Let’s talk about last week. Unless you were living under a rock, which in hindsight might not have been a bad idea, you couldn’t help but notice that North American stock markets suffered their worst week of losses since the financial crisis. Global economic fears triggered by the outbreak of coronavirus disease (COVID-19) caused the S&P 500 to fall 11.5 percent, while Canada’s TSX dropped 8.9 percent this week.
My own RRSP shed $15,000 – or 8.18 percent. Fear and speculation was rampant in the media, with several pundits predicting further losses and that the worst is yet to come. On the other side we had the ‘buying opportunity’ crowd. You know, the ones who endlessly crow about stocks being on sale and going bargain hunting. So annoying.
Then there’s me, sitting here with no bonds to sell and no unused RRSP contribution room. Sad.
Me right now with no bonds to sell and no RRSP room. pic.twitter.com/nCfqAGnc4X
— Boomer and Echo (@BoomerandEcho) February 28, 2020
A market sell-off of this magnitude has a real psychological effect on investors, no matter their age and stage. Retirees, or soon-to-be retirees, are undoubtedly concerned when their nest-egg takes a 10 or 15 percent hit. Investors still in the accumulation stage might be re-thinking their investment strategy as they watch their portfolio decline in value.
Let me remind you that a 10-15 percent correction is well within the normal distribution of returns. It happened in late 2018, and in August 2015, and again in August 2011. This is not new, so ignore any headlines that claim to say ‘this time is different’.
Coronavirus and the Markets
So what’s an investor to do? This is a good time to remind investors that the money invested in their portfolios should have a time horizon greater than 3-5 years (ideally 10+).
It’s a good time to remind investors that their asset allocation should reflect their actual risk tolerance, not just their perceived tolerance when markets are performing well.
Finally, it’s a good time to remind investors that timing the market is incredibly difficult and so the best course of action in these volatile times is to stay the course and stick to your plan.
What that means is tuning out both the bearish pundits and the annoying ‘stocks are on sale’ investors. I say that about the latter because normal investors can get a serious case of FOMO or just feel plain dumb if they don’t have a sensible way to add to their investments during this sell-off.
Let me be the first to tell you that it’s perfectly okay to stick to your regular contribution schedule, or to not contribute at all (just stay invested). All of the great buying opportunities in history come at times when few investors are truly in a place or frame of mind to double down on their stock investments. You’re not missing out.
Here’s some perspective to consider. North American markets have basically retreated to October 2019 valuations. Ask yourself how you felt about your portfolio in October of last year? Probably pretty darn good.
How did you feel about your investment portfolio in October last year? Things were pretty good, right?
The TSX and S&P500 are basically back to October 2019 levels today #perspective pic.twitter.com/RwztnY9UYh
— Boomer and Echo (@BoomerandEcho) February 29, 2020
Now ask yourself if markets were completely flat for four months between October and February would you still feel this sense of fear and dread? Likely not. After all, investors have been fortunate to participate in 10+ years of nearly uninterrupted gains. You’d forgive the markets for going sideways for a few months.
Instead, we got a steady climb of investment gains for four months, followed by a fast and furious tumble in the past week or so. That’s just the markets doing what they do.
It’s also another good time for a reminder of an age-old fallacy: the idea that investors can get out of the market and wait for things to settle down. When exactly have markets been calm and consistent? How about never.
Now for some more advice and perspective on investing, market corrections, and avoiding emotional panic selling.
- Ben Carlson for Fortune Magazine on resisting the urge to panic.
- Ben Carlson again in the A Wealth of Common Sense blog on the art of not panicking.
- The Humble Dollar’s Jonathan Clements telling us not to lose it.
- Servo Wealth Management on avoiding an irrational response to irrational markets.
Coronavirus and Travel
A more pressing concern, at least for me and my family, is how the coronavirus affects travel plans. More specifically, we’ve planned a trip to Italy in April, a country that has reported the largest number of coronavirus cases and deaths in Europe.
While areas such as Rome and Florence, which are on our itinerary, have not been affected, we planned to stay in Venice for three nights to cap-off our trip. Areas and towns in Northern Italy have been placed under quarantine, which has caused heightened security alerts for anyone travelling to the region.
We’ve been closely following the Government of Canada’s official travel advisory notice board, which says to take normal security precautions when travelling to Italy. However, there is a heightened advisory (level 2) for northern Italy, which tells travellers to exercise a high degree of caution when travelling in northern Italy due to the spread of a novel coronavirus disease (COVID-19).
For now we have no plans to cancel or alter our trip. All indications on the ground in Italy is that it’s safe to travel and live in Italy, with just 0.05 percent of the country being affected by “extraordinary measures of temporary isolation of some Italian cities”.
To be clear, we’re not concerned about contracting the virus when we travel to Italy. Of greater concern is how airlines and other countries will react to passengers and tourists going to Italy and returning from Italy.
We have flights on United Airlines (Calgary to Rome via Newark), and returning flights on Lufthansa (Venice to Calgary via Frankfurt). That means closely monitoring not only Travel Canada advisories, but also U.S. advisories, German advisories, Italian advisories, as well as watching for news from United Airlines and Lufthansa.
A lot can change either way in six to eight weeks, so for now we’re planning to travel but we’ll wait and see what happens.
This Week’s Recap:
Earlier this week I asked if you should pay off your partner’s debt, and shared my experience in doing so.
From the archives: Here’s a more realistic retirement income target.
On Rewards Cards Canada: Here are the best Aeroplan credit cards in Canada.
Promo of the Week:
I’ll admit that the price of admission is pretty steep ($699) for what’s widely considered to be the top travel rewards credit card in Canada. But the American Express Platinum card comes with a host of points and travel benefits that more than make up for the annual fee, at least in the first year of card ownership.
The incentive is even sweeter to sign up for the card right now because you can get 70,000 Membership Rewards points when you sign up with a referral link (it’s just 50,000 points on the Amex website). Check out this review by travel expert Barry Choi, who explains the new Amex promotion and its benefits.
Bottom line: You’ll get a minimum $950 worth of travel rewards with this card, which more than makes up for the annual fee. Couple that with a Priority Pass membership, which gives you and one guest unlimited airport lounge visits, plus automatic hotel status upgrades at Hilton, Marriott, and more, and you’ve got a fantastic travel rewards card.
Weekend Reading:
Our friends at Credit Card Genius have a terrific (and free) $100 Amazon gift card offer when you sign up for the Scotia Momentum Visa Infinite card – this card pays an incredible 10 percent cash back in the first three months!
There are changes coming to CDIC deposit insurance and Barry Choi has all the details, plus a chance to win a $500 Air Canada gift card.
An interesting post on the gambler’s fallacy and the simple math error that can lead to bankruptcy.
Pension expert Alexandra Macqueen on why bad pension planning advice could cost you your retirement. Watch for my own collaboration with Ms. Macqueen on my pension decision coming soon.
Here’s Michael James on Money explaining why behavioural biases are in all of us:
These rules of thumb have served us well throughout human evolution, but they sometimes give us the wrong answer to modern questions such as “should I save some of my windfall or just go blow it all on a wild trip to Las Vegas?”
Rob Carrick says, ‘this is a hell of a time to tell people they need to take more risk with their retirement investing’. But that’s exactly what long term investors should be doing – stocking up on more stocks if they want to retire earlier. Indeed, Canadians are notoriously conservative when it comes to investing.
I love this video by the Prince of Travel explaining some hard truths about credit cards and travel points:
What happens next in the stock market? Nick Maggiulli offers a historical examination of short-term market declines.
Mr. Maggiulli also takes a deep dive on when to invest your money with the definitive guide on dollar cost averaging vs. lump sum investing.
Financial advisor Jason Pereira looks at what the Globe and Mail missed in its assessment that Wealthsimple (and the robo advisor business) is a flop:
“Or consider what happens in the next market correction – when the parents’ old-school, stock-picking broker, who doesn’t implement Modern Portfolio Theory and thinks he can “time the market” – fails to deliver on downside protection?”
Finally, digital nomad and Canadian expat Andrew Hallam shares why adventurous, cost-conscious retirees should consider Costa Rica.
Have a great weekend, everyone!
One of the first issues that couples face in a serious relationship is how to handle their finances. Dividing up the household bills is one thing, but what happens when one partner brings other financial baggage – such as credit card or student loan debt – into the equation?
In marriage, what’s yours is technically mine, and vice-versa. But how should couples treat debt that was incurred prior to marriage? And, more to the point: should you pay off your partner’s debt?
One philosophy is that “he who spent it pays it back’, an approach that might sound better in theory than in practice. It doesn’t make sense for one partner to struggle with credit card debt while the other earns 1 or 2 percent in a savings account.
In some cases the type of debt can make the difference as to whether one partner is willing to help out the other. Student loan debt, for example, is often seen as an ‘investment’ and doesn’t carry the stigma of consumer loans or credit card debt.
Should you pay off your partner’s debt?
My wife and I met when we were in post-secondary, and student loans were a fact of life for us both. When it was all said and done we owed a combined $60,000 in student loans, line of credit, and credit card debt.
I say “combined” because by the time we moved in together in 2003 our finances became a joint effort. We opened a joint account, pooled our income, and started paying off our debts.
It wasn’t a concern that, since I earned more money, I was paying proportionally more toward her debt than she was. As far as we were concerned we were in it together.
Automatic payments came out of our joint account and we tried to pay more than the minimum on our higher interest loans.
My wife left the workforce to stay home full-time after our first child was born in 2009. We decided to live on one income, which meant the remainder of our debt would become my responsibility to pay off.
We made our final student loan payment in 2011 – killing it off with a $2,000 lump sum transfer from our joint account.
I can’t recall if it was my loan or my wife’s, but that’s not the point. For eight years we treated that debt as “our debt”, just like the income we earned was “our income”, even though there was a clear disparity.
Final thoughts
The decision to pay off a partner’s debt shouldn’t be taken lightly, as it can lead to resentment or even divorce if the couple is truly financially incompatible. That’s certainly true if one partner brings significant savings into a relationship while the other is a spendaholic with heaps of credit card debt.
For us, we met in our early twenties and made all of our money mistakes together – figuring out how best to manage our money along the way. We got into debt together and paid it off together – and even though it was technically “my income” that paid off most of the debt, I never resented that decision. I embraced it.
How did you decide whose responsibility it was to pay off the debts in your relationship?
For several years the federal government has tightened mortgage rules with the goal of slowing down rising home prices in booming markets like Toronto and Vancouver, and ensuring home owners weren’t getting in over their heads by taking on too much debt. The mortgage stress test, first introduced in 2016 and then expanded in 2018, made would-be home buyers prove they can afford a payment based on the Bank of Canada’s benchmark five-year posted rate (currently 5.19%) rather than the bank’s discounted rate (currently less than 3%).
The mortgage stress test has been widely criticized by the real estate industry as an unfair burden for otherwise well-qualified borrowers. In a surprising announcement this week, the Department of Finance said it will revamp the stress test for insured mortgages (for those who put down less than 20%) effective April 6th.
The Canadian Mortgage Trends website breaks down the changes here:
- Current stress test rate for insured mortgages (typically those with less than 20% equity): 5.19%
- Based on the Big 6 banks’ posted 5-year fixed rates.
- New stress test rate (if it were in effect today): ~4.89%
- Based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.
The author says this change will help the average home buyer by decreasing the income required to buy a $300,000 home by roughly $1,500, and allow those who can easily pass the stress test to purchase about 5% more home (someone who qualified for a $500,000 mortgage (previously) will qualify for $525,000 in April).
In reality, this doesn’t do much to help home buyers qualify for a mortgage. In fact, mortgage expert Rob McLister says the looser mortgage stress test may stoke the market and drive prices even higher:
“Homebuyers—particularly younger buyers—are already worried about prices running away from them, given the double-digit gains of the last 12 months. News of an easier mortgage stress test won’t help.”
I understand why mortgage professionals and wannabe home buyers are frustrated by tight borrowing guidelines. But it wasn’t that long ago when we had 35 and 40 year mortgage amortization and zero-down mortgages.
We’ve tightened lending over the past decade to avoid the type of housing crash that occurred in the U.S. ahead of the great financial crisis. By all accounts it has worked. No need to swing back the other way and completely loosen our lending standards.
This Week’s Recap:
Earlier this week I wrote about whether it makes sense to defer OAS to age 70. As with most personal finance decisions, the answer depends on a number of factors.
Then we had a guest post from Steven Arnott, author of The Snowman’s Guide To Personal Finance, on how to become the CFO of your own personal finances.
Many thanks to Rob Carrick for highlighting my guide for the anti-RRSP crowd in his latest edition of Carrick on Money.
Over at Young & Thrifty I wrote about the best low-risk investments in Canada.
I also looked at the difference between index funds and mutual funds.
From the archives: A look at my mortgage renewal strategy.
Over at Rewards Cards Canada you can find the best Aeroplan credit cards in Canada.
Weekend Reading:
A major downgrade to Rogers MasterCards this week. The Rogers World Elite MasterCard got hit the worst, including a new eligibility criteria I’ve never seen before where cardholders must spend at least $15,000 per year on the card or else they’ll be downgraded to another card. Brutal.
From the brilliant Morgan Housel – History is only interesting because nothing is inevitable.
Mr. Housel also lists 100 little ideas that help explain how the world works. One of my favourites:
Ringelmann Effect: Members of a group become lazier as the size of their group increases. Based on the assumption that “someone else is probably taking care of that.”
In his latest Common Sense Investing video, PWL Capital’s Ben Felix looks at whether the value premium is dead:
Do you have a defined benefit contribution plan? Rob Carrick explains how to get the most out of it.
Her husband told her not to work, then cut off her money — here’s how financial abuse traps women.
With RRSPs, there is a time to contribute, there is a time not to contribute and there is a time to withdraw funds — choose wisely.
Here’s Dale Roberts on how to use your RRSP and TFSA to play retirement portfolio catch-up.
Nick Maggiulli has a terrific post explaining why avoiding bad decisions is more important than making great decisions:
“Too many people in the financial community obsess over the “optimal” way to invest when their time would be better spent steering clear of actions that could lead to ruin.”
The F.I.R.E. movement is relatively new but here’s a neat story about how Canadian personal finance blogger Bob Lai grew up with a father who retired at age 43.
Preet Banerjee uses a great example to explain the basics of risk transfer when it comes to life insurance:
In a Globe and Mail column, Preet Banerjee explains why older, actively trading men are more likely to be victims of investment fraud.
Tim Cestnick writes about the best approach to figuring out how much money you’ll need in retirement.
Finally, NPR reports that more employers are looking into the benefits of a 4-day workweek. Nice!
Have a great weekend, everyone!