Roller Coaster Market and Debts
Roller Coaster Ride
Up…down...up…down…down…down…down…up…up!...up!
Do you sometimes feel the stock market is like riding a roller coaster? Because that’s exactly how it felt like the last few weeks. It’s like how you feel during the Christmas season. All the highs of the season, the Christmas jingles, the lights, the cold winter air, the parties, everyone greeting Merry Christmas to each other. Then after Christmas, comes the crash, the quietness and the realization that you have a ton of credit card bills to pay when it arrives in January.
It’s certainly has been an interesting January we’ve had so far with the stock market. The S&P500 was down 5.07% for the month of January. It came crashing down until the 3rd week of January then started going up until the end of the month. Then suddenly, it started going down again until it hit bottom on February 11 and is now almost back to the high of February 1, 2016.
I normally write a something to my clients whenever I see s big market drop. However, I sort of hesitated writing this because every time I sit down to write it, the market has turned (either up or down). This kind of market reminds me of something I read from one of Warren Buffett’s letter for shareholders. It goes like this.
“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.”
It take a lot to ignore the news on the media about the stock market. But most successful long term investors ignore the short term noise and concentrate on their long term goals. Another way investors are successful is making sure they have the proper asset allocation in their portfolio. This means they have the proper mix of stocks and bonds.
One thing I think to most of my client’s portfolio is to reduce the volatility.
Volatility is defined as the degree of variation of a trading price series over time as measured by the standard deviation of returns. That’s quite a mouthful isn’t it? But I guess the simplest way to explain volatility is how much the price goes up and down over a period of time.
For example, we have ABC Corp. whose stock price over 1 year may range from +30% to -40% and for XYZ Ltd, it may range from +10% to -5%.
So in this situation, ABC Corp. is more volatile because the there’s a 70% range from the highest it normally goes to the lowest it can go over a period of time. XYZ Ltd on the other hand only has a 15% range.
Over a long period of time, say 10 years, you may earn a higher rate of return on ABC Corp. compared to XYZ Ltd. So your $10,000 investment in ABC Corp may turn out to be worth $500,000 in 10 years while your XYZ Ltd investment could only be $100,000.
When someone is asked to choose which investment they would prefer, one that gives you $500,000 in 10 years or $100,000 in 10 years without showing them the volatility, most people would choose ABC Corp.
However, there is a saying that volatility is only good, as long as it’s going up. What most people forget is that volatility also goes down. So they’re ok with high volatility, as long as they see their investment go up. But once it starts going down, they suddenly realize they don’t like volatility.
I’ve seen this happen several times and I know this as well from my own experience. Ever since the Financial Crisis of 2008, I have taken steps to reduce the volatility of my client’s portfolios. In some cases, the volatility of a client’s portfolio is half to less than half of the general market. So if the market is up 10%, their portfolio may only be up 5%. But if the market is down -20%, their portfolio may only be down -10%, sometime less.
This eliminates the need to keep a close eye on the market every day and helps my clients sleep better at night knowing their investment is somewhat safer than the gloom and doom you hear from the media about the stock market.
Of course, there is no guarantee this will always be the case, as we have all learned from 2008, if all hell breaks loose, there is no safe place to hide other than being in 100% cash. But by the time you hear about it in the news, it’s probably too late to do anything other than wait.
What happened in 2015?
The Canadian market (S&P/TSX) was basically down the whole 2015. Down -11.81% for the year.
Because of the drop in oil prices, it dragged the Canadian dollar down with it since we are a major oil exporter. You may find it confusing as to why gas prices is still high even though oil prices is down. While Canada is an oil exporter, we do not refine the oil into gasoline. It has to be transported to the US or other countries where it is refined and turned into gasoline and then sold back to Canada in US Dollar. Since the US Dollar is high, our gas prices still remains high.
Most equity funds invested in the Canadian market was either flat or down in 2015. If your Canadian investment did better than -11.81%, your investment did well even if it went negative since you didn’t lose as much. Even if your return on your Canadian based investment was -5%, then it means that your fund manager was doing his or her job protecting your wealth.
Consequently, the US market (S&P 500) was flat for the year, returning only 0.69% in 2015. However, most global, international and U.S. equity funds did very well. Some even returning over 15% in 2015. You may think your fund manager did really well. However, you have to remember that the Canadian Dollar went down -15% against the US Dollar in 2015. You would have made 15% return on your fund even if it was all invested in cash.
Funds that are invested internationally or in the US have to convert your Canadian Dollar investment into US Dollars before they can invest it. Then it is converted back into Canadian Dollar when it is sold.
There are basically two ways a fund invests in the US or International markets. One is called Hedged where they buy options to remove or reduce the currency fluctuation in your fund. The other is Unhedged, where there is no protection on currency fluctuation on the funds.
So your Unhedged investment in an American fund would probably have made around 10 to 18% in 2015 just because of the exchange rate. If you happen to have a Hedged American Fund, your return would probably be flat. This is not necessarily mean your fund manager is good or bad, it’s just something they have no control over.
2016
So what can we expect in 2016? Probably more of the same as 2015. Some economist and fund managers say that we may see the Canadian market start to bounce back since it was one of the worst performing market in 2015. This was due mostly to the low price of oil. Alberta is the province that’s hurting the most as it lost a lot of jobs because of that.
Some report say we may be in a bear market this year, while others say the economy is strong. As always, it’s better to ignore the noise in the market and make sure you have a portfolio that is properly allocated to your situation.
The recent report states that Canadian credit card debt is rising, with an average debt load of $3,610. That’s not very good.
While interest rates are still low, rising home prices makes mortgage balances higher as well. Which will take the average Canadian a long time to pay off that mortgage. Basically, not very good news if you’re in debt.
Meanwhile, reported inflation is 2%, but a report came out today that the cost of vegetables went up 26.2% last year. I don’t know about you, but the way prices are rising now, it doesn’t feel like the cost to live in Vancouver is only up 2%. MSP premiums alone went up by 4.17% compared to 2015.
The government reported inflation or CPI is what the government uses to determine how much your CCP, OAS, GIS and other government benefits goes up to. But the best way to determine inflation is to look at what you spend your money on.
My advice to my clients this year is to make sure they pay off their debts and mortgages while the interest rates are low. That way, you don’t get caught off guard if interest rates suddenly have to go up. At this low interest rate environment, the money lent to you by the banks is practically free money to buy your home. Don’t waste this opportunity by using the money to buy unnecessary things. Pay it off as fast as possible.
If you have some credit card debts, you may even want to consider consolidating your debts into one with low interest payments.
Finally, keep your expenses low and save any extra dollar you can. Make sure you have a lot of cash or emergency fund saved up. In case we do see a bear market somewhere, this could be a great opportunity to buy up some good bargains.
Up…down...up…down…down…down…down…up…up!...up!
Do you sometimes feel the stock market is like riding a roller coaster? Because that’s exactly how it felt like the last few weeks. It’s like how you feel during the Christmas season. All the highs of the season, the Christmas jingles, the lights, the cold winter air, the parties, everyone greeting Merry Christmas to each other. Then after Christmas, comes the crash, the quietness and the realization that you have a ton of credit card bills to pay when it arrives in January.
It’s certainly has been an interesting January we’ve had so far with the stock market. The S&P500 was down 5.07% for the month of January. It came crashing down until the 3rd week of January then started going up until the end of the month. Then suddenly, it started going down again until it hit bottom on February 11 and is now almost back to the high of February 1, 2016.
I normally write a something to my clients whenever I see s big market drop. However, I sort of hesitated writing this because every time I sit down to write it, the market has turned (either up or down). This kind of market reminds me of something I read from one of Warren Buffett’s letter for shareholders. It goes like this.
“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.”
It take a lot to ignore the news on the media about the stock market. But most successful long term investors ignore the short term noise and concentrate on their long term goals. Another way investors are successful is making sure they have the proper asset allocation in their portfolio. This means they have the proper mix of stocks and bonds.
One thing I think to most of my client’s portfolio is to reduce the volatility.
Volatility is defined as the degree of variation of a trading price series over time as measured by the standard deviation of returns. That’s quite a mouthful isn’t it? But I guess the simplest way to explain volatility is how much the price goes up and down over a period of time.
For example, we have ABC Corp. whose stock price over 1 year may range from +30% to -40% and for XYZ Ltd, it may range from +10% to -5%.
So in this situation, ABC Corp. is more volatile because the there’s a 70% range from the highest it normally goes to the lowest it can go over a period of time. XYZ Ltd on the other hand only has a 15% range.
Over a long period of time, say 10 years, you may earn a higher rate of return on ABC Corp. compared to XYZ Ltd. So your $10,000 investment in ABC Corp may turn out to be worth $500,000 in 10 years while your XYZ Ltd investment could only be $100,000.
When someone is asked to choose which investment they would prefer, one that gives you $500,000 in 10 years or $100,000 in 10 years without showing them the volatility, most people would choose ABC Corp.
However, there is a saying that volatility is only good, as long as it’s going up. What most people forget is that volatility also goes down. So they’re ok with high volatility, as long as they see their investment go up. But once it starts going down, they suddenly realize they don’t like volatility.
I’ve seen this happen several times and I know this as well from my own experience. Ever since the Financial Crisis of 2008, I have taken steps to reduce the volatility of my client’s portfolios. In some cases, the volatility of a client’s portfolio is half to less than half of the general market. So if the market is up 10%, their portfolio may only be up 5%. But if the market is down -20%, their portfolio may only be down -10%, sometime less.
This eliminates the need to keep a close eye on the market every day and helps my clients sleep better at night knowing their investment is somewhat safer than the gloom and doom you hear from the media about the stock market.
Of course, there is no guarantee this will always be the case, as we have all learned from 2008, if all hell breaks loose, there is no safe place to hide other than being in 100% cash. But by the time you hear about it in the news, it’s probably too late to do anything other than wait.
What happened in 2015?
The Canadian market (S&P/TSX) was basically down the whole 2015. Down -11.81% for the year.
Because of the drop in oil prices, it dragged the Canadian dollar down with it since we are a major oil exporter. You may find it confusing as to why gas prices is still high even though oil prices is down. While Canada is an oil exporter, we do not refine the oil into gasoline. It has to be transported to the US or other countries where it is refined and turned into gasoline and then sold back to Canada in US Dollar. Since the US Dollar is high, our gas prices still remains high.
Most equity funds invested in the Canadian market was either flat or down in 2015. If your Canadian investment did better than -11.81%, your investment did well even if it went negative since you didn’t lose as much. Even if your return on your Canadian based investment was -5%, then it means that your fund manager was doing his or her job protecting your wealth.
Consequently, the US market (S&P 500) was flat for the year, returning only 0.69% in 2015. However, most global, international and U.S. equity funds did very well. Some even returning over 15% in 2015. You may think your fund manager did really well. However, you have to remember that the Canadian Dollar went down -15% against the US Dollar in 2015. You would have made 15% return on your fund even if it was all invested in cash.
Funds that are invested internationally or in the US have to convert your Canadian Dollar investment into US Dollars before they can invest it. Then it is converted back into Canadian Dollar when it is sold.
There are basically two ways a fund invests in the US or International markets. One is called Hedged where they buy options to remove or reduce the currency fluctuation in your fund. The other is Unhedged, where there is no protection on currency fluctuation on the funds.
So your Unhedged investment in an American fund would probably have made around 10 to 18% in 2015 just because of the exchange rate. If you happen to have a Hedged American Fund, your return would probably be flat. This is not necessarily mean your fund manager is good or bad, it’s just something they have no control over.
2016
So what can we expect in 2016? Probably more of the same as 2015. Some economist and fund managers say that we may see the Canadian market start to bounce back since it was one of the worst performing market in 2015. This was due mostly to the low price of oil. Alberta is the province that’s hurting the most as it lost a lot of jobs because of that.
Some report say we may be in a bear market this year, while others say the economy is strong. As always, it’s better to ignore the noise in the market and make sure you have a portfolio that is properly allocated to your situation.
The recent report states that Canadian credit card debt is rising, with an average debt load of $3,610. That’s not very good.
While interest rates are still low, rising home prices makes mortgage balances higher as well. Which will take the average Canadian a long time to pay off that mortgage. Basically, not very good news if you’re in debt.
Meanwhile, reported inflation is 2%, but a report came out today that the cost of vegetables went up 26.2% last year. I don’t know about you, but the way prices are rising now, it doesn’t feel like the cost to live in Vancouver is only up 2%. MSP premiums alone went up by 4.17% compared to 2015.
The government reported inflation or CPI is what the government uses to determine how much your CCP, OAS, GIS and other government benefits goes up to. But the best way to determine inflation is to look at what you spend your money on.
My advice to my clients this year is to make sure they pay off their debts and mortgages while the interest rates are low. That way, you don’t get caught off guard if interest rates suddenly have to go up. At this low interest rate environment, the money lent to you by the banks is practically free money to buy your home. Don’t waste this opportunity by using the money to buy unnecessary things. Pay it off as fast as possible.
If you have some credit card debts, you may even want to consider consolidating your debts into one with low interest payments.
Finally, keep your expenses low and save any extra dollar you can. Make sure you have a lot of cash or emergency fund saved up. In case we do see a bear market somewhere, this could be a great opportunity to buy up some good bargains.
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