This year was a challenging one for investors. We’ve been so used to seeing positive gains in our portfolios it’s a shock when markets don’t cooperate!
The TSX is down 12.26 percent on the year. The S&P 500 is down 7.03 percent. International markets, as measured by MSCI EAFE, are down 13.94 percent.
With seemingly “no safe place to hide” this is the type of market that proponents of active management thought indexers would lose faith in as they passively track the market. But my low cost, globally diversified, 100 percent equities portfolio has only suffered losses of 4.93 percent year-to-date. How?
For starters, my Canadian equities component (VCN) tracks the FTSE Canada All Cap Index (large, mid, and small companies). This index is more diversified than the TSX and is down just 9.59 percent on the year – nearly 3 percent better than the TSX.
And while my international equities component (VXC) was hurt by the performance of U.S. and International stocks this year, it was buoyed by a weak Canadian dollar and was only down 2.75 percent this year.
So, yes, it was a tough year. But let’s have some perspective. A five percent loss is well within a normal expected outcome in any given year. If you can’t handle a 5-10 percent loss in a 12-month period then you have no business investing in the first place.
My two-fund index portfolio has achieved annualized returns of 6.33 percent since I implemented it four years ago. 2019 brings with it a new year of optimism (and contribution room!) and so I look forward to putting more money to work in the coming months.
This Week’s Recap:
I hope you all had a wonderful Christmas holiday! As we wrap up 2018 I want to thank you for making Boomer & Echo part of your weekly reading. I’ll be back one more time this year to update my net worth, so stay tuned for that on Monday.
Earlier this week I wrote how giving markets your daily attention by surfing news headlines and constantly monitoring your portfolio can be hazardous to your wealth.
Over on the Maple Money Show I chatted with Tom Drake about three strategies I use to create my own raise in light of salary freezes in the public sector.
And in my Smart Money column at the Toronto Star I shared the top five travel rewards credit cards for 2019.
Weekend Reading:
Blair duQuesnay of Ritholtz Wealth Management says that market declines are the price of admission. I couldn’t agree more with this:
“The temptation to do something will rear its ugly head if it hasn’t already. But market timing doesn’t work. It creates two chances to be wrong; when to sell and when to get back in.”
When stocks fall by 20 percent people start asking questions and there’s no shortage of people waiting to give you answers. Don’t fall for it.
Going back to 1945 there have been 48 instances where markets have risen 4 percent in one day. 38 of them occurred during drawdowns of 20 percent or worse. The point? Stay invested or miss out on important rallies like we saw earlier this week.
Investor advocate Dan Solin shares some investing answers you won’t see in the financial media. My favourite:
“The only thing we know for certain about technical analysis is that it’s possible to make a living publishing a newsletter on the subject.”
Be kind or be hostile? Nick Magguilli on the most important decision you can make every day.
The Irrelevant Investor Michael Batnick shares a history of bear market bottoms.
An academic look into market beating factors such as momentum, value, and profitability suggests the latest indexing trend towards factor investing, or smart beta, is flawed.
Jason Heath explains when is the best time of year to transfer a TFSA between institutions.
The Globe and Mail’s Tim Cestnick says to make good on your New Year’s resolution with a home based business.
Mark Seed interviews Bob Lai about his sure-FIRE path to financial independence.
The Canadian Couch Potato Dan Bortolotti looks under the hood at iShares’ revamped all-in-one ETF offerings, curiously called XBAL and XGRO.
Why the idea of steady retirement spending is a myth.
Finally, two retirement experts extoll the virtues of regular travel.
Have a great weekend, everyone!
When I got an activity tracker several years ago I was horrified to learn just how sedentary my lifestyle had become. I’d drive to work, park my butt at a desk for eight hours, drive home, park my butt on the couch for a few more hours, and go to bed. It was mindless laziness.
I fit right in with the average North American, who walks an average of 3,000 to 4,000 steps per day.
Steps to improve my steps
My activity tracker suggested a goal of 10,000 steps per day. I was motivated by the step counter and helpful nudges to get myself moving. I started parking in a free lot about 1 kilometre away from work, adding an extra 3,000 steps to my day (and saving $50 per month in parking fees!).
My new walking routine got me up to an average of 7,000 steps per day, but still not close to my goal. Then, following my wife’s lead, I got into running three to four times per week. The extra activity helped me reach my goal – not every day, but on average throughout the week. Funny enough, I still find motivation from my activity tracker as it nudges me to reach and surpass my daily move goals.
The hyper-attention and daily nudges helped me get my butt in gear and become a healthier person.
Curbing my Screen Time
Similarly, Apple sends iPhone users a new weekly report called Screen Time that shows how much time you spend on your phone. You’ll see which apps you use most often, how many times per day you pick up your phone, how many notifications you receive per day and from which application.
The report can be an eye opener if you’re into mindless scrolling through social networking sites like Facebook, Twitter, and Instagram. Twitter is the biggest attention sucker for me. Hey, it’s where I get my news!
I also get a lot of notifications and can conclude from the report that I receive about 30-40 emails per day from work. Not cool. Because of those notifications I tend to pick up my phone 65-70 times per day to either check my email, respond to a text, or check Twitter.
The week the Screen Time report first came out I spent six hours per day on my phone. I’ve got that down to less than four hours per day and try to design rules around curbing my screen time. That means turning off unnecessary notifications and keeping my phone in another room when I go to bed.
Again, these nudges had a positive effect on drawing my attention to a negative behaviour and making a conscious effort to curb it.
Negative Stock Market Attention
Back when I was a stock-picker I obsessively checked my portfolio and read every market headline. I scoured the internet for news about my individual stock holdings and searched for analyst opinions (only the ones that confirmed my own opinion, of course).
But just like in the previous two examples, all this attention and information made me want to act. My oil stocks were getting killed and I wanted to get out. Sobeys made a mess of its Safeway acquisition and I wanted to get out. The general market would fall by 5-10 percent and I felt like I needed to do something – like contribute more money than I had planned, or hold off on adding new money until things “settled down.”
Nudges worked against me. I’d get email alerts when Fortis or Great West Life missed their earnings targets. What should I do with this information?
The Globe and Mail app would send helpful push notifications like, “markets plunge on European/China/Russia fears,” or, “Dow posts worst day ever.” A smart investor is supposed to act on this, right? Shift their portfolio to safer assets? Buy gold?!?
Don’t just do something, stand there!
I switched to indexing four years ago with a simple two-ETF portfolio of global and domestic stocks. Now that I own thousands of companies I no longer pay attention to the fortunes of one or two. I find myself paying less attention to market headlines in general.
I make my monthly contributions automatic and only check my portfolio when the cash balance is large enough to make a trade. I figured instead of tinkering with my portfolio daily and reacting to news I’d be better off taking a two-decade nap and letting compounding do its thing.
Related: How and when to rebalance your portfolio
Your long term investing plan has no time for daily market noise. Yes, we may be entering a bear market. Or it’s just a run-of-the-mill market correction. Nobody knows for sure.
We do know that yesterday the Dow and S&P 500 had historic gains. If you happened to act on your fears and exit the market, thinking it was on its way to a 40-50 percent meltdown, you missed out on that important rally. In fact, many of the largest one-day gains occur during down markets.
Final thoughts
Technology can help bring attention to a negative behaviour and turn it into a positive outcome. But those nudges and alerts can also work against you.
When it comes to investing often the best course of action is to do nothing and stick to your plan. Daily gyrations smooth out over a period of several months, and over several years the trajectory of the stock market tends to point up and to the right.
Many so-called experts question the value of robo-advisors during a downturn such as this, saying that investors would be better off with a human advisor. But from what I’ve heard during tumultuous times, the robos send helpful nudges via text and email explaining what is happening and why fluctuations in the market are part of a normal investing experience.
For investors that can be calming reassurance in the face of negative headlines screaming for your attention.
What’s the difference between a run of the mill stock market correction and a blood in the streets bear market? By definition a market correction is a loss of around 10 percent over a short period of about two months or less. A bear market is a loss of 20 percent or more and typically lasts longer than three months.
So where does that put us today? It’s hard to tell. Using my globally diversified investment portfolio (VCN and VXC) as a benchmark it is down 12 percent since September 24. That puts this downturn squarely in market correction territory but the continued losses entering a third month has us trending towards a bear market.
All I know is these are times when investors tend to panic and abandon long-term plans for short-term “safe-havens”. What that does, unfortunately, is lock in losses today and ensure these investors will miss out when stocks inevitably rise again.
You are only allowed to be concerned about the markets right now if you are:
1) Retired
2) Spending from your portfolio
3) Have a financial plan that assumes zero bear markets during your lifetime.— James Osborne, CFP® (@BasonAsset) December 21, 2018
Part of the problem with our stock market expectations is we think in terms of straight line growth. I’m guilty of this myself. I have a financial freedom plan that includes expected annual portfolio returns of 8 percent. Well, barring a major Santa Claus rally next week, my portfolio will close the year down 7 percent.
While this is a problem for me when it comes to hitting my net worth target this year, it should not impact any of my long-term planning. In fact, a market correction or bear market lasting through the first quarter of 2019 will give me a chance to make major RRSP and TFSA contributions at a discount – which will only help my long-term goals.
As investing blogger Nick Maggiulli demonstrates here, it’s all about stock market expectations versus reality. If you’re planning a land journey across Antarctica, you’d better account for some unexpected variables along the way.
For investors, sure it’s reasonable to expect 8 percent growth annually over an investor’s lifetime. But the annual variations are going to be roller-coaster like in nature and you’d better be prepared to handle that volatility.
This Week’s Recap:
On Monday I wrote about budgeting basics for your financial plan, perfect for those just starting out to the soon-to-be or newly retired.
On Thursday I shared 11 worthwhile fees to pay.
Over on the CoPower blog I was asked to explain the inverted yield curve and what it means for investors. Here’s a snippet of advice:
“Those close to or in retirement may want to rethink their asset allocation and shift to safer investments with the portion of their portfolio they’ll need to access in the immediate future for retirement income,” said Robb. “But investors with a long time horizon should probably ignore any speculation around economic trends and just stick with their regular contributions and asset allocation,” he continued.
Have you joined my growing list of 10,000+ email subscribers? I’ll share new posts along with special offers from time-to-time.
You can also follow Boomer & Echo on Facebook, Twitter, and Instagram. Flipboard is where I save all of the best personal finance and investing articles that I read each week and curate the content for my weekend reading posts. You can follow me there, too.
Website traffic doubled in 2018 to more than two million page views – which is pretty amazing and humbling. Many thanks to all of you for reading, following, and sharing my posts this year. It means a lot.
Weekend Reading:
Only Morgan Housel could use a story about a guy who won the Nobel Prize for infecting syphilis patients with malaria to explain why it’s okay to make irrational investment decisions.
Housel also shares some investing ideas that changed his life. My favourite:
“Keeping money is harder than making money, because you can get rich by luck, but staying rich is almost always due to a series of good, hard decisions.”
No one is happy with the amount of money they have. Josh Brown shares three reasons why you’re never satisfied.
A great post by Mark Seed at My Own Advisor, who shares 10 ways to master your money in 2019.
Lisa Kramer, a professor of finance at the University of Toronto, explains why robo-advisors are shaking up the Canadian investment landscape – in a good way.
Ben Felix wants to talk to you about owning individual stocks, and no, he’s not going to tell you how to do it successfully. This is not that kind of channel:
Jonathan Chevreau explains what retirees need to know if they plan to defer Old Age Security benefits until 70.
Here’s Jason Heath on why retirement planning needs to be a major political issue in 2019 and beyond.
The Fat Tailed and Happy blog explains (with charts!) why $1 million isn’t enough – a direct shot at the FIRE crowd who assumes anyone can retire on $1 million even as early as age 35.
Meet XGRO and XBAL, iShares newly formed competitors to Vanguard’s all-in-one balanced ETFs, VGRO and VBAL. The competition is heating up in this space, driving down costs and making investing more simple for Canadian investors. Great news!
Dale Roberts shares a detailed review of Retirement Income for Life, the excellent retirement handbook by Fred Vettese.
Finally, for the holidays, Tim Cestnick shares five financial lessons for 2019 from Christmas movie characters.
Merry Christmas, everyone! Wishing you all the best this holiday season!