Dale Jackson retired at the age of 55. He didn’t win the lottery or start his own successful business. He just worked and saved diligently throughout his career as a media journalist, most recently known for writing investment articles for BNN Bloomberg.
Jackson explains that “opportunities come along for every generation.” Most of the time economic recessions are seen as bad times. But it’s actually an opportunity to speed up the retirement process. Asset values are down so we can buy more stocks at a discount. Interest rates are low so we can pay down the mortgage faster. Another example he points to was in 2011 where the Canadian dollar was worth more than the U.S. dollar. That doesn’t happen often. So with the suggestion of his financial advisor Jackson sold CAD to buy USD and that was one of the best currency trades any Canadian could have made during this past decade.
Diversify your holdings
Speaking of buying US dollars. It’s not enough to simply hold other currencies. We have to keep our money constantly working. Jackson says that Canada isn’t big enough to make up a diversified portfolio. But the United States is. 🙂 Buying U.S. companies in USD is highly recommended, especially when TFSA and RRSP allow for US dollar accounts. He uses the following graph to explain how over the past 10 years the resource-heavy Canadian stock market index (TSX Composite) has advanced only 55% while the S&P 500 in the U.S. has more than tripled in value! Uh oh. Poor Canadians.
Stock markets are down around the world in December. The Nasdaq Composite which is a barometer for tech companies has fallen 15% so far this month. Top economists and investors have been sounding the alarm for months on an economic recession. A New York Times survey discovered that 48% of business leaders at the Yale CEO Summit expected a recession to strike by the end of 2019. It said this finding was the “direst yet,” and shows just how worried companies are about an imminent recession. 😮
The S&P/500 is already in a bear market, which means it has dropped at least 20% from the last highest point. The Canadian S&P/TSX Composite index is only down 18% since its high point in July. But it could very easily enter bear market territory by next week.
Recently 82% of corporate CFOs surveyed in the Duke Global Business Outlook saw a recession starting before the end of 2020. But nearly half of them believe it will actually occur by the end of 2019.
A little pullback once in awhile is normal. When you have nearly 10 years of financial growth it shouldn’t be a surprise when growth finally decelerates. That’s why it’s necessary to always maintain a recession resistant financial plan. 🙂
The writing has been on the wall for a long time. About a year ago I explained how we are near the end of an economic cycle, and by using some charts, I predicted that the next financial downturn will probably happen sometime between 2019 and 2021. So I’m in agreement with most of the business people surveyed above.
Instead of choosing stocks that are largely recession proof, the best way to protect ourselves from a falling stock market is to own other types of investments such as bonds or prime real estate. Continuing to earn a steady stream of income also helps bolster one’s financial situation. Only 1/3rd of my assets are in stocks. So despite the double digit stock market pullback, my net worth is only down about 1% compared to July.
It is hard to know whether this current trend will continue to push stocks further down, or if we will see a bounce back soon. If I had to guess, I think there is still some time to prepare before things start to look really bad. Here’s a chart that shows the change in corporate income tax the U.S. government earned over the last 50 years. ~Notice how just about every time the line drops below the 0 point and reverses direction we see a vertical grey bar? Well those bars represent times of recession (or shrinking GDP.)
At this moment the U.S. could already be in the beginning of a recession. We won’t know for sure until the economic data is released many months later. But what we can determine right now is that the line has crossed below 0, and it hasn’t reversed direction yet. That’s why I think the next financial downturn will not be this year. 🙂
But in the meanwhile I am being weary and staying away from buying new stocks. It’s not a good idea to catch a falling knife, as a stock market in decline is most likely to continue falling in the immediate future. So I will be enjoying the holidays sitting on the sidelines. At the same time I am also not selling any of my stocks. And lastly I am continuing to pay down debts, saving up cash, and looking at bonds. 🙂
__________________________________ Random Useless Fact:
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. 🙂
New stock market highs aren’t that special. Here’s why.
Some people inaccurately believe that any time the stock market reaches a new high it must mean that we are near a peak, and it’s a sign that stock prices will probably fall soon. Many undisciplined investor may choose to pull out of the market when this happens. However doing so will almost always be the wrong decision. This is because stocks reach new highs all the time. And they usually go up even more in the following years.
This Bloomberg article explains that over the past 102 years from 1915 to 2017, the Dow Jones stock market index in the United States had hit 12 new highs every year on average. 🙂 That’s once per month. Another way to think about it is that the Dow experiences a new record high about 5% of the time. So it’s not really not that rare. 😉 The table below shows how the frequency of new highs are distributed over the decades.
If someone starts investing at age 30 and plans to live until 80, then he’ll have 50 years of time to invest in equities. Based on historical data for the Dow Jones, he will see roughly 600 new record highs during his investment duration. This is why selling stocks because we may have reached a new peak in the market is a very silly thing to do for long term investors.
Trying to sell high and buy low rarely works. Again, the facts clearly explain why this is the case. Over the same time period, (1915 to 2017), the one year average return for the Dow after it had reached an all-time high was 9%. The 3 year cumulative return was 21%, and the 5 year return was 32%. So even when stocks are at all time highs, they tend to move even higher in the years after. 😀
You’ve probably heard on the news about the stock market correction in China. Last year, Chinese stocks experienced huge gains and surged more than 140%. Oh my Buddha, that’s insane! 😯 But since June 2015, the market has dropped by almost a third in value. Some people in the media claim this is some sort of catastrophic event comparing it to the Great Depression.
But we know better. 😉 First of all, a 33% drop, after a 140% gain is not such a bad thing. In fact that’s a net positive return of 60% in about 18 months, so who’s complaining? 🙂 Secondly, due to strict foreign investment regulations only 1.5% of all the stock market shares in China are owned by foreign investors like Canadians and Americans. So this recent market decline has very little direct impact on investors outside of China. And lastly corrections inevitably happen after a parabolic upward trend, so this shouldn’t be a surprise to any informed investor. “Those who cannot remember the past are condemned to repeat it.” ~George Santayana
The Boom and Bust of China’s Stock Market
It all started a couple years ago when the Chinese government wanted to boost the country’s economy. It implemented policies making it easier for retail investors (average folks) to invest in the stock market. Things worked out even better than expected and the market quickly became detached from the fundamentals of the underlying economy. Last month the Shanghai Composite Index (SSE) started to fall. To make things worse many investors were investing on margin and had been forced to sell their stocks as their shares lost value which only perpetuated the downward momentum. 😕 Within a few weeks the SSE had dropped almost 33%. Here’s a comparison of stock markets over the last 12 months. (blue line = China, red line = Canada, yellow line = U.S.)