As people ponder retirement goals one asks how they can get more aggressive returns in the stock market. Seniors at times may also long for a pinch of the lottery-luck in recent news. I’m grateful for such questions you share with me as it helps us address what is actually becoming a risk to peoples’ savings. Keep in mind we aim to preserve and propel our clients’ pension and other savings: let’s today look at these questions.
Luck and Loss.
There’s a clue here. If something goes up quickly, it can evaporate just as quickly. Silver was $6/ounce in 1979, rose 8-fold to $49 in 1980 and then dropped to $5. Nortel rose 20-fold from $7 to reach $140 in year-2000 and then poof! Oil had been at $140 /barrel but last spring fell below zero to minus-$47/barrel. Cannabis was the raging roller coaster, one company rising from $2 to $66 then below $20: as I write this, the whole sector dropped 20% yesterday. GameStop has every appearance of the departed Blockbuster Video but recent excitement lifted it from $10 to $483 … then a 90% plunge. Tesla with 1% of global auto sales is priced as if it were a monopoly on all car sales worldwide: truly unique as a battery innovator, it may be quick-sand since buying (burying?) $1.5 billion of cash into bitcoin. 
Bitcoin itself is a reserve of money launderers and military dictators as it cannot be traced: rising 10-fold at times but also a history of 50-80% losses – there will be a future for digital currencies but it’s too early to say which may survive or what legal form they may take.
Years ago a sombre stock broker quietly shared how his client turned $18,000 into $310,000 of dot.com stocks, and then sickened as the account dropped to $21,000 in the tech meltdown. This story repeats with every fad and fancy, and pride comes before a fall. Those who crow of their winnings on the way up seem silent when they lose it on the way down.
A social-media message board recently pumped (in this case “swarm traded”) certain stocks as they rocketed upward and then fizzled like spent fireworks. You know the smell – burned sulphur. A young man admitted to putting $1000 into one of those gambits and has less than $200 in hand today. Some invested money intended for their rent or mortgage payments, others disposed their food money, and more than a few borrowed cash from credit cards at 20% interest to buy what subsequently evaporated. The bill won’t disappear like that!
Who does such things? A neighbour, siblings, a parent, a child or grandchild. Everyone has experienced a bit of greed if life that is stoked by juicy news stories of others getting rich fast (it boosts advertising revenues). Similarly people buy lottery tickets – a scant hope with no mathematical rationale. Can you remember such a time in life, when some scheme or another (pyramid perhaps) took your cash on a sure-thing and lost? Such urge can befall at any age, money or no money, anyone.
In a moment we’ll look at some of the signs and guidelines to avoid losing money like that. If in doubt – ever – just reach me.
Clues to 2021.
What assets today have just come through their worst year in a decade? Aside from airlines and hospitality we can think of Banks, Real Estate, Utilities and other Infrastructure. Pandemic-induced panic last year took 35% to 50% off the value off many firms even though dividends and earnings have generally remained surprisingly consistent. What do you suppose happens for such companies when they’ve come through their toughest year in a decade? For some this may be their best year in a decade.
News media push reports of markets reaching new peaks, but unseen behind that is how a handful of companies drove those highs. More than 80% of US stocks last year lost value while the index reached highs, suggesting a few stocks did the heavy-lifting while the rest lagged. Laggards included Energy down 35%, Real Estate down 12%, Utilities down 8%, Value stocks overall down 7%. To sharpen our view we could compare two leading Canadian names which have both featured in our investment funds, but see remarkable differences between these two and consider how our portfolio teams manage such holdings.
- Royal Bank, since 1864, global financial services, high near $110 on Feb. 17/20, subsequent low $77 on March 16/20, now at $105 and paying 4.3% dividends on earnings of $7.82.
- Shopify, since 2004, cloud-based commerce services, year-ago $700, now nearing $1900, paying 0% dividends on earnings of $1.99 (a quarter of the bank’s earnings).
The investor focusing on stable, reliable dividend income wants Royal Bank at 4.3% instead of Shopify at 0%. For jet-powered acceleration it turns to Shopify instead of Royal. For earnings ratio (lower price/earnings is better) Royal Bank at 13 stands infinitely above Shopify at 1,134 (ie. over 1000 years to recoup costs at today’s rate of earnings). For cash-flow Royal Bank beats Shopify four times over.
These are different business models. The combination is likely stronger than either one on its own. Indeed our investments need a broad and purposeful diversity of the strong/stable as well as innovators/accelerators.
With our portfolio teams each excelling at their own focus, we avoid the roller coaster while protecting and building wealth. Rocky-Road is a nice ice cream but it’s not an investment plan: sustainably growing earnings, dividends, and free cash flow is vital to surviving beyond the peaks and valleys.
Richer or Poorer?
Real goals are about securing life and enjoying the journey. What you want in a home (now, or next one). Retiring sooner. Choosing your lifestyle. Comforts and enjoyment. Not worrying … especially not worrying about money.
Consider if you could invest as follows, which would you choose?
- Steady growth 4% to 5%, rarely dropping 5-8% but fully recovering in 9-18 months.
- Expected growth between 6% to 9%, sometimes dropping 20%, recovering within 24 months.
- Wanting 10-15% growth despite 30-50% drops that can drag on two to five years.
- Combination of the above.
Those aren’t goals as there’s no way to know in advance which strategy will win a particular period. Usually (c) will fail as it drops too far and too often, unable to support when you need money. A careful combination wins more than any of the three on their own. (Compare the sails on a schooner – each has its place.)
Goals require a healthy fit and alignment between investment planning and the lifestyle we want to enjoy. In younger stages of life avoid being overly cautious (missing growth) or overly ambitious (taking major losses). Approaching retirement, avoid disasters that can steal years of your savings. Retired, enjoy a steady and increasing income, and never run out of money.
Someone said the route to a small fortune is starting with a larger one. Skip that. Far better is to consistently build and protect wealth for present and future living, so as the sands of time pass through the hourglass, the sands of wealth won’t slip through our fingers.
Happy Valentines.
Happy and healthy wishes to you and your dear ones. We are always here to help – reach us anytime. And definitely continue to share with me your thoughts and questions or any upcoming needs.
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.
Certified Financial Planner, Certified Retirement Coach
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 Canada Life, CIBC, Dynamic, Mackenzie Financial, RBC / PH&N, and more. Opinions in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to coordinate with your legal and accounting advisers to further your financial goals in home and business. We are grateful always to receive your comments and questions.