividends have been ratcheting lower. Preferred shares are still great, but not as great as they were a few years ago.

–Doug

#87 IHCTD9 on 08.26.18 at 2:41 pm

#76 Shawn Allen on 08.26.18 at 1:08 pm

Inflation Perception vs Reality

Now, as a result would people consume the same basket of essentials and save the excess 70%? Of course not. The typical person would spend more. The typical lifestyle would involve more eating out, more travel, better vehicles and on and on.

—————

Boston’s Law of Clutter:

“In any household, junk accumulates to fill the space available for its storage.”

You might also say:

“In any household, lifestyle inflation increases to consume the cash flow available.”

You see this all over. I guess this is why half or more of our GDP is consumer spending. I’d have to say kept within the limits of real cash flow – this is all good. Obviously, this practice died decades ago, and we are now pulling future consumption into the present via a colossal binge on cheap debt.

I don’t know what the plan is, but it either gets paid back with interest in an orderly fashion, or the economy gets napalmed to ground level.

#88 Where's The Money Greedo? on 08.26.18 at 2:47 pm

Re: #62 Wrk.dover on 08.26.18 at 7:31 am
#60 Where’s The Money Greedo? on 08.26.18 at 2:55 am

Also Bill opened the door wide for the Asian Triads in Washington, proof is abundant.

————————————

Repeal of the Glass Steagall bill is the Clinton legacy which all retirees will pay for with their imploding retirement funds until death do them part.

That one act of terror was the mightiest of all.
The entire world will pay for forever it looks like by now.
+++++++++++++++++++++++++++++++++++++++
You get it.
What will our Canadian political leaders be known by. And how little the CRA did to prosecute them.
Same thing happening here…One slice at a time, for the little guy…But the big fish, nuttin’:
http://www.cbc.ca/news/business/cra-tax-gap-foreign-holdings-1.4726983
https://www.cbc.ca/news/business/paradise-papers-canadians-1.4386839
Roblaw set up tax dodge in Delaware, the biggest tax dodge jurisdiction in the world, in addition to, Bahamas, Bermuda. Barbados, Canary Islands. Panama are other jurisdictions that launder. Funny Delaware’s so close to Washington and operates until midnight, lots of work….
https://www.nytimes.com/2012/07/01/business/how-delaware-thrives-as-a-corporate-tax-haven.html
Here’s Roblaw’s statement: https://www.documentcloud.org/documents/4165479-LOBLAW-STATEMENT-to-CB
So why are they being sued by CRA if they are so legit? $404 million and counting.

#89 MicroGX on 08.26.18 at 3:44 pm

Thanks Doug, look forward to it.

#90 After Communism on 08.26.18 at 6:52 pm

Comparison of terrorism death to natural death is a false perspective since we all die but suffering a violent death is more unexpected.

A valid perspective is terrorism + violent crime by terror type people, per capita now, compared to forty years ago as a measure of regress or progress.

#91 B Wilds on 08.26.18 at 11:05 pm

While the perception of economic growth appears robust and a solid GDP number can result in a feel-good moment it can also mask growing weakness in various parts of the economy. Quantity simply does not make up for the reality of poor quality, we are talking about two totally different animals.

The false narrative that simply growing the size of an economy even by using deficit spending undercuts the importance of a solid economic and the long-term stability of the financial system.

#92 Simon on 08.27.18 at 10:00 am

Nice post! It is informative, concise and the format makes this a good read.