I hope you and your family are managing to navigate your way through this crisis. All of us are all facing uncertainty. No one knows how the crisis will play out.
Given the severe economic slowdown, many people are questioning how the stock market can be within 5-10% of all time highs. The following questions which I posed six weeks ago remain unanswered:
- What will be the pace of effective health intervention including testing, tracing and, ultimately, vaccines?
- What level of economic activity will be achievable without sparking uncontrolled spikes in infection rates?
- What industries will remain impaired post crisis?
- What will be the impact of increased government, business and individual debt levels?
- When will employment, consumer spending and, ultimately, corporate earnings return to pre-crisis levels?
These questions undoubtedly imply a heightened level of risk. So what gives?
I believe the strength of the market rally is based on two main factors:
1. Governments and central banks have so far demonstrated they will do whatever it takes to prevent economic meltdown. This backstop has provided stability and taken the worst case scenario off the table. So in this higher risk environment, even if earnings will be lower for some time, owning a diversified mix of great companies still looks like a good long term bet.
2. Returns on “safe” investments are downright miserable! Most Canadian and US government bonds yield less than 1% p.a., below recent inflation levels, and prospects for higher interest rates going forward are dim.
I don’t know your circumstances so I can’t make personal recommendations but will leave you with three reminders.
i. Expect continued volatility.
ii. Your most important investment decision is determining your overall mix of stocks (growth potential but volatile) and bonds (safe but near zero returns). Check out Chapter 9 of Beat the Bank for a quick refresher on making that decision and sticking to it.
iii. If you expect to draw cash from your investment portfolio within the next two or three years, I suggest you have some short/medium term federal or provincial government bonds, bond ETFs (which hold largely government bonds), insured GICs, insured bank savings accounts or cash to cover those withdrawals.
I welcome your questions and feedback.
I am saving for the purchase of an income property and would like to put my money in a safe investment, I was thinking a cashable GIC (0.6% interest rate) within my TFSA. I am aware that I have to be careful of my contribution room limit.My money is currently in a TD Epremium savings account at 0.1% interest rate.
As you mentioned, ‘returns on safe investments are downright miserable’. Would you recommend a) I keep my money in the high interest savings Account (HISA) and wait for the GIC interest rates to increase or b) I transfer my money to a GIC now.
Thank you
Hi Karen. Rates are miserably low but 0.6% is better than 0.1% and you can cash out so I would suggest going with the GIC now. Hope that helps. a bit.
Hi Larry, I just finished reading your book and it was truly excellent. Given this situation with COVID 19, do you still believe in your core principal of focusing on long-term growth of investments and not getting thrown off by market fluctuations? I am a new/young investor and I’m looking to invest in low-cost ETF’s and stocks. I plan on avoiding mutual funds based on my research and your book.
Hi Jake. Thanks for the feedback. Yes, I still believe in focusing on the long term. Time is on your side! Good luck!
Larry
Your book “Beat the Bank” has been like getting a (Robin Hood sent) life boat when we were about to drown in shark infested (bank) waters. It takes more than one read to fully grasp the enormity of the enlightenment contained in its pages. Years ago, my husband and I were ripped off by Scotia-bank (Scotia Macleod) when they managed to get (as per government protected) “the right” to keep our $5000 investment pass maturity in 2008. They even TRIED to charge us “management fees” while holding up our money. We ultimately recovered $1000 which they held in “cash” until recently, when we moved it (“all in cash”) to an online broker. Since that experience GIC’s and high interest savings accounts was all we had. Never again did or would I trust our banker (s) or invest in Mutual Funds, EVER!!!. Now that my husband is close to retirement, I felt the need to overcome Financial Illiteracy. After months of determination and research I finally came across the vague concept of Index Funds, which eventually lead me to your book. NO ONE, not even a Financial Advisor we met EVER mentioned the things you talk about, or that Index Funds was even an option all along! Better late than never, we can still help and protect our daughter who is in her early 20’s. Thank you SO MUCH Larry. God bless you!!!
Monica.
T.O.
Wonderful to get this feedback Monica. Please spread the word with your friends and on social media. Thanks and good luck!!