In 1987 my journey began on this critical path of learning about money in life. I saw how investments could rise 10% but also quickly lose 25% or more. I felt there could be tremendous potential if this could be mastered. There’s a real sense in which it can not. However as a sailboat tacks amid strong ocean winds, we can set our sails to attain goals for financial freedom, personal security, and the life and goodness we choose to enjoy. (See “Set of the Sail” by Ella Wheeler Wilcox often wrongly attributed to Jim Rohn.)
Now two weeks into 2020 we see how investments continue their upward ascent. For now, it seems cushioned from whatever good or bad news may arise. Good news could include easing trade frictions between US and China, continued low interest rates, rising employment, increasing wages, positive business outlook, and an upbeat survey on consumer expectations. Terrible news includes the downed flight 752 in Tehran. Brexit is fairly neutral now. Scent of stronger manufacturing in Europe and Emerging Markets favours the upside. The global economy seems reasonably promising as we look ahead in 2020.
What we’ll be watching over a longer period, two to three years, is how things develop when interest rates start to edge upward. Today’s 10-year bonds near 1.6% in Canada and 1.8% in the US may reach toward 3% or 4% in the next three to five years. As we witnessed for a while in 2013 and also late-2018, rising interest rates can sharply reduce valuations of both bonds and equities, even those paying significant dividends. The answer will not be: (i) doing nothing, (ii) worrying unduly, (iii) hiding in a mattress, or in gold or cash.
Strategies at such time can include: (i) real-return and floating-rate bonds, (ii) continued investment in strategic innovation, (iii) increasing weight where resilient companies have lagged and will recover, (iv) keeping high-conviction positions in low-debt companies with increasing free cash flows. Such preparation can sail ahead when markets sink. We will address this further approaching 2021 / 2022.
Hints for the next ten years to 2030?
With credit to Eric Lascelles of RBC Global Asset Management here is a possible picture of our pathway to 2030:
- Inflation remaining low as Europe and N.America echo Japan’s experience since 1990.
- Low interest rates continuing, perhaps an ultimate ceiling of 3-4% if they even reach that.
- Global forces of discontent and populism unsettling political regimes here and abroad.
- Modest growth in traditional sectors; higher growth as new technologies arise/expand.
- Profit margins easing due to increasing regulation, anti-trust actions, and rising wages.
- U.S. will continue growing, even as its share of the world economy recedes.
- Canada offers healthy investing opportunities but global reach is vital.
Hints for twenty years to 2040?
Rear-view mirrors are a poor guide to future results. The world’s biggest market (S&P500) from 1980 to 2000 grew an average 9.48% per year due to technology surging in the late 1990s. That shaped people’s expectations to get 10-15% returns. But 2000-2010 left the market flat, near zero for a decade. Twenty years of the S&P500 ending two weeks ago showed only 2.42% annual growth. I share this because it’s important to know what we cannot know! Analysts in year 2000 were juicing their forecasts for the S&P500 to more than double in the decade to 2010 — yet it was flat through that period and barely paced 2.5% inflation over two decades! Aside from some dividends, and subtracting inflation, that’s nearly zero real-return for 1/4 of our human lifespan. So clearly we give no market forecasts for the next ten or twenty years.
Would it sound happy to forecast 10% annual growth? … but that never lasts twenty years. Would we accept a 3% forecast? … no that puts money and lifestyle at risk!
So in fact, when we’re clear about Life Income Mandates and combine these with unique assets representing high-conviction, narrow and strategic diversification, we can continue to base our planning near 6% average annually, 3% or more above expected inflation. This let’s us build wealth with reduced risk, to assure the good and comfortable life you choose.
Looking ahead …
The year ahead will echo with daily news that yields little lasting impact. There will be Brexit, a signing of the USMCA deal, easier terms between US and China, inevitable flare-ups in the middle east, mischief involving Russia, a U.S. presidential election, and some foot-in-mouth gaffes among Canadian politicians.
Set aside media headlines intended to sell advertisements with fear or greed. Ignore temporary wobbles among world markets.
Today if you’re young and building a future nest egg, keep investing each month into assets that grow along the way, and in time these results will reward you richly. In the years when you’re drawing income from a savings “reservoir” as we’ve discussed, we continue aiming your safety to age 85, 95, or beyond, plus an estate for your loved ones. Most vital over the next 10 or 20 years isn’t how markets may act or media may shock, but simply to remain steady in your plan. Meet with us regularly, review any changes along the way in life, and we continue to protect your personal lifestyle and desired goals.
Be sure please to share this letter when it can answer questions, ease worries, or introduce our service.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Author: A Lifetime Of Wealth — And How Not To Lose It (2013). Protecting Life, Loved Ones, and Future Dreams (2013). Your Business, Your Retirement: Halton Retirement Study (2015).
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to GLC, RBC, CIBC, Mackenzie, Franklin Templeton. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to consult alongside your legal and accounting firms to advance your financial security and unique goals. We are grateful always to receive your comments and questions.