Danger, danger

Sell. Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small. China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the ‘Goldilocks love-in’ of the last two years. Risks are high.

Now, relax.

Those words were a hoax. A marketing sham. Intended to gain exposure, notoriety and media exposure. And it worked. When analysts working at the Royal Bank of Scotland issued that report in January, 2016, it made global headlines and helped scare the poop out of millions of investors. Bad news sells. If you want attention, stand there and yell “Fire!”.

So what happened?

In January of that year the S&P 500 – the broadest measure of the world’s biggest equity market – sat at 1,918. Yesterday it closed at 2,998, for a gain of 56%. Oil, which RBS said was going to $16, trades at $54.

You might have noticed for all of 2019 analysts seeking attention have been warning of a recession. In that period of time the Dow is up 16% and Bay Street is ahead 15%. Investors in bonds have made a pile of money as rates fell and prices rose. US unemployment is at a 50-year low and Canada has created a record number of new jobs in the last year. And that’s despite a trade war, Brexit, Syria, Trump, Hong Kong, inverted yields and impeachment.

Investors or their advisors sitting on the sidelines in cash since 2016 have paid a huge price for their wussiness. Ditto those who believed the doomy talk a year ago. The best time to invest is when you have the money, and the best possible strategy (history tells us) is to stay invested.

Anyway, here’s the latest iteration of hellfire. This time from Bank of America Merrill Lynch.

Analysts there have just declared the most successful investing strategy of all time – the balanced portlfolio – as ‘dead.’ The rationale is that (a) US government bonds pay peanuts, (b) the negative correlation between stocks and bonds is breaking down and (c) there’s a bond bubble which will pop since too much money has gone into fixed income assets because of an aging population and slowing economy.

Their fix? Buy more stocks.

Is this smart advice? Have things changed so much in the past few months or years that a time-honored approach is kaput? Is it different this time?

Well, don’t get excited. Or scared.  First, the BoA guys are talking about a portfolio with a huge 40% bond weighting (twice what you should have) and comprised solely of US Treasuries (which you should not own). And second, it’s all about risk. By trying to reach for more return, they’re suggesting you stray into the red zone.

Let’s ask one of my fancy, suspender-snapping portfolio guys to comment. Here’s Sinan, who’s earned his stripes on both Wall and Bay Streets. So, what’s the message for investors?

“With the U.S. Treasury 10-year yield currently below 2% and many other government bonds in Europe and Japan yielding negative rates, it’s easy to question whether it still makes sense to hold 40% of a portfolio in bonds,” says Sinan. “However, as always, there remains a need for investors to control risk in a portfolio, especially those approaching and in retirement. Significantly increasing exposure to equities at this stage of the economic cycle and at current valuations substantially increases the risk of a portfolio.”

“Equity markets can be extremely volatile in the short-term and experiencing a significant decline over a short period of time is always a possibility. The future is uncertain and risks to the global economy are building so in our opinion it is very important to maintain balance between equities and bonds and diversification within both.

“There are alternatives to low yielding government bonds such as corporate bonds yielding 2-3% and preferred shares yielding close to 5%. Also, Canadian dividend paying prefs benefit from the dividend tax credit so on a bond equivalent basis the effective yield is over 6%. While corporate bonds and preferreds add credit risk to the fixed income portion of the portfolio they are less risky and less volatile than equities but offer yields in-line with dividend paying equities. The key is to build a well-diversified bond portfolio that includes the right mix of government bonds, corporate bonds and preferred shares while re-balancing periodically.

“Over the long term a balanced and globally diversified portfolio has grown at an average annual rate of ~7%. Currently, a well diversified 60-40 stock-bond portfolio yields ~3.5% which is in-line with higher yielding dividend paying equities but with substantially less risk. Most importantly, a balanced 60-40 stock-bond portfolio significantly improves the odds of not losing money over a 10 year period while still positioned to achieve solid growth above the rate of inflation. Most importantly, a well balanced portfolio provides a proven and disciplined system that keeps emotions in check. Often investors become overconfident and misjudge risk. They think they’ve identified trends which often turn out to be expensive assumptions.  Don’t abandon a proven system that has worked over the last several decades.

“Imagine you took the advice of the Merrill Lynch strategists and substantially increased your exposure to dividend paying equities.  You expect to earn 10% a year vs a 60-40 stock-bond portfolio delivering 5%. Unfortunately, your timing is off and you pay too high a valuation for the equities as the economy contracts more than expected and equity markets lose half their value within the first year (highly unlikely, but just an example). Your reduced bond exposure is no longer large enough to help offset the significant decline in the equity allocation. The equity market finally finds a bottom and starts to recover but even if the suggested portfolio of ‘more dividend paying stocks and less bonds’ generates twice the return of a balanced and diversified 60-40 portfolio, it will take you more than 16 years to overtake the balanced portfolio simply because you paid too much and lost too much. This is not the time to substantially increase risk in an attempt to earn a little more because bond yields have dropped and the negative correlation between bonds and equities has recently declined. “

Exactly. Investors should have two goals: (a) don’t lose money and (b) get a reasonable rate of return. Swallowing more risk to enhance returns means you increase the odds of failing both tests. Meanwhile emotion makes folks do weird things – buying stuff that goes up and selling at a loss.

Then there’s this danger: listening to people who make money when you get excited and trade. Like the banks. And the brokerages. And advisors paid on transactions.

Turn off BNN. Go walk the dog. It’s all good.

73 comments ↓

#1 joblo on 10.18.19 at 3:00 pm

https://calgaryherald.com/opinion/columnists/smith-alberta-heres-how-to-stop-being-a-national-doormat

Hey Alberta, whether Trudy or Andy here ya go!

#2 Flop... on 10.18.19 at 3:04 pm

#35 Spaccone on 10.17.19 at 6:35 pm
My thinking has always been….hmmm 1 or 2 piles of bricks that you’re taking a gamble on, in a place that’s a frozen over hellhole half the year…or hundreds of the best companies in the world. Decisions-decisions…

///////////////////////

Hi Spackie, you might enjoy looking at this recent article.

There is an app for that.

Or as I say I my house, there is a howmuch article for that…

M45BC

“The Highest-Paying Companies in the U.S.

According to the most recent data from the U.S. Census Bureau, the median household income in the U.S. is $61,937. Some companies are well-known for having sky-high salaries that are more than twice the median household income. Our new visualization ranks the highest-paying U.S. companies by median salary based on the latest research from Glassdoor.

Top 10 Highest-Paying American Companies

1. Palo Alto Networks: $170,929
2. NVIDIA: $170,068
3. Twitter: $162,852
4. Gilead Sciences: $162,210
5. Google: $161,254
6. VMware: $158,063
7. LinkedIn: $157,402
8. Facebook: $152,962
9. Salesforce: $150,379
10. Microsoft: $148,068

Interestingly, some of the most profitable companies in the world, such as Apple and J.P. Morgan, are not listed among the highest-paying companies in America.

Instead, firms that specialize in social media networking, cybersecurity, cloud computing, and software are the most-represented on the Glassdoor list.

In fact, some estimate that there will be 3.5 million unfilled cybersecurity jobs by 2021, which could drive median salaries in this field up even further. But at the same time, workers at some tech companies like Google and Facebook face an uncertain future due to increased public scrutiny and calls for regulation. As the economy, federal laws, and job market demands continue to evolve, the list of highest-paying companies could also look very different in the future.”

https://howmuch.net/articles/highest-paying-american-companies-2019

#3 Tater on 10.18.19 at 3:29 pm

To be fair to the RBS guys, the Jan-Feb period of 2016 had a 10% drop on the SP500 and 13% on the FTSE. So, they weren’t totally wrong.

The stock/bond negative correlation IS a recent phenomenon, though. And there’s no logical reason why it should exist. Will it persist for the next year? Decade? longer? Who knows. But it is absolutely not the historical default.

No reason not to tap out a little SPY short here, especially if you own a nice portfolio of value stocks.

#4 SoggyShorts on 10.18.19 at 3:48 pm

There’s not a lot of 50% drops in all equity portfolios though…

For those with long retirement horizons (40-60 years) the gains from higher equity weighting have historically been needed for success. (success being defined as dying with money left over and a 4% withdrawal)

#5 James on 10.18.19 at 3:49 pm

Mr Black has spoken. Its up to Canadians to toss Trudeau’s and his cronies out on the street so we can see if they could fend for themselves like the rest of us have to. They have been sucking us dry for four years now does anyone really think he will change?

https://nationalpost.com/news/politics/election-2019/conrad-black-trudeau-has-failed-voters-should-toss-him-out

#6 Tannhäuser Gatekeeper on 10.18.19 at 3:49 pm

The median dividend paying security in the S&P TSX currently yields 3.36%. An equal weight portfolio of the 92 securities yielding at least this much would pay 5.67%, and would expose you to the size and value factors relative to holding the index.

Any scenario where that portfolio declined by half would be apocalyptic. Is this the start of a series of scary Hallowe’en stories?

#7 S.Bby on 10.18.19 at 3:53 pm

“… the economy contracts more than expected and equity markets lose half their value within the first year”

50% drop when was the last time this happened?

#8 Sebee on 10.18.19 at 3:54 pm

Hello Garth FM 108.1!

What happened to DEBT WEEK?

Can I make a request that Garth FM go back to DEBT WEEK please? 6 straight days cheering us up about how much money Canadians owe…you know $1.77 for every dollar earned and all that?

While we’re reading it we should play songs like:

Money for nothing, debt for free – by Dire Straits (how appropriate)

Opportunities (Let’s borrow lots of money) by Private Lending Boys

Easy Money – by Billy Loans

If I had a $1,000,000 (I still couldn’t buy you a house in Canada) by the Barenaked Wallets

Material Girl (no prenup) by Mad On Naahhh.

And of course…Bills Bills Bills by Destiny’s Children (…in debt before they were born.)

DO NOT play Mo Money Mo Problems – few in debt agree with this.

#9 Mona on 10.18.19 at 4:37 pm

#5 James on 10.18.19 at 3:49 pm said “Mr Black has spoken.”

Good lord. You actually quote the ex-con Conrad?

He who wears his PRISON TERM like a toilet seat around his neck?

ROTFLMAO.

You must be a Trumpster!

#10 Paddy on 10.18.19 at 4:45 pm

“It will take you more than 16 years to overtake the balanced portfolio simply because you paid too much and lost too much”……uh what??? This applies to a 100% equities portfolio?? 16 years? The US market took about 5 years after the crash of 08 to recover. I’m an equity cowboy i guess. If shit tanks, don’t sell at the bottom.

#11 Tater on 10.18.19 at 4:51 pm

#7 S.Bby on 10.18.19 at 3:53 pm
“… the economy contracts more than expected and equity markets lose half their value within the first year”

50% drop when was the last time this happened?
————————————

In the SP500 both ’02 (-50%) and ’09 (-57%).

TSX did -54% in ’02 and -50% in ’09

#12 Steve French on 10.18.19 at 4:54 pm

French here.

What’s the word from down in freedumb loving Californiiiyae there Smoking Man?

Did you cast your ballot?

My guess is you voted for Mad Max?

But it might have been during one of your drunken stupors.

Ahhh.. i miss ole Rob Ford sometimes. We was an idiot. But a useful idiot.

Doug.. not so much.

Keep on rockin’ Smoking Man and don’t let the haters get to you….

“The Smoking Man abides.” chuckle.

I don’t know about you, but I take comfort in that.

It’s just good knowin’ he’s out there.

Takin’ ‘er easy, for all the rest of us Canadian sinners.

#13 Sovavia on 10.18.19 at 4:59 pm

(1) Investors in government bonds include central banks; interest rates can remain low for a very long while (many dog lives).

(2) The return on assets for banks is lower than long-term bond rates; bank equities are highly leveraged investments.

(3) Contrary to popular belief, Canadian banks are riskier bets than American ones.

#14 one big joke on 10.18.19 at 5:02 pm

a 60/40 portfolio had horrendous returns in the 60’s 70’s and early 80’s. absolutely horrendous. the SP inflation adjusted total return peaked in 1968, lost 50% and you didn’t break even until 1983/4. Bonds were an even worse investment. Unless you were holding only tbills for 20 years. nope.. 60/40 doesn’t always work.

if inflation returns, watch out.

#15 Xpat on 10.18.19 at 5:07 pm

Sell side fear tactics as per usual. Do the opposite.

#16 Stan Brooks on 10.18.19 at 5:21 pm

#14 one big joke on 10.18.19 at 5:02 pm

The inflation is already here, just the sheeple does not see it yet, which is not a surprise as the sheeple is stupido.

The ‘return’ of bonds is due to expected price increase/appreciation when nominal rates decline and go negative.

Imaging now inflation north of 6-8 % and negative nominal rates… It is coming, the real rates are already negative, recognized inflation of over 2-2.5 %, real 3 times that with ‘interest rates’ of 1.25 %, real 0-0.5 % on locked deposits at the bank.

Let’s see for how much more can the statistics, the government and the banks lie about it.

Cheers,

#17 Shawn Allen on 10.18.19 at 5:28 pm

Banks are highly leveraged?

13 Sovavia on 10.18.19 at 4:59 pm said:

(2) The return on assets for banks is lower than long-term bond rates; bank equities are highly leveraged investments.

***************************************
That is absolutely true. For example the last I checked Royal bank’s assets were some 20 times larger than its common equity but closer to “only” 12 times or so if the assets were “risk-adjusted”.

Sounds very risky but somehow they have managed to produce mostly steady rising earnings.

They are willing to leverage things like CMHC loans almost infinite times. (They allocate very very little if any common equity to CMHC loans and it is all blessed by bank regulators.) So far, so good.

This is perhaps why banks tend to trade at fairly low P/E ratios. There actually is a good amount of risk due to the leverage.

#18 Andy is voting for People's Party on Oct 21 on 10.18.19 at 5:37 pm

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#19 Andy is voting for People's Party on Oct 21 on 10.18.19 at 5:38 pm

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#20 Andy is voting for People's Party on Oct 21 on 10.18.19 at 5:47 pm

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#21 Bob Dog on 10.18.19 at 5:52 pm

If everything is wonderful, why are interest rates going down?

If you consider the rate of inflation in food, interest rates should be 10%

#22 espressobob on 10.18.19 at 6:13 pm

Own the major indices by way of ETFs along with bonds and prefs that pay you. Sweet.

Lifes way too short trying to beat something even the pros fall short on. Trading equities with a mindset of superiority leads to a world of pain. Mutual funds ain’t proof of that?

Ride the wave, all the greatest investors never try to time the markets.

Quaffing some good ale sounds more productive than being an uber trader.

#23 Andrei on 10.18.19 at 6:17 pm

Garth – what is wrong with owning US bond ETF as part of a diversified portfolio ?

Why would you? – Garth

#24 SoggyShorts on 10.18.19 at 6:19 pm

#21 Bob Dog on 10.18.19 at 5:52 pm
If everything is wonderful, why are interest rates going down?

If you consider the rate of inflation in food, interest rates should be 10%
**********************
And if you consider the inflation rate on 55″ TVs the interest rate should be negative 30%…

I think you’ve spent too much time in the Stan Brooks school of inflation where only the price of food and rent in Toronto should be included in calculations- forget everything else that people spend money on and obviously forget that anyone lives outside the GTA.

#25 Andrei on 10.18.19 at 6:39 pm

Garth – what is wrong with owning US bond ETF as part of a diversified portfolio ?

Why would you? – Garth

Highest yield in developed markets, USD exposure, and in RRSP accounts, no tax on interest

#26 crazyfox on 10.18.19 at 7:01 pm

#14 one big joke on 10.18.19 at 5:02 pm

That’s a valid point. So, what could cause a return to inflation? A currency crisis from public debt would do it, here AND abroad.

A housing bubble gone bust could also do it. Canada has been a bubble now for what officially… 8 years or more? We’ve tried to tame valuations with some success through regulation trying to allow incomes to catch up and its worked to some degree but we are still in one. If an elected government loosened housing regs, the bubble inflates once again and the next recession could demand a government bailout. When the U.S. housing bubble blew up, some 2.2 trillion was spent on a bailout of 6% of the population if I’m not mistaken, was it more? What would the size of a bailout look like here, if, say, taxpayers had to pony up 5% defaults? 7, 8, 10%? How big a bubble do we want to go? Like Spain’s? (22% as I recall) When I look at what political parties are offering in Canada, I shake my head.

Canada’s intergovernmental debt to GDP is, let me see… if the Canadian taxpayers association is at all accurate (I really can’t say but I’ll use it anyway):

https://www.debtclock.ca/

Federally we are $696.5 billion in the red.
Provincially, I will use guest blogger Ryan Lewenza’s number, $700 billion total. Add a wild guess $200 billion in municipal debt and Canada is 90% public debt to GDP, same as Ryan’s assertion although I must confess to laziness and guessed.
We are 5 to 10 years away from 95 to 100% public debt to GDP of which, this is the area where a nation is vulnerable to a currency crisis reflected in a currency the international markets have lost faith in with bond rollovers and new debt reflected with much higher rates.

And, its not just us:

http://worldpopulationreview.com/countries/countries-by-national-debt/

The U.S. is well past that now and the problem with this is, this is the nation we owe the most to… so there’s that. If the U.S. has a currency meltdown, they can take us with them and they are at, what, 113%?

Where is this all headed… currency consolidations? I think so, towards the end but not for a while yet and it will be highly disruptive when it comes. Currency crisis? With Canada and the U.S., I think its still years away. A currency crisis triggered by a blown up housing bubble? We would need to elect a government that loosens lending regs OR higher inflation triggering rates. Still years away or never, lets hope.

Climate change can do it:

https://inews.co.uk/news/business/bank-of-england-governor-mark-carney-warns-that-firms-ignoring-climate-crisis-will-go-bankrupt-812840

If Canadians drag our heels and not adjust to the new realities before us, entire industrial sectors could go down through regulation alone not just here but internationally. In 2 years? I think not. Within 3 to 5, its possible and guaranteed within 10 with the advent of regulations and the global mass production of EV’s. Absolutely and the thing is, regulators or the markets world wide may not be able to fix climate change. Inflation can and will come from the results of climate change all on it’s own.

We view climate change as a long term problem but it’s not and there’s the rub.

With climate change, we will be in shocked to learn (don’t know why, ok I do) that the train has left the rails in 2021/2022 and get to find out the hard way in 2025 and beyond. Inflation is guaranteed to hit possibly sooner than 2025 but definitely no later than 2025 to 2030 from climate change all by itself without world regulators stepping in (which they will), without a commodity crash in oil (light crude will get hammered), without a currency crisis (also likely), without a Canadian housing bubble blowing up, without market force inflation or a doubling/tripling of rates, without all of that, I’m basing this on the destruction of a changing climate on it’s own especially 2025 and beyond. People just aren’t taking it seriously and even if they were, it’s not a matter of prevention anymore, but a matter of damage control and survival because, in case we haven’t dawned on it yet, that’s where we are at now and we can’t even agree on a carbon tax.

#27 Timmy on 10.18.19 at 7:12 pm

The worst crash in over 80 years the market recovered in a few years, so if you have enough funds for 4 years to ride out a bear market, then why hold bonds, given that interest rates will rise?

https://www.marketwatch.com/story/2007-09-bear-market-now-totally-erased-2012-04-04

#28 Yanniel on 10.18.19 at 7:27 pm

Half of my money is on the balanced portfolio (passive strategy). The other half on a momentum strategy. I like the convexity of the latter.

Both are very low cost to implement. Very little trades, achievable with cheap ETFs, very little maintenance (even the momentum).

I like the extra diversification of having two strategies. I am trying to expand the “do not put all your eggs in one basket”.

#29 Yukon Elvis on 10.18.19 at 8:04 pm

Conan O’Brien
@ConanOBrien
It’s smart of Trudeau to hold the election before Halloween, I mean why even tempt yourself?
3:14 PM · Oct 17, 2019·Buffer

#30 Sail away on 10.18.19 at 8:04 pm

A few commenters are missing the point slightly on the balanced portfolio in saying that an all-equity portfolio will eventually recover.

One of the most powerful parts of a balanced portfolio is that after stocks crash, you can rebalance and pick up great bargains. With an all-equity portfolio, you wouldn’t do this since it would mean locking in big losses.

#31 acdel on 10.18.19 at 8:06 pm

I was more captivated by your blog pic today and did not even read what was next! :)

#32 Shawn Allen on 10.18.19 at 8:19 pm

Information on Inflation

If anyone wants to explore the inflation rate and what is in the CPI data, use the link below.

https://www150.statcan.gc.ca/n1/pub/71-607-x/71-607-x2018016-eng.htm

You can see the official estimated inflation rates of different items if you play around with the interactive tool.

#33 Shawn Allen on 10.18.19 at 8:24 pm

Inflation – prove whatever you want

Click on “price Changes” at the link I gave just above. You can get the chart to show that prices are up exponentially since 1914. Classic hockey stock.

Or you can show the year to year inflation and show that it is quite tame right now. Whatever fits your agenda.

Or choose an item with big inflation or one with tiny inflation or deflation. Grab data to show whatever your particular view is.

Warning: People (maybe even Stan) using this could learn something if they are not careful.

#34 Tannhäuser Gatekeeper on 10.18.19 at 8:26 pm

What I like about Canadian equities right now:
On a forward P/E basis, the market is 1/3 of a standard deviation below its long term average. Considering the Fed Model relating stock prices to bond yields, this is pretty amazing. Foreign investors see us as a petrocurrency with a housing bubble attached, our big domestic pension funds are chasing sexy private equity and foreign assets, and middle class Canadians are too house poor and indebted to be putting any cash into Canadian stocks. Who’s left to invest? Me, that’s who. Every stock in the S&P 500 is probably being analyzed by 5,000 CFA charterholders, every stock in the Russell 2000 by 500. Not here! If US corporations’ mantra is “Your margin is my opportunity,” Canadians are more like “Let us conspire to fix the price of bread.” Which would you rather own?

What I like about fixed income:
Nothing. Somebody’s got to hold govvies yielding 1.5%, IG corporates yielding 3%, and junk paying 6%, (usually while moaning about government deficits, high corporate debt levels, and weak covenants) but it doesn’t have to be me. Call me the last of the bond vigilantes.

Nobody (smart) buys bonds for the yield. Amazing how many times that has to be said… and people still don’t get it. – Garth

#35 Bytor the Snow Dog on 10.18.19 at 8:31 pm

#18 Andy is voting for People’s Party on Oct 21 on 10.18.19 at 5:37 pm
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#19 Andy is voting for People’s Party on Oct 21 on 10.18.19 at 5:38 pm
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#20 Andy is voting for People’s Party on Oct 21 on 10.18.19 at 5:47 pm
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—————————————–
I doubt it.

#36 acdel on 10.18.19 at 8:52 pm

https://calgary.ctvnews.ca/trudeau-coming-to-calgary-for-saturday-evening-rally-1.4645165

Why???????????????????????????????????????????

Save the carbon footprint and do not bother! Could care less about us through his whole campaign and now he will grace us with his presence at the end of his campaigning; seriously????????????? This guy is beyond delusional!!!!!

#37 Steven Rowlandson on 10.18.19 at 8:57 pm

“Equities and credit have become very dangerous.”

Credit dangerous? What do you think high quality bonds are?
I’ll tell you; they are the extension of credit to debtors by creditors. All things priced in the markets and all means of exchange sans gold or silver is debt or the extension of credit by a creditor. You say credit is dangerous…. Indeed it is if your debtor can not or will not redeem his or her debt.

Sovereign debt is considered risk-free. It is backed by the power to tax. – Garth

#38 mike from mtl on 10.18.19 at 9:13 pm

#25 Andrei on 10.18.19 at 6:39 pm
Garth – what is wrong with owning US bond ETF as part of a diversified portfolio ?

Why would you? – Garth

Highest yield in developed markets, USD exposure, and in RRSP accounts, no tax on interest
//////////////////////////////////////////////////////////////////////

And their preferreds have an actual positive total return!

And no tax credit! – Garth

#39 meslippery on 10.18.19 at 9:15 pm

Significantly increasing exposure to equities at this stage of the economic cycle and at current valuations substantially increases the risk of a portfolio.”
——–
At some time you have to sell the winners even if only to buy back later. (Ideally at a lower price)

———
Don’t abandon a proven system that has worked over the last several decades.
——–
Our employers and the Government folk who let it happen abandoned a proven system.
Good paying full time jobs with great benefits and defined pension.

#40 Shawn Allen on 10.18.19 at 9:36 pm

I like preferred shares now, but…

#38 mike from mtl on 10.18.19 at 9:13 pm
#25 Andrei on 10.18.19 at 6:39 pm
Garth – what is wrong with owning US bond ETF as part of a diversified portfolio ?

Why would you? – Garth

Highest yield in developed markets, USD exposure, and in RRSP accounts, no tax on interest
//////////////////////////////////////////////////////////////////////

And their preferreds have an actual positive total return!

And no tax credit! – Garth

************************************
Yes, Canadian rate reset preferred shares give the dividend tax credit. AND, when sold they have mostly given capital losses so that can be used to offset capital gains on other investments. (This last point is I guess a back-handed compliment, or a damnation with faint praise)

#41 Yukon Elvis on 10.18.19 at 9:44 pm

And no tax credit! – Garth
……………..

Right you are. I fear losing that tax credit. How else are they gonna pay for all the free ponies they are promising after they are re-elected ?

#42 Millennial Realist on 10.18.19 at 9:49 pm

Paleo Boomers become irrelevant in:

4 Days and Counting………..

#43 Linda on 10.18.19 at 9:56 pm

It has been over a decade since the GFC of 2008, but were not both the Bank of Scotland & Merrill Lynch teetering on the brink of disaster during that time? I know that wasn’t unusual – just about every financial institution & brokerage were having issues – but my point is that why would anyone still believe in anything said by these institutions? Depending on the source, one would perhaps be better off doing exactly the opposite of whatever they proclaimed one should do. Certainly I’d want to see a detailed analysis of just why they believe ‘the end is nigh’ & that would need to be backed by cold, hard proof to boot. NOT ‘ifs’ & definitely not ‘in our opinion’. One thing 2008 did was blow off the fairy dust of superior financial knowledge from most of these institutions. It was quite clear that most of them didn’t have a clue. Not quite what one pays a fund manager for, now is it?

#44 Renter's Revenge! on 10.18.19 at 9:58 pm

So, given the spectacular returns of the S&P500 that came after BusinessWeek declared the Death of Equities 40 years ago, does that mean that a 60/40 balanced portfolio will do amazingly well over the next 40 years?

#45 John in Mtl on 10.18.19 at 10:09 pm

Shawn, thanks for this – very interesting and fun to play around with. Amazing datasets!

#32 Shawn Allen on 10.18.19 at 8:19 pm
…Information on Inflation

If anyone wants to explore the inflation rate and what is in the CPI data, use the link below. …

#46 oh bouy on 10.18.19 at 10:11 pm

interesting and a bit sinister imo.

https://www.theglobeandmail.com/politics/article-kinsella-firm-hired-to-seek-and-destroy-berniers-peoples-party/

#47 Treasure Island CEO - 34,097,044.88 Offshore on 10.18.19 at 10:15 pm

Why are you defending the recession so badly Garth?

It is coming baby! And nothing motivates the real estate market like job loss.

Folks, we have some motivated sellers. They are one pay cheque away from foreclosure.

40-year amorts coming.

#48 Doug in London on 10.18.19 at 10:25 pm

So what was I doing in January 2016, selling my stocks? Hell no! I was backpacking, touring around in India. Quite a cultural experience. Come to think of it I recall, among many other things, submitting buy orders from an internet cafe somewhere in Mumbai. You are supposed to buy stocks, ETFs, and other assets when they’re on sale, aren’t you?

#49 Tannhäuser Gatekeeper on 10.18.19 at 11:09 pm

Nobody (smart) buys bonds for the yield. Amazing how many times that has to be said… and people still don’t get it.

Of course not. Because it represents the greatest example of thesis creep in the history of investing.

– First, investors bought bonds for the yield, and only the yield, held to maturity.
– Then Markowitz showed that a mix of high quality stocks and high quality bonds with decent yields provided superior risk adjusted returns — up until then. Now investors bought bonds for yield and volatility reduction.
– Then the 1970s happened and investors learned that correlations weren’t always negative. “Certificates of confiscation,” they called them.
– And lately, we’ve had three decades of mostly positive correlations and falling interest rates. Bond portfolio gains, which used to come mainly from the coupon, now come almost entirely from capital gains. Bond investors have become momentum investors. Bonds are bought with a guaranteed real loss to maturity, and some are even bought with a guaranteed nominal loss to maturity. The only rationale is they’ll go up, and you can sell them to a “greater fool” willing to take on even greater losses, to rebalance your portfolio.
– Lately, the fixed income world has followed Bogle’s and equity’s lead, marketing bond index funds. Whereas an equity index fund holds the most stock of the companies which investors think most valuable, a bond index fund holds the most bonds of the companies which have amassed the most debt. Progress!

It’s easy to slag bonds after a long bull market for stocks, that’s for sure. But I can buy quality equities with solid earnings, whose dividends increase by more than CPI every year. While I watch fixed income investors, usually known as models of conservatism, lend billions to the likes of Uber, Tesla and WeWank. I wonder what Michael Milken thinks of it all?

If rates keep declining at a decent pace, bond investors will keep winning. If they trade in a range, with volatility, rebalancing may keep working. If they become much less volatile at current rates or lower — as in Japan — they will be dead money. If rates go up, big losses. If CBs decide to raise their inflation targets, big losses. When President Warren is sworn in, I don’t know.

#50 Yabba Dabba Doo on 10.19.19 at 12:03 am

If you buy a zero return bond, you are guanteed to lose money if held to term. That does not include loss from inflation as well. A double whammy.

Even the Bond King Bill Gross recommends not buying bonds at today’s prices/yields. Stocks are the only game in town. Even Buffett will tell you that. The Blue Chip dividend payers that is….

#51 NoName on 10.19.19 at 12:09 am

Some people worry about climate change, other about blue light which actualy makes more sence. I remember some time ago i posted “led light are making you crazy” something along those lines, and i was called crazy, but now new study not just that led are making you crazy, they are also probably shortening your life… Cant wait to see incandescent bulbs back on shelf.

But luckily i am here to help, with link to blue light protecting glasses, and to sugest to get worm hue definetly frosted bulb, it helps wit retina and cascadian ritam. Maybe in time someone come up with something for mood/crazy other than a pill…

https://www.legacysupply.co/blue-light-computer-glasses/

—-

The LED technologies are relatively new; therefore, the long-term effects of exposure to blue light across the lifespan are not understood. We investigated the effects of light in the model organism, Drosophila melanogaster, and determined that flies maintained in daily cycles of 12-h blue LED and 12-h darkness had significantly reduced longevity compared with flies maintained in constant darkness or in white light with blue wavelengths blocked. Exposure of adult flies to 12 h of blue light per day accelerated aging phenotypes causing damage to retinal cells, brain neurodegeneration, and impaired locomotion.

https://www.nature.com/articles/s41514-019-0038-6

#52 Ponzius Pilatus on 10.19.19 at 12:18 am

The US military uses 40 year old technology to manage Nuclear weapons.
And an unstable President on the button.
And we worry about RE.

https://www.engadget.com/2019/10/18/us-military-nuclear-missiles-floppy-disks/#comments

#53 Tony on 10.19.19 at 1:15 am

Sell only to rebalance. Buy continually. Ignore the news. Never bet against America.

#54 Smoking Man on 10.19.19 at 2:00 am

Risk vs Reward.

You can aspire to be the best Starbucks coffee bitch. No risk.

Or you can be drug lord. Lots of risk and big money.

Making loot requires risk. If you little shits think you are going to conficate the loot via the state. I made my loot taking huge risks. You have no idea of the character of your enimy.

Thrives and tax collectors always lose.

https://youtu.be/xvaEJzoaYZk

#55 Smoking Man on 10.19.19 at 2:25 am

Father of rock. Been copied by freeks that don’t own originally.
Scripted suck ups..

I hate the left..

https://youtu.be/PsfcUZBMSSg

#56 curious goat on 10.19.19 at 6:14 am

I agree with staying invested for the long term but the guy that called the US housing crash says index investing is in a bubble. I will stay the course.

https://www.bnnbloomberg.ca/the-big-short-s-michael-burry-explains-why-index-funds-are-like-subprime-cdos-1.1310874

#57 NoName on 10.19.19 at 6:30 am

#52 Ponzius Pilatus on 10.19.19 at 12:18 am

I red that yrs back, but ion’t think that you know inginiusnes of running a keys on floppy disk. But when you understand difetance between copy and xcopy it’ll be clear to you.

#58 Good time Charlie on 10.19.19 at 7:51 am

Currently there are fewer than 50 million millionaires on the planet. Seriously, you’d think there’d be more given the price if real estate in Vancouver. How many of those 50 are real all cash millionaires sans inflated real estate? Who knows. Likely fewer than half are cash millionaires.

Now figure that there’s 7 billion people . That means less than one half of one percent of all human beings are millionaires. Does that make you feel better? You’d think that with all your advantages you’d be worth a lot more.

If you’re not a multimillionaire now , what’s this nonsense about waiting till your sixty?

#59 crowdedelevatorfartz on 10.19.19 at 8:05 am

@#37 Steve Rowlandson
“Indeed it is if your debtor can not or will not redeem his or her debt.”
++++

Japan’s sales tax just bumped from 8% to 10%
Bank of Japan’s rates for savers -0.5%
Not a bad deal for the Japanese govt.

#60 crowdedelevatorfartz on 10.19.19 at 8:19 am

Planet of the Apes part V !

https://www.reuters.com/article/us-hongkong-protests/hong-kong-protest-leaders-urge-turnout-for-march-despite-risk-of-arrest-idUSKBN1WY029

Where’s Roddy McDowell when you need him…..

#61 Dharma Bum on 10.19.19 at 9:59 am

#60 crowdedelevatorfartz

Planet of the Apes part V !
——————————————————————–

Take yer stinkin’ paws off me ya damned dirty…cop!

https://www.youtube.com/watch?v=Cdmqn9JIuzc

#62 Phylis on 10.19.19 at 10:32 am

#51 just get some tinfoil for your glasses and all will be well. Ooops sorry that was the solution for fluorescent lamps. Never mind.

#63 Steven Rowlandson on 10.19.19 at 12:32 pm

Okay fans of the tax departments of the world what is your heroes record of debt redemption since the anomaly known as the Paul Martin government in Canada given the power to tax? Without the political will to pay down debt it makes no damned difference how much governments tax….

#64 NoName on 10.19.19 at 12:36 pm

#62 Phylis on 10.19.19 at 10:32 am
#51 just get some tinfoil for your glasses and all will be well. Ooops sorry that was the solution for fluorescent lamps. Never mind.

—-

It’s all fun and games until someone looses an eye, I mean vision. And other stuff…

https://texasbar.memberbenefits.com/2018/02/16/myopia-and-millennials-the-trend-no-one-saw-coming/

And I have a story to tell you about tim foil hat sightseeing in one of Mississaugas shopping malls.

#65 Dogman01 on 10.19.19 at 1:15 pm

#1 joblo on 10.18.19 at 3:00 pm
https://calgaryherald.com/opinion/columnists/smith-alberta-heres-how-to-stop-being-a-national-doormat
Hey Alberta, whether Trudy or Andy here ya go!

‘There’ll be hell to pay’ if a coalition government cancels TMX pipeline: Andrew Coyne

https://nationalpost.com/tag/video-centre/video/ZXjzsqIczIo
Last 2 minutes.

I have never seen so many normally moderate Albertan’s so alienated from Canada.
Saudi Oil is better than what we produce? Landlock Canadian Oil and Gas so we can only sell it to the US for much lower prices?

It beggars belief…

#66 Robert Ash on 10.19.19 at 1:24 pm

What I find difficult in today’s investment climate, is that there are such opposing diametrically opposite, ideas, strategies, and recommendations, and all delivered by Analysts and Learned Advisors.. ie Folks, who are experts…Folks whose opinions, I respect.. so… If there is such a broad and extensive divergence of future assumptions, recommendations, trends, and possible outcomes…. what path to follow… it seems like a coin toss, and that is not the way to make important decisions… what to do?

#67 Sam on 10.19.19 at 1:33 pm

Sovereign debt is considered risk-free. It is backed by the power to tax. – Garth

……..

tell it to Venezuela

#68 Phylis on 10.19.19 at 3:44 pm

#64. Maybe all those BSDs are the cause of my ocular migraines.

#69 Phylis on 10.19.19 at 6:07 pm

Oopps, meant BSOD.

#70 Drill Baby Drill on 10.19.19 at 9:19 pm

Smoking Man you are a God. You expound wisdom that Millenials need to hear and absorb. Thank You

#71 604renter on 10.19.19 at 9:27 pm

Hey Doug. Appreciate your column. Keep in mind – you dont need to be a Kurdish fighter to get murdered. Its not just politics. You could be elderly, peaceloving or an infant. Its slaughter.

#72 Dumb Wealth on 10.20.19 at 1:08 am

Bring on the doom porn!

#73 Prince Polo on 10.20.19 at 9:48 am

#23 Andrei on 10.18.19 at 6:17 pm
Garth – what is wrong with owning US bond ETF as part of a diversified portfolio ?

Why would you? – Garth

===========================
I also wondered about this. Garth, may you please elaborate? If one already has USD and can shield it in an RRSP/401k, would it be worthwhile to grab a low-cost US bond ETF or is this an example of needless over-diversification?