by Garth Turner
Only a few months ago the African disease was causing panic. Airports thousands of miles away went into high alert. Myopic Canada shut its borders to people coming from afflicted areas. Good Samaritan health care workers returning from fighting the virus were ostracized and feared. And financial markets slumped as people on subways in Toronto and New York worried about the guy sitting next to them.
Ebola’s largely contained these days. A couple of people in North America died. No pandemic. Next?
So now it’s measles. And oil. Ukraine. Lefties in Greece. Deflation. Putin. ISIS. Mad cow. 50 Shades.
There’s always something to worry about in a world where nothing happens without a selfie. We’re all experts. Know almost everything. And for the rest, there’s Google. Mostly it scares the poop out of people.
Magnifying fear today are the merchants of it. Hedge fund managers and burned-out pundits like Marc Faber, Jim Rickards or Harry Dent never let up with predictions of a 50% market crash or 25 years of depression. Behind it usually lurks the ‘advice’ to buy into their funds, subscribe to their newsletters or join their bullion-licking club. So far they have an impressive track record. 100% wrong.
Anyway, crap does happen. We saw a 55% stock plop in 2008-9, and a 20% market swoon in 2011 during the US debt ceiling crisis. There was the tech bubble which blew up the Nasdaq in 2000 and lately people with all their assets in Canada have taken a 20% hit. As you know, the same risk lurks for residential real estate. Meanwhile, savers have been punished with losses for the last six years as their deposits earned less than inflation.
Those who read doomer web sites, worry, and do as they’re told have flamed out. Those who borrowed big to buy inflated real estate have absorbed epic risk. Retirees sitting on GICs are getting poorer. And along the way our financial illiteracy has grown just as fast as the Twittisphere. For example, I’m always surprised at those people who think you should buy bonds to collect the interest or believe every new stock market high means it’s destined to crash.
Ignorance leads people into one-asset solutions. They buy a house, they hoard gold, or they hide in cash. In this, there is danger. By trying so hard to avoid risk, like Ebola, bank failures, stock collapse, hyperinflation or the zombie apocalypse, most people dramatically increase their odds of financial failure. In a volatile and changeable world, there are only three principles to sane investing: balance, liquidity and diversification.
Balance means an appropriate mix of safe assets, like bonds and preferreds, and growth assets, such as equity-based ETFs. The best split remains 40-60. Diversification means lots of asset classes (fixed income, equity, trusts). Plus, you should avoid home-country bias (these days Canadian growth assets should be a minority), and have exposure to various sectors of the economy along with different-sized companies. Liquidity means a portfolio that can be converted to cash in a few days – in case I’m wrong and the walking dead arrive.
Why is this safer than buying silver bars and burying them under the hot tub?
Simple. When equity markets dip, the fixed income stuff rises in value to offset it. Also, when interest rates decline, bonds get more valuable. Meanwhile REITs are not closely correlated to stock markets and kick out regular income. Ditto preferreds, which are way more stable than stocks and have higher, fixed dividends. These days, oil is hurting Canada, but it’s fuelling the US. As I explained recently, you never want to exit an asset class, while ensuring you rebalance a portfolio routinely to harvest gains and constantly trim risk.
So far in 2015, while the Canadian economy staggers, Calgary homeowners stress, rates drop, gold’s mercurial and markets uneven, this portfolio has gained about 4.5%. Bonds alone have pumped up 6%. The portfolio yield (not the total return) is about 3.3% – dividends and interest only – which means even if there was zero growth you’d still get twice the yield of a GIC, most of it at 50% less tax. As I’ve said often, over the last ten years, even with the 2008 disaster, this portfolio has delivered an average of 7.4%.
And, trust me, there is no 2008 re-rerun coming. No Ebola on your street. No broke banks or bail-ins. No $28 loaves of bread. No depression. No market collapse. The risk was six years ago. Get over it.