Weekend Reading: Stock Market Expectations Edition
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.
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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!
Thanks Robb. I remember doing an estimate for my retirement plan in the 90’s. I probably used a conservative 16% annual return based on the 90’s US stock markets. I think I projected that I’d retire in my mid to late 40’s. Then 3 years in a row of negative returns in early 2000’s, then 2008-2009. Ha, we can be swayed by the times. All said I think/guess we’ll still get some decent returns moving forward. Hopefully investors get that 7, 8% or more annual over the next couple of decades.
Rob,
Love your blog and look forward to it on the weekends.
With the market down recently, does it make sense to harvest capital losses before year end in non-registered accounts and immediately buy back in to something similar but not identical?
Hi Charlie, tax loss harvesting can make sense when used to offset capital gains. Make sure to replace it with something that tracks a different index to avoid the superficial loss rule. Also, be sure to make the trade on or before Dec 27th to ensure it settles by the end of the year.
For further reading I suggest this post from Canadian Couch Potato: https://canadiancouchpotato.com/2014/11/03/tax-loss-harvesting-revisited/
Many thanks for reading!
Being new to DIY investing (so happy to ditch high fees), in the middle of an overall portfolio makeover, this week got me paralysed.
Should I bit the loss on my actual investments and buy new ones at a discount?
What are your thoughts?
I should have indicated that this is registered money
Hi Mary, congrats on making the move to DIY investing and for lowering your investment costs.
I’d say go ahead and make the switch now and stay invested. Let’s say you’re moving $50,000 from Expensive Mutual Fund to Low Cost Index Fund. In a registered account (RRSP or TFSA) it makes no difference whether the market is up or down when you sell the expensive fund and buy the low cost fund. You’re staying invested and just moving from one product to another.
I had a similar reaction when selling my individual stocks and buying my two ETF portfolio. Some of those stocks (oil & gas, mainly) were down quite a bit and it was painful to “lock-in” those losses.
Then I reframed the problem. Instead of selling 23 individual parts filled with winners and losers I focused on the overall portfolio value ($100,000~). All I was doing was moving $100,000 made up of 23 individual stocks and buying two ETFs with the same $100,000. The same amount of money was invested.
So it wasn’t about selling at a loss and buying at a discount…it was just shifting my investments from one set of products to another within the same container (my RRSP).
It makes sense looking at it this way, thank you Robb!
Curious (not challenging, serious puzzled), if an investor can gain 8% over the long term, reliably, would that not be $80,000 a year, with no loss of capital, and plenty to live on in a tiny house in the woods, while a person also travels around the world from time to time?
Hi Jules, are you suggesting a withdrawal rate of 8 percent ($80,000 on $1 million)? Research suggests that it’s possible to have a safe withdrawal rate of 4% ($40,000 on $1 million) over a 25-30 year period, but anything higher than that dramatically increases the odds of running out of money.
The problem is as I described in the preamble – investment returns don’t move in a straight line. Imagine you retired and in the first year you withdraw $80,000 from your $1 million portfolio but the markets go down 20 percent that year. Now you have roughly $720,000 left and a long time horizon still for that money to last your lifetime.
Now your withdrawal rate is 11.11 percent ($80,000 from $720,000).
This is called sequence of returns risk.
Now imagine you retire at 35 with a $1 million portfolio and although you can live on $40,000 per year in your tiny house in the woods you need that money to last much much longer (60 years+). Your odds of running out of money again increase dramatically over that length of time.
The other thing we have failed to account for is inflation and the idea that your $80,000 in today’s dollars will likely need to increase every year to keep pace with inflation.
Hi Robb, Love your blog and always looking forward to it for the weekend read.
I have one concern about the CoPower Bonds, I was reading their documentation last weekend and noticed that we would need to send them a copy of either our passport or driver permits. Seem this would be necessary in order to buy the bonds in the case of money laundering.
I have tried emailing my concerns to them but have not received an answer back from them.
Since I have never sent a copy of my passport/Drivers permit to someone by email. I do not know by email. Seems not very secure. I find that banks request a form that we just have to mark the box that we have read and understood everything for money laundering.
What is you take on this.
Happy Holidays to All.