Mar 202018
 

Most stock market investors will find it nerve-racking to see their portfolios drop by 50% or more. But a large stock market crash is usually beneficial for our long term finances and we should welcome a bear market sooner rather than later or even not at all. 😀

How an early stock market crash creates more wealth

During a stock market correction, all the new money we invest will be used to purchase assets at cheaper levels. 🙂 These investments can have more time to compound and grow.

Even if we somehow could avoid a bear market for the next 30 years, [our] retirement wealth would likely be substantially better if we instead experienced an immediate bear market. ~Mark Hulbert

Most people my age will probably retire around 60 years old. That gives us about 30 more years to save for retirement. I found a chart below, courtesy of Mark Hulbert from MarketWatch that shows how the timing of a stock market crash affects the value of a retirement portfolio. It assumes a constant annual rate of return for 30 years, except a brief period where the stock market crashes similar to what happened in the 2007/2008 global financial crisis.

The red bar at the far left of the graph represents the portfolio’s value at the end of 30 years if a stock market crash happens right now in 2018. The far right is when it happens near the end of the 30 year period. In all cases plotted on the graph, the average annualized return for the 30 year period is the same, which is 5.9%. The only difference is when that market correction occurred along the way. 😉

As we can clearly see, our portfolio’s value 30 years from now will be highest ($4.3 million) if a downturn happens immediately, and lowest ($1.9 million) if it happens right before we retire. Wow! We will have $2.4 million more if a major bear market breaks out now, rather than later, even when the overall annualized investment return is the same. That’s a huge difference. 🙂

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Jan 292018
 

The Next Recession is Coming

Although not directly correlated to the stock market in the short term, the economy also experiences cycles of ups and downs. Here are some graphs that have historically been very reliable when used to forecast recessions in the United States. Recessions occur when the total economic output of the country declines in two consecutive 3-month periods.

The Yield Curve is Flattening

The graph below shows the difference between the 10 year treasury yield and the 2 year treasury yield. The yield curve tends to get flatter when the economy reaches the end of an expansion phase. The vertical gray bars on the graph represent periods of recession. Every time the yield difference falls below 0% a recession happens soon after. Looking at the chart it appears we’re approaching 0% again.

 

 

Unemployment Rate Nearing A Turning Point

A lower unemployment rate is good for the economy. But at the end of every full employment cycle is a sharp increase in the civilian unemployment rate, usually accompanied by a recession. In the past a long period of declining unemployment rate has always lead to a spike up and a recession.

This rate has fallen from 10% eight years ago to 4% today. Practically speaking it cannot go much lower than this. The lowest the rate has been over the last 60 years is 3.5%. So this downward trend in the civilian unemployment rate is almost over. It’s not hard to imagine what will follow after the rate stops heading lower.

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Apr 112016
 

The New York stock exchange regularly releases information about how much margin (or debt) investors are using to invest. Based on the latest reports from the NYSE market data, Doug Short who writes for advisorperspectives put together the following graph which conveniently compares the credit balance of investor’s accounts to the S&P 500 over the past two decades. We can clearly see some correlation between the two sets of data.

16-04-investor-credit-margin-stock-nyse

The blue dotted line represents the nominal performance of the stock market index since 1995. The set of red and green bars represents the net credit balance inside investors’ accounts. This credit balance is basically the sum of free credit in cash and margin accounts, minus margin debt. Red bars show that investors have negative credit balances (borrowing money to invest,) and green bars mean they have excess cash or credit.

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Sep 022015
 

The R Word

Stock markets fell about 5% in August and my assets have dropped in value. Canada is technically in a recession now. 🙁 Oy vey.

But we investors are deep thinkers. For example, if pencils came with erasers at both ends, what would be the point? ? So we understand that recessions are necessary for economic growth to be meaningful. The boom and bust cycle is what makes the economy interesting because it creates long-term opportunities to those who are prepared. Besides, why is a recession so bad anyway? It makes the cost of living less expensive, which is good if you’re a consumer. 😀

*Side Income:

  • Part-Time Work = $800
  • Dividends = $500
*Discretionary Spending:
  • Fun = $400
  • Debt Interest = $1400

*Net Worth: (MoM)15-08-networth-chart

  • Assets: = $898,700 total (-4900)
  • Cash = $3,000 (-500)
  • Stocks CDN =$88,800 (-3700)
  • Stocks US = $65,500 (-5300)
  • RRSP = $56,400 (+4600)
  • MICs = $15,000
  • Home = $259,000
  • Farms = $411,000
  • Debts: = $504,700 total (-2400)
  • Mortgage = $192,600 (-400)
  • Farm Loans = $199,800 (-400)
  • Margin Loan CDN = $28,900 (-1000)
  • Margin Loan US = $27,200 (+500)
  • TD Line of Credit = $25,000  (-500)
  • CIBC Line of Credit = $10,000
  • HELOC = $18,200
  • RRSP Loans = $3,000 (-600)

*Total Net Worth = $394,000 (-$2,500 / -0.6%)
All numbers above are in $CDN. Conversion rate used: 1.00 CAD = 0.76 USD

It will be interesting to see how markets perform over the fall. September and October are historically the worst months to be a stock investor, lol. I’m just glad I still have a job, unlike so many people in Alberta right now. 😐

Embracing the Recession

Recession tends to have a negative connotation because people associate it with job losses, falling profits, and high unemployment. But for a large part of the population recessions can be quite beneficial. Retirees and the financially independent should embrace recessions. 😉 They don’t have to worry about losing their jobs since they don’t have any to begin with. High unemployment means fewer of their friends and relatives are working, so they have more opportunities to socialize. With a slowing economy and deteriorating household incomes, there will be less competing buyers. 🙂 Falling profits mean cheaper prices! If you’re in the market to buy a house, low demand means more affordable options.

When the price of food, fuel, housing, and other goods falls it directly benefits everyone because we all have to eat and live somewhere. For the majority of us who are still employed a recession means we can spend less money, and save more for retirement. Personally I’m enjoying the cheap $1.20/L gasoline around here ⛽. I can’t even remember the last time gas was this cheap in Vancouver. 😀

15-09-petroleum-harry-potter

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Apr 262013
 

13_04_pewunevenrecovery wealthThe Pew Research Center released an interesting study recently. They looked at the change in average net worth in the US during the economic recovery from 2009 to 2011 and found out that despite America’s households growing their net worth by 14% during this time, the vast majority of Americans actually saw declines to their wealth. This is because the lower 93% of all households actually saw a decrease to their net worth on average. But the remaining Americans, (the top 7%) saw their wealth grow by 28% during the same time, which pushed the national average up. This made for a very uneven recovery where the affluent became richer 🙂 while the lower 93% of Americans experienced negative gains 🙁

How can we take advantage of this information? Well the study points to the “different performance of financial asset and housing markets” as the largest contributor to the opposite trajectories of the rich compared to everyone else. Rich households have 65% of their wealth in stocks, bonds, and retirement accounts while their home only accounts for 17%. But the average household have just 33% of their wealth in the markets, while 50% comes from their home. We all know that between 2009 to 2011, the financial markets (stocks, bonds, etc) rebounded from the recession, however US housing prices remained flat to negative. So the solution is simple. We just need to diversify our assets and not have most of our wealth tied up in our homes.

I have used this strategy with my own finances and from experience I can say it has worked brilliantly so far 😀 After I bought my home in 2009 I invested in other assets and benefited from much of the stock market gains. Today I have about $50K equity in my home, $80K in stocks, and $40K in farmland. Below is a pie chart breakdown.

13_04_equity_allocationThis is why I’m not a fan of paying down the mortgage when interest rates are low. If we make extra payments to get out of debt then we deny ourselves the opportunity to properly diversify our investments. And diversification, as the study points out, was how the top 7% got wealthier. Some people may argue it’s risky to invest while still in debt, but they don’t realize that it’s also risky to aggresively pay down debt and not diversify (^_-)  How fast we pay down our mortgage does not affect the price appreciation or future market value of our home when we sell it some day. But the profits and returns on our other investments like stocks, commodities, and maybe even a second property in the future, does depend on whether we buy them now or later because of course the earlier we invest the better (゜∀゜)  Canadian stocks have unfortunately underperformed in the last couple of years 🙁 And it looks like real estate is starting to cool off too. But due to strong soft commodity demand the average Canadian farmland value appreciated by 15% in 2011, and 19% in 2012. That’s why diversification is so important.  By spreading our investment seeds broadly we are better positioned to capture the overall growth of our economy no matter what happens in the future 😉 Isn’t learning about investing so much fun? (=^_^=) We don’t even have to be in the top 7% or have a crazy high net worth to use the same financial strategies as the rich do 😀