February 2018 SWM Letter — Snakes and Ladders?

It naturally garners attention when markets fall 10% in ten days.  Especially so, as nearly two years passed without even 5% decline.  So what can we observe and learn from this kind of event?  Where does the word “risk” come to play in this?  And how do we focus to continue building wealth and sustaining life-income while reducing risks?

The 10% Drop.

It happens.  This is a healthy way of removing excess speculation or steam from otherwise healthy and orderly investment markets.  “Steam”, you ask?  Lots of steam.  This includes the noise about bitcoin and marijuana.  It especially includes FAANG-type stocks without which markets might hardly have moved in the past year.  FAANG is Facebook, Apple, Amazon, Netflix, and Google.  News media report widely on such stocks (with scarce earnings) and far less on businesses that built and sustained value through many decades while raising earnings and dividend pay-outs.  We’ll look at this further.

How Far, How Often?

Here in a picture is the U.S. market showing the duration of markets rising, compared to the # of days markets have fallen in this “bull market”.   Market values fall (blue shading) breaking or pausing the extended periods of rising values.  Since early 2009, 10% decline has occurred five times;  drops of 5-10% have occurred seven times.  I’ve likened this to using a yo-yo on an upward staircase;  the yo-yo goes down at times but the result still rises positively with further steps.  Nick Murray is famous for saying, “it’s not timing the markets, but time in the markets” that makes wealth grow.

RED LINE smooths out the daily / weekly volatility (blue).  200-day average (red) shows the true destination and journey to increased wealth.

(Any pictures appearing unclear, please ask me to email clearer copies.)

Is a Bear Market Coming?

Easy to see that Bulls always beat the Bears.

In 1805 there was a volcanic blast in the South Pacific that overshadowed the entire world and stole two summers causing widespread hunger.  Another bizarre event happened to investment markets in 1820 and was not repeated again (except US in 1929-1939) until 2008-2009.  Major catastrophes are rare yet stimulate much fearful anticipation (and lots of media advertising so that's why we hear so much about these events).

There will be bear markets and bull markets.  This picture illustrates how bulls are far larger and more persistent than bears.  Yet if bulls take the staircase, bears go down on an elevator, so we must never, never ignore the bear.

Is the BEAR coming this year?

We must never ignore risks.  More on this below (see “snakes”).  Many human schemes to avoid risks are actually shockingly at risk.

Eight reasons we don’t expect a major correction or bear market this year include:

  • Synchronized economic growth worldwide
  • Continuing increase in corporate earnings
  • Trend toward lower corporate taxation
  • Interest rates remaining at stimulative levels
  • Inflation safely within central bank targets
  • Safer valuations in Canada, Europe, Emerging economies
  • Commodity prices rising, improved profitability (helps Canada)
  • Most contentions of world trade may settle favourably (see Nafta).

I’ve was concerned that if U.S. stocks continued their rocket-trajectory from last summer into next summer, we would need serious action to avoid major correction.  With the more modest 10% market correction (gentler in client portfolios) investment markets are now more able to resume growth in 2018 for eight reasons mentioned above.  Negatives are always on the horizon -- always so -- such as today with N. Korea or the middle east, Canada’s meagre competitiveness, Brexit hurting the UK, protectionism in the US, deficit financing at every level of US governments, and frenzied speculation of new fads spawning a “fear of missing out.”

If the US market had kept rising (and other boats on the same tide) I expected major risks by late-2018.  With a correction of recent days we now see earnings-driven growth resuming over the months ahead.   European, EM, and Canadian markets can move considerably higher now.  RBC’s analysis suggests the following ranges for US and Canadian markets.  Ask me if you want the Europe and EM pictures too.

RBC projections at Dec 29/17 looking to 2018: TSX range 14,297 to 21,667. SP500 range 2,171 to 3,624.

(If picture appears unclear please ask me to email a clearer copy.).

DEFINING RISKS, UNINTENDED “SNAKES”.

Let’s say our #1 goal were to reduce risk as much as possible.   One point then is to define risk.  The second is avoid known and unintended risks, like the snakes pictured on a certain board game we've all enjoyed.

Example 1:  define risk as losing money.   Solution: buy GICs to guarantee return even if it’s below inflation.  Unintended risk then is losing purchasing power, running out of money while living.

Example 2:  define risk as loss of purchasing power.  Solution:  just buy dividend funds.  Unintended risk?  …values fall when even the big companies are sold off in a downturn.

Example 3:  define risk as lost opportunity, or “fear of missing out”.  Solution:  buy a genius financial instrument to profit from volatility.  Unintended risk? …imagine the people who lost 100% in a US inverse ETN last week – it happened in just sixty minutes.  VIX was designed to profit from volatility – ie. changing opinions – as if psychology itself could be commoditized for investment.  VIX made this possible and banks got millions in fees.  But last week VIX dropped 85% (Bloomberg) and its creator Devesh Shah freely confesses such a product should never have gone from theory into practice (see Shah)  except for gamblers.  “Everybody knows that Inverse VIX is going to go to zero at some point”, he says, and “at the end of the day cost people a lot of money.”  (Shah would agree the VIX strategy is full of snakes …and sadly, suddenly, they can lead to “zero”.)

Example 4:  define risk as under-performance.  Solution:  buy hedge-funds.   But the unintended riskThe Economist  points out 2017 was the fifth year in a row when hedge-funds under-performed benchmarks.  The same article recalls 2008 when the average hedge fund dropped 19%.  Realize too:  defunct hedge-funds no longer report.  Group results are far worse than survivors’ “average”.  Unintended risk is tying up money in high-cost funds that can permanently reduce wealth.

Example 5:  define risk in terms of fees.  Solution:  buy cheap index funds.  Unintended risk? …following the index down 30%, 50%, or more when big meltdowns hit.  One such Canadian index fund with lowest fees was at $22 in 2008, dropped to $12 in 2009, and is no higher today than it was ten years ago.  That would have been more hazardous than the GIC mentioned in #1 above.

The world needs a safe, secure process to define and reduce risks that steal people’s savings and lifestyle.  This allows fluctuating values so over time we can increase returns, build wealth, expand income.  But we must tame the snakes!  The answer is – and always has been – Life Income Mandates.

SAFER PATHWAY, CONFIDENT RESULTS.

This is the purposeful combining of Income-Oriented Assets which overcome the above risks -- both known risks and unintended ones.  This is a cornerstone of seminars I've offered over many years, and my first book in 2013, A Lifetime Of Wealth – And How Not To Lose It.

Here we see the influence of combining five types of investment.  Aside from Life Annuities for seniors, the remaining are:  Dividend Income, Real Estate Income, Infrastructure Income, and Bonds or Fixed-Income.  Each must hold both Canadian and Global assets.  The result over 10 years, 50 years, 100+ years, has given strong investment returns.  In a lifetime or simply in retirement “LIM” offers prosperity and security.  And when markets fell >50% as they did in 2008-2009, this design was four-times safer and recovered four times faster.

For your specific goals, whether they be two years to buy a home, five years to retiring, fifteen years of raising children, thirty years of retirement lifestyle, “LIM” will help immensely.  It is not the whole plan but it is a substantial part of the planning to reduce risks, reach financial goals, and enjoy life income.

If we would rebuild the game of Snakes and Ladders to represent “LIM” none of our snakes would look like the board above where 27 drops to 1, or 21 drops to 9, for  such high risks would instead fit the five risky examples in a paragraph above.  Our snakes would gently shift 5%, 10%, sometimes 15% or so but you’d still have ladders for sustained upward progress.

Our picture of LIM today updates the 5-year diagram in my 2013 book, A Lifetime Of Wealth.  Extending this back 11 years we see the whole 2008 meltdown – the one that devastated US and world-markets until their eventual 2014 recovery.  Today comparing the five examples of “unintended risks” among the slippery snakes mentioned above -- and pondering this picture -- I’m sure you can agree, focusing on Life Income Mandates offers a safer journey to secure your personal needs and goals.

(If any pictures appear unclear you can have me email clearer copies.).

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

Brian@SovereignWealth.ca

Author:  (2013) A Lifetime Of Wealth — And How Not To Lose It(2013) Protecting Life, Loved Ones, and Future Dreams.  (2015) Your Business, Your Retirement: Halton Retirement Study.

** 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.

 

2 comments

  1. What a great article, enjoyed that Brian.

    I really like the explanations.

    • Thank you Roy, I am indeed glad to help 🙂

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