Entries from February 2020 ↓

The real deal

Nancy’s in a state. “Hope you pick a scared-looking puppy for this post,” she says.  “Feels very appropriate.”

No, we’re gonna use a cat.

However, she caught my attention with a pretty good MSU: “My husband initially forced me to read your blog (out loud to him) with plenty of sighs and eye rolls on my end but now I look forward to our nightly ritual, I swear!”

Okay, N. You’re in. Now what’s this anxiety thing?

I’m hoping you can quell my anxiety right now by helping us not lose all of our money. We make 160k combined and have close to 900k invested in rrsps and tfsas. Our investments are relatively balanced but we do own pretty large portions in our “winning” stocks (Tesla, Shopify, Apple and Facebook) the rest are in ETFs. As the stock market is currently taking a gargantuan tumble, what should we do? Should we take our money out now and buy again at the bottom? Should we stay put hoping this sneaky virus goes away and things return to normal? Should we buy a house with our money – seems like that market isn’t being effected by the virus… Please help otherwise I’m afraid we’ll be right where we started years ago with nothing left in our savings!

Yes, fear is the strongest of emotions. It trumps greed, sex or the way you feel when someone says ‘hereditary chiefs.’ This week has been ugly for investors as the virus spreads, traders take risk off the table and the stock market lurches into a correction (down 10%). As described here two days ago, money has cascaded from equities into bonds, driving prices up and yields down. Oil’s been whacked as have most commodities. And look at volatility – wow, an eruption. Similar to 2011.

Now contemplate the comment made by blog dog Bill about the stock market’s slide from record highs. This is what I mean about the effect of fear:

Garth doesn’t get it. This virus is the real deal. Tens of millions will die. The global economy will be completely wrecked. I think we break the 2008 lows. Ultimately, your investment portfolio right now is going to be less of a concern than how much food and supplies you have stocked up on. It’s going to be a shock when this hits people and they will panic when they realize how unprepared they are. Grocery store shelves will get cleared out one day soon. It’s happening.

Covid-19 cases are fading in China and growing outside. The crap on social media and the icy fingers gripping the hearts of some of wussy doubters down in the steerage section are predictable. People never change. They think half the world will get this and countless millions die. But in Wuhan, a city of 11 million, there were (at most) 70,000 cases – .6% of folks. Deaths there have run at 0.02% of the population at large.

So, Nancy, there may be empty store shelves in the coming weeks but you probably won’t get the virus and you surely will not die. Nor is this what Mr. Market has been worried about, either. Instead the issue is a drop in global economic output caused by the public health response, leading to diminished corporate profits. If you think that sounds like a temporary hit, well, bingo. Exactly the case. And in that reality there is much optimism.

Investors hate uncertainty, so until a timetable emerges, the selling will continue. We’re maybe half-way there. The correction of 10% that has occurred could turn into a 20% drop – the technical definition of a bear market (the same thing happened at the end of 2018, when people on this blog utterly capitulated. Then markets gained 30%.).

What’s likely to occur at that point (or sooner)? Central bank action, for one. The market now believes rates will drop two or three times by the end of the year, lopping 60-70 basis points off existing levels. That will inject a huge amount of liquidity into the economy, and because this is a global issue there will be a global response. Central banks will likely move in a coordinated fashion, while governments also scramble to restore equilibrium. Look at Hong Kong. This week they handed spending cash to every adult.

Meanwhile the reasons markets went up two months ago are still in place. “Even with the retracement… we’re still at cycle highs,” says a Wall Street manager. “But once we get through this very large uncertainty, markets will have an enormous coordinated tailwind of fiscal and monetary stimulus to help those equity valuations in 2021.”

Expect the Bank of Canada to trim its key rate in April, given the virus, the FN blockades, the oil sands disaster and the plopping price of oil. (There should be a cut next week, the CD Howe Institute argued on Thursday.) All that is pushing Canada towards a temporary recession, and pushing the bank to act. Which it will.

So the virus may be a new challenge, but the ultimate pattern should follow that of past shocks – from the GFC to Y2K to 9-11. It may come with more emotion, and more disruption in daily lives if subways and schools close for a while. And the sight of malls full of people in surgical masks is chilling.

But in terms of your portfolio, Nancy, sit tight. Never sell into a storm. The balanced and diversified part will be fine. The individual stocks will be more at risk. Sounds like you failed to realize capital gains and move them into safer, broader assets. Remember that lesson for next time.

Yes, there’ll be one. We shall have exactly this conversation again. Count on it. Now go and load up on toilet paper before Bill hoards it all.

Letter from a Chinese blog dog…

Thursday, 8 pm ET. I just received the following letter from a regular reader working in China, who is living through the Covid-19 storm. You might find this of interest.

Writing you again as a Canadian investor working and living in China through the Coronavirus.  I’ve written you in the past, but I just thought I’d share with you a response to Bill who you featured a fearful comment from today on how the Coronavirus is going to destroy the worlds population and market.

Over here in China (where I’ve been living and working for over 2 years now), at least in my southern city near the Hong Kong border things are returning to normal. More and more shops are open.  People are out and about in parks and sidewalks.  People have returned to work – myself included.  Everyone still wears masks outside their house all day and we sign in to every location we visit via an app so potential outbreaks could be tracked quickly.  But there hasn’t been any new confirmed cases in this City of nearly 20 million in days.

As a daily reader of this blog for years now, who’s recently started a new job with a 30% salary increase, I’m excited to see this downturn and will be investing every cent I possibly can into this storm to take advantage of these sale prices!

Thanks again for all that you do!  You’ve helped this moister relate more to boomers financially, and looking at my portfolio, that’s a good thing.


Pension pooched

Made your RRSP contribution yet?

Wait, keep reading. This isn’t another tedious piece on tax-free compounding, using a retirement plan to split family income, making a contribution without having any money, how to remove funds without being taxed nor how the entire system is dramatically skewed to benefit high income-earners, medical professionals, lawyers and the self-employed. You already know that stuff.

Instead, let’s revisit a fav topic: how pooched everyone else is.

How much do you need to retire? That depends on when you hang ’em up and how much you spend, of course. Plus if you have kids or wish to leave an estate for others to squander on stuff you’d never buy. There is no static answer. Some people say 30x your annual working income is the right number. Investment giant Schwab suggests $1.7 million is a reasonable goal. Fidelity says you need enough saved/invested to replace 80% of your work salary. Anyway, the Internet teems with financial calculators you can use to come up with your own target.

Then compare your readiness with this dismal set of facts:

  • As mentioned before, people retiring without a defined corporate pension have an average of $3,000 saved. Yeah, they probably have a house, too. But you can’t eat that.
  • About a third (32%) between 45 and 64 have saved… nothing. Seriously.
  • Roughly a fifth (19%) have less than fifty grand. But the average amount Canadians have saved/invested for the future is $184,000. That tells us a small slice of folks have saved a boodle. A giant slice of people are heading for a future of KD and CPP.

Now on that point, we all need to understand clearly the public pension system in Canada will not save you. Not with the recent enhancements, either. If you’re a Millennial, the higher benefits (a max of just over $20,000 a year) don’t click in until the average moister is 76.

Today the max someone can collect in CPP is $1,175 a month, but very few qualify. So the average received is $672, or eight grand a year. Grocery money. Old Age Security goes to everyone at age 65 (for now), and that adds $613. So the total in government pogey the average person receives is $15,420. If that were your only income, then the GIS (Guaranteed Income Supplement) kicks in at a max of $876 per month, bringing  the grand total of public assistance to $25,932 – or about two thousand a month.

Married people get less GIS, but it’s still possible for an average household of two to receive a total of about $45,000 annually. Maybe all the people with little or nothing think this is enough to get by on, which is why they don’t save or invest. Given that the median household income in Canada is north of $90,000, this translates into a 50% drop in retirement. So ask yourself, could you suddenly live on half the money you’re getting from employment?

Let’s compare with the deplorables in Trumpland (which some people think may soon be the home of Bernie’s Sandersnistas).

The average monthly Social Security payment in the US is $1,471, or about $1,900 in moose money. Therefore it’s three times more than CPP pays (on average). By the way, the max SS payment of $2,210 at age 62 is about twice as generous as CPP – and it grows from there: $2,900 a month if you wait until 66 and $3,770 monthly ($45,300 US) at 70. So a couple of wrinklie old pensioners who worked all their lives could actually see up to ninety grand a year.

But what about household savings?

A new survey by TD Ameritrade says 50% of Americans have more than $100,000 – way better than us. Most of this is in the hands of people over the age of 40 (no surprise there), yet Millennials in the US are the ones most often stuffing their Roth IRAs (the American equivalent of our TFSA).

Hmm. The average American has saved more money for retirement, and the US system is far more generous with public pensions. So how did we get so smarmy and snooty, believing the States is a land of dumpster-divers, people who spend everything on Glocks and trailer park rednecks where financial illiteracy reigns supreme and society is divided between billionaires and losers?

Beats me. The CBC maybe. Or our political elite. Maybe it’s the whole real estate-government complex.

After all, the US rate of home ownership is lower than in Canada by almost 10%. American households carry far less debt, and actually reduced borrowing a ton after the housing market blew up. Plus the median cost of an American house is just $228,000. The average paid by first-time buyers is $219,000. There are porta-potties in Vancouver worth more.

Thus, when it comes to the financial state of Canadians, this pathetic blog’s thesis stands. It’s suicide by house.