Hot Stocks Burn!

A little bit of knowledge can be dangerous, so its been said. And in the stock market, oh man, ain’t it the truth! Especially in a boom market like the technology heavy NASDAQ.

During the past nine years, ever since the financial world began healing from the Great Recession, the return on a NASDAQ index fund has been relentlessly positive.

Sure, temporarily, price dips into the dreaded valley of bears but give it a day or two or thirty, and charging bulls wrestle momentum forward as price resumes its heady ascent. Currently, the NASDAQ stands above 6110. A mere one year ago, it was at 4800. That’s a 27% gain in one year! Such a gain is outrageously potent when considering that equities historically return an average closer to 8%.

‘Ya, well, that was then, this is now. Get on board the gravy train or stand there with your hands in your pockets, money in a savings account and earn your 1%. Good luck with that!’

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Derailments Happen

More or less, that’s what Jake said to me the other day. Jake is in his late 70s. His wife, Nancy, passed away several years ago. Until bidding farewell, Nancy held the title of family investing guru. Despite having next to no knowledge nor experience with investing, Jake figured, how hard can it be?

And since he’s taken over the portfolio reins, Jake has done well. As have others who have invested in American based index funds.

But here’s the thing: Jake attributes success to his investing prowess. Fact is, Jake has no knack for investing, no know-how, no prowess. I don’t say this as a knock against Jake. Not at all. He’s a fine person with a warm disposition and a kind heart. It’s just that I know Jake well enough to understand that he’s been following the crowd.

And the investing crowd has been riding a tsunami sized wave of good fortune since late 2009. And for anyone whose investment days only just started after the last recession ended, it’s quite possible that all they’ve known are good times.

Cool. Good. Excellent for all who have seen their portfolio grind and bump higher and higher as the NASDAQ, S&P 500, Dow Jones continue to break records. And should Stock Market Gods continue to stoke global economies and shine light upon corporate profits then, hey, whose to say that, far from nearing its end, this party isn’t just getting started?

Hmmmm … hope for the best, nothing wrong with that. But choose to remain blind to the fact that the longest period of sustained economic growth in the USA was 10 years (1991-2001), that from the 20th century onward, recessions typically occur every three to six years, that we are currently in year nine of the economic expansion cycle … and you may be in for a nasty turn of your portfolio.

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This Is Not Chicken Little Calling

Jake talking:

‘Australia is experiencing its 26th consecutive year of economic growth; old age doesn’t derail economies, something has to kill them; consumers are spending; banks are lending; full employment; property prices rising … tell me: where’s the dark, foreboding cloud indicating recession and stock market collapse? Huh? Where?’

Absolutely, Jake. All signs look positively stellar. I mean, who can argue with what you just said or the zooming stock prices of Amazon, Apple, Google and Facebook this year? Wowzers!

But you know what? The stock market, and life, is about looking forward, not backward. Sure, we check out history to learn from others, to learn what worked and what didn’t. Still, as far as my limited knowledge reveals, we humans don’t know what’s coming in the next minute nevermind the next year or two or ten and beyond.

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What’s This Game All About

I’ll give Jake this: economies of the developed world are healthy and look to be getting stronger. And in year five and six and seven and eight, and now nine of the US expansion, pundits have been tripping over themselves to call the next recession and stock market downturn. Yet all they’ve done is fall flat on their face as growth continues and stock markets chug along.

But does this mean you shouldn’t be careful? (yes, yes, be careful!) Re-assess your portfolio? (again, yes!) Consider selling winners and taking profit (oh, yes!) rather than staying fully invested and letting all the chips ride? (yikes, don’t do that!).

Why? Because managing your portfolio is about managing risk. There is ALWAYS risk in your investment portfolio with some assets inherently riskier than others. And you can best manage risk by coming up with a plan that allocates fixed percentages of your portfolio to different asset classes.

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Laws Of Gravity Still In Play

Okay, real world example instead of blathering on: let’s say Jake’s plan involved allocating 20% of his investment portfolio to equities in the technology space, either through buying individual stocks or index funds. And with the gains Jake has made in the tech sector during the past few years, tech’s share of Jake’s total portfolio has ballooned to 45%.

Having too much exposure to tech, i.e., too much risk, makes for a portfolio out of balance. Because when (not if, but when) there’s a market fall, you can be sure that those tech related gains will wither if not evaporate entirely.

Now, since Jake wants to maintain technology exposure at 20%, assuming he accepts sage guidance from BuddhaMoney, he’ll happily sell 25% of his tech assets, pocket the profit, and reinvest elsewhere.

For example, maybe Jake will bump up his fixed income allocation (currently at 20%) and buy a Bond index or individual bonds because he wants to reduce portfolio volatility. Or maybe with interest rates seemingly, finally, on the rise, he’ll put his money to work in financial companies, banks and insurance, since their bottom lines tend to benefit from rising rates. Or increase his cash holdings (nothing wrong with cash; best to be patient and wait for opportunity rather than rushing into investment action).

Whatever Jake decides, the most sensible course of action is to maintain a balanced portfolio, diversified across asset classes (i.e., stocks, bonds, real estate), industries, and geographically. Because booms don’t last forever, crystal balls are the stuff of dreams, and the laws of gravity will not be repealed any time soon.

 

 

 

Cheat Sheet to Stock Investing

This really smart guy I know, lets call him Really Smart Guy, has made a whack of dough through his business. He’s married with two kids and owns a beautiful house in a so-called desirable neighbourhood in stunningly beautiful, and outrageously expensive, Vancouver, British Columbia, that’s worth a few million bucks. His excess cash he shovels into residential real estate, buying homes and renting them out.

Why residential real estate? I’ll leave that one alone for another blog entry, since the topic demands a space all its own. For now, let’s just say that Really Smart Guy bought into the conventional wisdom that bricks and mortar is always a good investment. And for the most part, he’s done well.

Is That a Brick In Your Head?

The other day he was talking to me, telling me how he sold two properties at a slight loss. Feeling sorry for himself, he says to me, ‘you know, if I had invested the same money in Royal Bank of Canada back in 2008 (Canada’s largest publicly traded financial institution with a market value of about $140 Billion Canadian dollars [RY:TSE] – or about $107 Billion of the more valuable American paper [RY:NYSE]), I would have tripled my money! Shoot, I’d be really rich by now!’


Chewy Bit

Every publicly traded company (i.e., company listed on a stock exchange) is given what is known as a ‘ticker symbol’. The purpose of a ticker symbol is to identify a particular security listed on a particular stock exchange. The ticker for Royal Bank of Canada is RY. Since it is listed on two stock exchanges, RY:TSE indicates Royal Bank of Canada, Toronto Stock Exchange. And RY:NYSE, indicates Royal Bank of Canada, New York Stock Exchange.


I’m listening to Really Smart Guy, not saying anything. But I’m processing what he just said, ‘I’d be really rich by now’. And I say to myself, Wow.

Here’s someone who owns his own business, runs his days however he wants with no one telling him what to do, he and his wife and two children are all healthy and thriving, and he’ll likely never have to worry about paying rent or a mortgage, putting food on the table, or providing shelter or clothing to himself and his family. Not only are his basic needs taken care of but he has the wherewithal to satisfy most any other need or want.

Batshit Blind

Yet, Really Smart Guy doesn’t see it this way. He’s already sailing with the top 1% but that’s not enough. He wants more. He wants to be ‘really rich’, whatever that means to him.

Channeling Buddha, I say to myself, okay, here’s a person who’s filthy rich and doesn’t know it. What should I say, what should I do? Well, my perpetually smiling friend tells me:


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Enter Buddha

There is nothing ‘to say or do’. Really Smart Guy is on his own path. Who are you to tell him to be grateful for what he has, for what he’s accomplished? Maybe his perspective will shift one day, maybe it won’t. Either way, your role is not to offer unsolicited advice about living life. What you’re here for is to offer investment advice; that’s the only thing Really Smart Guy asked of you.



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This Way or That

After some more talking about how rich he could have been if only he knew then what he knows now, Really Smart Guy tells me he has never invested in the stock or bond market and he wouldn’t even know where to start.

I get it. There’s so much noise out there coming from mainstream financial media, banks, investment houses, mutual fund companies, exchange traded fund companies, financial newsletters, economists, analysts, central bankers, blogs (except BuddhaMoney, naturally), advertisements, well-meaning but misinformed friends …

… and the noise can be persuasive, pulling you every which way, screaming at you to BUY this; SELL that; stocks are best for the long run; balancing stocks and bonds is essential; buy gold, dump everything else, the system is crashing, paper money will soon be worthless; no, no, no, cash is your best friend; mutual funds are the only way for most people to adequately diversify; scratch that, mutual funds are too expensive, buy me, I’m an Exchange Traded Fund (ETF) that is essentially a mutual fund that charges you lower fees; global markets are down 4% and falling fast, the sky is falling, sell SELL!; global markets are up 4%, sunny days ahead so buy now while stocks are on sale, buy stocks, buy real estate, buy commodities, buy, buy, BUY!

If you want to ride an emotional rollercoaster and in the process drive yourself completely nuts, read these kinds of headlines everyday. That said, because you’re here, cozying up to BuddhaMoney, I assume you shimmy toward inner peace and balance. Bravo.

And if you’re a daily follower of the markets frenzied gyrations then, at this very moment, you agree to take a solemn vow to change this behaviour, to stop allowing mainstream financial media to push your emotional buttons, simply because it will be good for you, good for your BuddhaMoney soul, to shut out the noise.

Still, how do you know what to tune into and what to tune out? What sources are objective and reliable, not touting their own self-interest? How do you know what to buy/sell, when to buy/sell, how much to buy/sell?

Check out our next blog post (ahhh, the cliffhanger), I’ll be talking more about stock market investing, where to start on your investing journey, and how to figure out what’s best for you.