I haven’t written anything for awhile, for good reason.
The wife and I just got back from a month long trip to the UK and Ireland, and it was great! We’ve been planning this trip for over a year, and haven’t been on a trip since the pandemic took hold of the world back in early 2020 shortly after we retired. We spent first few days in London and Greenwich, did a 13 day bus tour through England-Ireland-Scotland, spent 4 days in Nottingham visiting long-lost family, 5 days in seaside Whitby, back to London for 5 days, then home to Canada. I can’t even list all the things we saw, but we definitely hit many highlights. Just to mention a few; Westminster Abbey, London Eye, St Pauls Cathedral, Buckingham Palace, Stonehenge, Shakespeare’s birthplace, Liverpool Beatles museum and Penny Lane, The Irish Emmigration Center in Dublin, St James Gate Guinness Factory, Belfast Titanic Museum, Cliffs of Moher, Giants Causeway, Edinburgh Castle, Alnwich Castle, and The Shambles in York. There were many, many other places we visited but this gives you an idea of the area we covered. Now that we’ve scratched the retirement travel itch, we want to do it more, and are planning again for next year (or earlier) to see another area of the world. Currently we have our sights on Greece-Croatia but that could change.
Some days, you feel like your brain is gonna explode! When I came back home a market sell-off was in progress, with the world market indices shedding 4-5% during our May absence, and another 4-5% in the first weeks of June. Bull markets don’t last forever and this one got tamed by the bears. Finally, inflation and recessionary fears have translated into very nervous investors and the market selling activity has been fierce lately, with the USA igniting the selloff by claiming 40 year inflation highs at +8%. It doesn’t help that all the news has been negative lately, hypothesizing on nuclear wars, mortgage defaults, China-covid flare-ups, and throwing the “depression” word around. Am I worried? No. Did I sell into this declining market? No. Am I going to buy more shares at a discount to my existing ACBs? Yes. I feel like this is just another correction to what has been a very unusual event. I’m hazarding a guess that there is a mix of portfolio rebalancing and anxious money leaving the market temporarily, just like March 2020, and eventually it will come back in some form or another.
A passive approach to investing means you invest in indexed ETFs, dollar-cost-average into your investments, and your keep your hands off them so they can work for you. The thing I have to keep telling myself through these events are; you can only lose money when you sell a share at a loss, buying them cheaper means more dividends and price upside, and having your money working for you is ALWAYS BETTER than having it sidelined. This, of course, is if you have a solid, diversified plan and didn’t put too many eggs into crypto, gamestop, shopify or some other bullish or longshot investment? If you did this and rode them down in the latest decline, and then sold them at a loss, then you are likely feeling the pain right now? Trust me, it will feel worse when you buy them back for more in the upcoming weeks/months/year? This is the kind of scenario you want to avoid as a passive, diversified, index investor.
The thing about diversification in indexed ETFs, is you never have to guess what stock is going to do good or bad. The investments you hold inside these types of ETFs prop each other up at different times, usually suffer the least in a crash, always keep paying dividends, and always recover after a crash. The economy is simply too big to fail for too long, and technology has made the market hyper-responsive now, so things happen a lot quicker than 20-30 years ago! And also, if you are in an all-in-one indexed ETF you don’t even have to worry about the asset allocations, it’s all done for you.
It will be interesting to see how the Feds and central banks respond in the next policy adjustments. Raising interest rates higher or providing more stimulus are the only relief levers for them at this point that I can see. They have been talking about tax relief at the gas pumps and new home owner plans lately. I’m sure they will all be racking their brains to figure out something creative to keep people spending through this inflationary pain despite rising prices on goods and services, and without putting the county into a tailspin economically. Actually, a market pullback isn’t the worst thing for now. That alone is an indicator that the economy is cooling off, so inflation and rising rates is likely doing it’s job. It’s just that the market moves slowly, and it will take some time for the scales to rebalance. As of late, it’s getting to the point where fixed income instruments like bonds and GICs are paying nearly what the stock market pays, without the volatility, which is causing uncertainty in stocks and mutual funds, and a shift towards fixed assets. History tells us, though, the stock market always does better than fixed income market in the long run, but people’s emotions usually win over this logic and they take flight to whatever safe haven becomes more obvious in “THE NOW”. In reality, a mix that reflects your stage-in-life risk is the best approach to maintain. Also, of note, is a loss is significantly more impactful on your sense of wellbeing than a gain is, which is why these panic selloffs happen and why having a solid finaincial plan works. The opposite of instant gratification is at work, “instant dissatisfaction”.
It’s actually a bit surprising, I don’t really see people’s overall spending habits visibly changing yet despite all the complaining about higher prices right now? London was packed solid with people for Jubilee week, pubs and restaurants full, and the airports were (and still are) over-run with anxious travellers. Our home town is a bit of a tourist mecca and tourist activity and associated events here are visibly picking up. This doesn’t mean things won’t change in near future, but people still seem to have extra money or anticipation for a big repoening despite the inflationary pressures on the world. Maybe the covid savings are deeper than we expected, and maybe lots of people got rich during the pandemic and bull market? Maybe this is simply where they will put their money right now instead of investing it? At any rate, people still seem to be spending and for now, and this is good. It’s when the cash starts going into people’s mattresses or isn’t available to spend at all that true depressionary forces set in. This is still possible, though I’m not sure I see it as a deep or long term problem just yet. Even if it does go deep and lasts awhile, I still believe I’m diversified enough, and in quality assets that will keep paying me regardless of whether or not the market does a complete nose dive and stays there a year or more or not. We haven’t even pulled the CPP lever yet, which is another source if I feel we need it earlier, but won't.
One thing that has been reinforced for me in retirement is that minimalization will help you sleep much better at night. I was super-nervous when the pandemic hit months after we pulled the pin, but we coasted right through it and downsizing was a major factor. 50% smaller home and 50% less stuff = 50% less costs. Then, if you can build a retirement plan on top of that with targets to keep your expenses 20% or more below your annual income, you’ll have room to ride out any inflationary or higher expense environments. Furthermore, if you can identify all the flexibilities in your budget then these are additional savings triggers you can pull. Things like travel, cable TV subscriptions, or a 2nd car (insurance and costs), are things you can pare off if you want. Obviously, if you are living on the edge with your retirement income to expenses this is a very tough and undesirable place to be when 7-10% inflation is at work.
With housing and rental costs where they are today, retirement might seem like a long ways off unless you already own your home, or can use your existing equity to get into another place without a mortgage? I basically own a 2nd home in an REIT. This particular investment pays me reliable rent and I can sell it any time and in any denomination I want if I want the equity out of it. It rises and falls with the CAD real estate index and general market sentiment, just like a single rental house but way more diversified and stable in value. If I needed, it could pay my rent in another place, but I don’t because I’m lucky enough to be a home owner so it simply pays me retirement income. If I didn’t own a home right now, I’d be renting for the unforeseeable future.
Many people are forced into retirement due to age or otherwise without the adequate savings or a plan, and live with the ongoing stress of every little bump in their expenses putting them in dire trouble. I feel bad for those who worked their whole lives and have to give up the basics of life; like food or heat, to make ends meet in these scenarios. I don‘t have solid answers for this demographic, and obvious this is not where you want to be. Living paycheque to paycheque is just as bad a plan in retirement as it is in your working career. That’s why saving early to build good habits and having realistic financial goals and plans will benefit you in the future. Having income plans that always exceed your expenses is a very good strategy, because you can never plan for those bumps in life like a market crash or huge medical expense.
But what happens next is anyone’s guess. Some things are obvious to me. People saved a lot through Covid and have a bit of a spending therapy going on. Many put their savings to work in the market. Some did it wisely, others not so much. Things are getting more expensive worldwide for a whole gammet of reasons, and nobody knows how deep inflation will bite. It won't get better until supply chains catch up with demand. Some countries will feel it worse than others. People will eventually get more defensive with all their expenses in this environment, meaning money will stop flowing into some areas and will shift around where people see needs or ongoing value. The volatility will continue until people feel they are making more than they are spending or are significantly improving their wellbeing. But it will eventually get better.
These are definitely interesting times. If you are a passive investor and have a good plan, I’d say turn off the news, stop looking at your investments every day, and take a rest from what everyone else is doing. The market will go up more than they go down over time. History says so.