Updated: 2 days ago
It’s been a long time since I’ve put my fingers to the keys on this website. I have my reasons. Firstly, as I mighta mentioned before, I was hit with a relentless and daily onslaught of fake subscribers from Russia. That put me off to the internet in general and I was considering, and am still considering, discontinuing this BLOG. Secondly, it is just strange times in the world, and I feel that there is so much noise daily, so many different opinions circulating, and so many planned and unplanned interventions. Talking about what is the right and wrong financial approach for your portfolio these days is very unique to your situation and the constantly changing investment landscapes. Market pundits are the masters of spin and they all have bias. You really only have three choices. Wait the current volatility out if you have time on your side, change your allocations to take advantage of some of these changing investment landscapes, … or a blend of the two? None of these approaches are terribly wrong, as long as you aren’t taking a haircut on your reallocations by going for long shots with all of your money? Gamestop and crypto is still crap IMO, but if you feel the need to avoid FOMO, just keep it to your allowance money only. That way any hard lessons are less hard.
The daily news shifts from good to bad and huge market swings are becoming increasingly common. I predicted this volatility in a previous BLOG with the increase in retail investors and advances in technology (online investing). It also now seems that investors are starting to desensitize to 2-4% market swings, where in past this would have triggered a mass sell-off or buy-in. If nothing else, the last few years have been a crash-course in human behaviour and the various market influences. We have had just about every market scenario imaginable since 2019 including pandemics, market crashes and recoveries, record-high inflation, falling and rising interest rates, wars, and major shifts in government leadership and policies in the top GDP countries. There has been currency woes and post-covid reopening challenges. Government deficits are running at historical highs, capital is building up in bluechip companies that are scared to grow (e.g. oil and gas), short term bonds are paying more than long term bonds, GICs are paying better than the market, and nobody knows how far interests rates will rise or what the breaking points will be. Companies flush in cash due to reduced capital spending are giving it back to investors as dividend increases. Lots of speculation but who really knows? Recently the BOC (Bank of Canada) raised interest rates another 25 basis points to 4.5% and signaled a hold period, all while without promising anything. The message is clear to Canadians, …. “quit your damn spending!!” Governments are going to be relentless at getting inflation back to 2% ASAP, and they are very concerned now with inflation getting embedded into labor long term before they can get it down.
Regardless of the time-tested and traditional ways of saving and building wealth, people have been quick to flee the market into fixed income investments in the last year as GICs and bonds approach returns equivalent and surpassing what you would get from the market, … AND without the volatility. This might seem logical, for investors on a shorter time horizon anyways … but who can time or predict the market recovery and your cash will be sidelined in these investments. There’s a reason banks are offering better rates on 1 year GICs than you would get on 5 year GICs? Banks predict rates will drop next year and don’t want to pay out more than necessary.
The market recovery will come as it always has. Fixed term investments could be a good approach for aged, short term investors, who need regular access to cash without the future volatility. Yet, for longer term investors, the market always prevails. Different time horizons and different risk profiles will always influence investor behaviour and their investment allocations. People tend to lose sight of the game objectives and goal posts when markets become a bit challenged and they see some losses. Saving as much as possible, diversifying into quality investments, adding quality shares at lower prices, dollar cost averaging, DRIPping, etc.
With the way things have been going in 2022, even I have done a little rebalancing and shifted investments out of some things and into others. Mid-year we cashed in on post-covid gains in our portfolio, sold our condo, and bought a new house. I basically got fed up with condo life and rules. The jury is still out if this was a good move with the Liberal government’s commitment to drive Canadian home prices down, but I figured I’m in for 10-20 years, inflation will eventually recover the temporarily deflated value, we are living in a highly desirable area, and we didn’t need a mortgage,... so we went for it. There were other good reasons but getting out of the strata was the main one. So far the change has been good, except for the return to shovelling snow and climbing stairs again, …. to be honest!
We also recently sold off our REIT position and moved into some strong, Canadian, high-dividend paying stocks. I’m probably gonna learn some lessons in capital gains tax this year from all these moves! I felt that the REIT was showing some challenges through the year with rising interest rates that likely won’t be resolved in the next couple years, and I want to be on the upside of some stable market performers. I felt the worst-case scenario with this change is I simply collect +6% dividends for the next 5+ years, which by my math will significantly offset any (historical) pullback in the stock value I might experience from stock I chose. The REIT was only paying 3.8% in dividends, which was OK but in a sector with significant inflationary pressures and limited rent or lease increase options nothing is guaranteed. There were other benefits behind our decision, including some minor tax loss harvesting on the REIT to offset the previous capital gains, and taking advantage of an increase in dividend tax credits from investing in qualifying Canadian shares. Tax loss harvesting is where you take capital losses selling investments to offset capital gains from previous stock sales, thus reducing your annual tax burden in your taxable accounts. REITs don’t qualify for the dividend tax credit, which helps your tax bill by reducing the income you have to declare from qualifying, dividend-paying Canadian stocks.
What I’ve found fascinating lately is the fall-from-grace of crypto. I still feel investors in this space don’t put enough caution or risk around the complete absence of regulation. It will be interesting to see the full fallout from the FTX fiasco, which highlights that most people really don’t understand or know where their money is going into this big black box? Another financial news story that just won’t die is Gamestop. Despite it’s lack of performance, it still has a following of loyal and delusional investors propping up the share value and waiting for the next short squeeze.
I have my own theories of what the market and some sectors will do this year. Obviously, any company that has revenue tied to discretionary spending will likely hurt in any recession. Things like shelter, food, heat, power, fuel, banking, etc sectors and anything tied to them will be pretty safe as they are non-discretionary spending. You need these to survive. Buying a new home, recreation, hospitality, subscriptions, clothing, furniture, appliances, vehicles, etc. sectors are very vulnerable in the next couple years. These are things people can live without. That being said, some of these areas could be areas of value for longer plays? That’s the extent of my predictions, … very general and kind of obvious. You can chase some of these individually or stay diversified in an ETF, or a mix of both.
A shift from single-use plastics in Canada this year could make an already-cautious oil industry even more cautious, as oil is the building block for plastics. Where this goes is anyone’s guess, but more biodegradable options are likely to emerge. Even though my livelihood came from Oil and Gas, I believe this shift is required and necessary for the health of our country and this world.
As a retiree not willing to take on too much risk, I maintain one relatively stable, diversified, retirement income-generating ETF from Vanguard in my RIFs/LIFs, and a few Canadian blue-chippers in our TFSAs and non-reg accounts for higher dividend returns and tax efficiency. I'm really trying to keep things simple, and in the last 3 years have learned a lot, though going from condo to house added a level of added expenses back into the equation. Heat and city service costs doubled, and I had to buy stuff I got rid of 3 years ago. Of course, we also need to redecorate ..... yeeesh!!
The inflation outcome and timing will be largely decided by consumers this year, which nobody can really nail down. What consumers are willing to spend on and/or go into debt on is somewhat unpredictable as we've already seen since the hikes started early in 2022. There are lagging expenses that haven’t necessarily impacted people’s pocketbooks yet, for example rent. Property owners have been waiting to jack up their rents post-pandemic, though there are limits on these annual rent hikes (max 2%/year) in Canada. This is good for people renting and bad for property owners when expenses (including interest rates) are starting to run higher due to inflation than the income generated from renting. Investors are becoming more savvy and are pricing this bad news into the market in advance.
The economy is basically a slow-moving super-tanker on rough seas. It takes a long time to turn around and you have to dodge the odd storm. It can be a long and choppy voyage to calmer waters.
Recently, I missed my opportunity to shut this website down, because I had it set up on autorenewal with WIX, so I’ll likely ink a few more articles here and there as I’ve signed up automatically for another two years. I feel like I’ve become a bit critical post-pandemic and will dial this BLOG back in to helping and sharing my own experience/s in retirement.
On a positve note, with travel opened back up, we are back on track with our retirement travel goals, and have planned our next big retirement adventure; a 4 week, 12 country, tour through Europe, which is coming up soon. Last year we spent 5 weeks in the UK, including a 2 week tour of England, Ireland and Scotland.