Looking Ahead – What to Expect in the new year
The last decade has been one of the best times for investors of any generation. 🙂 It didn’t matter if you had money in stock, bonds, or real estate. Almost every major asset class delivered terrific returns on average. But I think 2020 will be a very pivotal year.
The U.S. will hold a presidential election. Stock markets are about to head into the new year at record highs. And there’s a greater than 50% chance Canada will fall into a recession according to Oxford Economics.
The U.S. is even more likely at 64% probability to hit a recession in 2020 according to the New York Fed.
Data seems to indicate consumer spending in North America will almost certainly slow down next year. The U.S. government will spend a buttload of money to desperately prop up the economy. Deficit spending will go through the roof. But the market demand for U.S. bonds won’t be there unless interest rates rise. But rather than let natural market forces drive up interest rates, the Federal Reserve will step in and buy up the newly issued bonds at lower rates. This will likely create some inflation which will be felt in Canada as well.
Protecting Your Net Worth
No matter how we look at the financial markets it’s not hard to see how overvalued most asset classes are. A straightforward way to reduce our exposure to the markets right now is to become more conservative with our investment strategy. If you’re worried about a financial crisis here are some ideas to consider…
- Emphasize investing new savings into value stocks and dividend stocks rather than growth stocks.
- Sell some equities and hold onto short term bonds or cash.
- Stay away from IPOs and ICOs.
- Find value in alternative investments such as peer to peer lending.
- Write covered calls or buy some put options.
Any of those methods should help reduce portfolio losses in the event of a stock market correction.
My Strategy for 2020
We can’t predict the future. But there are events we can anticipate ahead of time and be ready to make the correct decision when the time comes. Given what we know so far, I think one of two scenarios will happen next year.
1st scenario: The current course of expanding asset bubbles will accelerate – widening the wealth gap between the haves and have-nots even more. Private and public debts will grow.
2nd scenario: We see a dramatic economic slowdown followed by a recession in the U.S. first, and then probably in Canada. Central banks inject over $100 billion a month of new liquidity into the markets. Public debt grows. Private debt shrinks through paydowns and defaults.
Right now it’s impossible to know which scenario will play out. But I don’t see an in-between scenario happening. This isn’t financial advice or anything, but if I’m right about next year, then here are some investment opportunities to watch out for.
- Real estate.
- Silver stocks.
- Telecom stocks.
- Investment grade corporate bonds.
If either of the 2 scenarios play out then there will be a lot more debt owed by governments. This will cause inflation, especially if the money makes it into financial markets and trickles down to the consumer level. Inflation is also good for precious metals, and silver appears to be undervalued compared to gold right now. Phone and cable companies should also perform well next year as telecommunications tends to be an inelastic service. Canadian real estate prices have been cooling off since 2018. Meanwhile the TSX/S&P composite index climbed to an all time high last week. Compared to the stock market, the real estate sector seems like a bargain. Personally I will be looking at buying an investment property around the Greater Vancouver area. The expected return on investment for real estate about 7% under current conditions. If I see something I like and the price is reasonable then I will buy it. 🙂
Random Useless Fact:
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Thank you for the information!
What type of the next real estate investments would you recommend:
– condo investment somewhere in greater Vancouver
– house investment somewhere in USA (Arizona for example)
– team up with other investors and invest in multifamily in Vancouver
Personally I’m going for the condo investment in the Greater Vancouver area. But it’s hard to make a recommendation for other people because it depends on their situation. For example if you are a permanent resident or citizen of Canada, then there are tax advantages to investing in Vancouver or any other Canadian city. You don’t pay capital gains tax on your primary home no matter how much in value it grows. If you are a U.S. citizen then U.S.A would be a better place to look for real estate investments because you have more options, and the cashflow is better. Generally speaking the capitalization rate is higher in the U.S. than in Canada. In terms of condos vs detached houses, it depends on your budget and investment time horizon. If you want to drop $0.5 million on an investment property, then a condo not older than 10 years would probably give you a decent 8% to 10% annual return over the next 10 years. You can potentially earn more if you use more financial leverage. But if you plan to live in Vancouver (or any other large and growing Canadian city) for 20+ years then spending $1+ million on… Read more »
Hey Liquid! How goes your search in the Greater Vancouver area? Have you stumbled upon anything yet? As you go through the process, do you have a realtor that you’re working with or are you contacting the listing agents yourself? I am currently poking around the market in the Fraser Valley region; looking to acquire a property with rental potential. I would love to connect with some potential real-estate investors in the area, even if it is simply to practice the lingo. I feel that investing, whether in stocks, bonds, real-estate, is similar to learning a new language. The best way to learn is to speak and practice with those who are fluent or learning as well. Do you subscribe to any groups or have any recommendations about connecting with investors in the Greater Vancouver or Fraser Valley region? I’ve been following your blog for 2-3 years now and absolutely love your posts. Please continue to publish this fantastic content. Even as an accountant and a business school graduate I find myself taking away tons of useful information. Especially, Lending Loop – great addition to the folio. Thanks again for your work on this blog, I would love to connect… Read more »
Hi steve. I’m using the services of a realtor to help me look. I recently found a property I like and have put a deposit on it. The Fraser Valley area is expected to grow modestly in 2020 according to an article I read. It’s experiencing a buyers market due to the substantially higher inventory compared to the previous year and more buyers qualifying for the stress test as they improve their financial situations. Another area I like is the Surrey City Center neighborhood. I don’t know any groups or investors that get together to discuss real estate. I’ve been to a few different local real estate investment seminars before though so that might be a good place to talk to people who have similar mindsets. The presentations are usually free to attend and you can search them out on eventbrite or other ticketing sites. You can also check out real estate investor groups on meetup.com. I find just talking to real estate agents at open houses can be very beneficial. I can ask them about the local market, and alternative units to the one I happen to be looking at. Once I like a particular listing I get my… Read more »
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[…] Last year I predicted rough waters for 2020’s economy, and suggested 4 investments to protect against uncertainty. […]