March 2016 SWM Letter

We could title this The Year of Illusions except that probably belonged to 2015.  In the Chinese calendar we’re now in the year of the Monkey, perhaps suggesting luck, romance, and good fortune.  A picture you’ll see here is not a monkey and it suggests that much of what we see or hear about investment markets is actually an illusion.   So powerful is the illusion that many are tricked into making life-threatening mistakes that deplete their fortune.  That would be sad monkey-business indeed!

First let’s have some fun with this picturePic _ Duck Rabbit IllusionIf you’ve seen it before try to recall the first time, and what appeared to you at that first glance.  If this diagram is new to you, what do you see here?  Possibly you’ll return to this picture in a moment and see something remarkably different than what you witnessed at first.  (If you want to know more about the picture check the name Joseph Jastrow who first used this illusion in 1899.)

My perspective here is that people at times can see something that may actually be very different.  If you’ve caught on to this, perhaps you’ve seen two quite different animals in the picture here.  Or consider if chicken-little’s news that the sky was falling was actually good-news for someone aiming to gather acorns.  So when news media report a falling sky, might we ask:  “What could this be good for?”

INVESTMENT MARKETS AND ILLUSIONS.

April 2015 world markets seemed cozy and promising, and the TSX (Canada’s main exchange) was near 15,400.  From that point on values dropped to close the year at 13,009.  2016 then dropped to 11,950 -- a vast 25% drop in value from last April.  Adding to the seeming urgency, this year opened with the worst first-week in U.S. market history – down 5.6%Many commentators in the news were forecasting worse and urged people to bail, jump, sell, “the sky is falling”.  But if you think about it clearly, which side of the illusion did these people have in their focus?  (Hint ...see the market-channel picture below).

The opposite view was seldom offered but was quietly embraced by investors who saw such events as bringing good fortune.  No monkeying around here, they simply continued their investments and if possible bought more.  They realized that as markets go down, there’s actually “less risk” not more!  And we focused on a rising income-yield …which in due course also lifts capital values in seasons ahead.

For a quick example let’s say your Dividend Fund owns something we’ll call “OK Bank.”  OK was $85/share a year ago and dropped to $65/share in January (BAD NEWS?).  OK was paying $2.40 in dividends last year, and is paying $2.80 in annual dividends now.  Last year’s dividend yield was 2.8% but high earnings and low share price now put this at 4.3%.  Is it somehow bad news if income-yield is 50% higher than a year ago?  As this continues we can see a time when OK will be passing $100/share.  (Would you consider that as GOOD NEWS?)

Which is the good news and which is the bad news?   Perhaps the bad news is when people who lack financial advice sell when things are down (sabotaging their income) and face the impossible task of deciding when to re-purchase their securities.   Or consider someone who stopped investing because markets were down, to postpone monthly deposits until markets are higher.  That would be bad-monkey behaviour, throwing luck out the window and earning fewer acorns for their future.

Another picture arises for people already retired who might worry unnecessarily.  Imagine you have $1 Million and it’s paying you $60,000 a year in income from a safe reservoir.  Let me add here that the investment is strongly positioned in “life income mandates” (see link).  When markets tumbled 25% from last April your account may have dropped 5% or 6% as we aim to be far safer than the “markets” but we could also find your income-yield rose 20% or more.  Owning strong income-assets reduces risk on the downside, and boosts our income-yield as well as future capital growth.

My 2013 book, “A Lifetime Of Wealth – And How Not To Lose It” explored this in more detail through the world-wide financial meltdown of 2008-2009.  If that was the worst calamity in the world since 1820 (~65% drop) our approach dropped 15% and still preserved life income.  2015 was a wee puddle by comparison.

GOOD TIMES ARE RISKY -- BAD TIMES ARE SAFER.

Pic _ Stock Channel Jan 2016We update this picture occasionally and it’s worth reviewing what these lines mean.  The dark blue line is the stock market, fluctuating upwards and downwards.  When it’s up high it tends to fall;  when it’s down low it tends to rise.  The pathway can look threatening, or even flat and stagnant for extended periods of time.  The past eight years have been somewhat stagnant, offering little net growth aside from our precious income-yield.  Over time the channel rises higher.

The gentler grey lines here are imposed over the stock-market line, showing a “channel” which holds 95% of all change that occurs in the stock market.  Take a look and put a circle (or storm cloud) over the time when stock markets rise above the upper line.  That’s when news is cheery yet things are likely to turn downward!  On the other hand draw a circle (or a sunny smile) where stock markets drop below the lower line.  That’s when news is dreary yet you can probably see what’s happening next as markets push upwards.

Things are always changing but it’s worth knowing that our markets are 10% higher now than a few weeks ago.  It’s really hard for markets to stay long outside the channel.  They don’t stay under the lower line for long.

Pic _ MonkeyWISE MONKEYS.

Pardon my allusion to monkeys but they can make great stories, and are a nicer metaphor compared to some other animals of the Chinese zodiac.  Wise monkeys use some of the following principles to ensure healthy living for the years to come:

  • We keep focused on the “plan” that preserves life and future wellbeing.
  • Prudent monkeys would invest more whenever market news sounds bad.
  • Older monkeys like assets that continue to bear increasing fruit (income).
  • Monkeys living above the jungle get the clearest view of what’s happening.

Did you manage to find two animals in the picture at the top?  Did you first see the rabbit or the duck?  Can you play with the picture to switch views between rabbit and duck?   Could you use this same skill in order to translate the illusions you may hear in news stories …especially when it comes to financial illusions?  If media are playing with peoples’ emotions (fear of loss; fear of missing out) let’s talk frankly together on the real truth and enduring realities which can safeguard our health and wealth through all seasons. 

Yours in Financial Security for LIFE!

Brian

Brian Weatherdon, MA. CFP. CLU. CPCA. CRC. MDRT.  905-637-3500 x 223
627 Guelph Line, Burlington, Ontario. L7R 3M7.   1-877-937-3500 FREE x 223
Brian@SovereignWealth.ca 
Ret.Coach SEALAmazon (2013): “A Lifetime Of Wealth — And How Not To Lose It.”
Amazon (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. For information on near 10,000 investment funds and other financial structures please feel free to contact me directly. Returns shown are from Morningstar and other major financial news media. Research is sourced from leading sources including GLC, RBC, CIBC, Franklin Templeton, Mackenzie, and a wide range of highly reputed firms. 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 serve alongside your legal and accounting advisors with whom we can best protect your financial security and advance your goals. We are grateful always to receive your comments and questions.

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