What’s Next? (And When Will It Happen)

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Talk of recession is in the air and amongst my clients and readers of this blog the chief question is “when”?

Ever since Trump was elected, questions about when “it’s going to happen” have been floating about. Trump, an 800-pound gorilla with a twitter addiction, has left a predictable path of destruction and the promise of more chaos always seems on the horizon. It should not be surprising then that investors have been waiting with bated breath for an inevitable correction.

Those predicting imminent doom got a little taste of it last week when markets convulsed and delivered the worst day of the year so far, shedding a dramatic 800 points off the Dow Jones. Globally the news hasn’t exactly been stellar. Germany, Italy and France are all showing a weakening economic outlook, which is to say nothing of Great Britain. Despite three Prime Ministers and two deadline extensions, the nation has yet to escape its Brexit chaos and is no closer to figuring out what to do about Northern Ireland. China too is facing a myriad of problems. Trump’s tariffs may be making American’s pay more for things, but it does seem to be hurting the Chinese economy. Coupled with the persistent Hong Kong protests and its already softening market, last week the Chinese central bank opted to weaken the Yuan below the 7 to 1 threshold, a previously unthinkable option aimed at bolstering economic growth.

In all of this it is the American economy that looks to be in the best shape. Proponents of the “U.S. is strong” story point to the historic low unemployment and other economic indicators like consumer spending and year over year GDP growth. But this news comes accompanied with its own baggage, including huge subsidies for farmers hit by Chinese import bans and other trade related self-inflicted wounds. This issue is best summarized by Trump, who himself has declared that everything is great, but also now needs a huge rate cut.

Trump TweetThe temptation to assume that everything is about to go wrong is therefore not the most far-fetched possibility. Investors should be cautious because there are indeed warning signs that the economy is softening and after ten years of bull market returns, corrections and recessions are inevitable.

But if there is an idea I’ve tried to get across, it is that prognostication inevitably fails. The real question that investors should be asking is, “How much can I risk?” If markets do go south, it won’t be forever. But for retirees and those approaching retirement, now ten years older since the last major recession, the potential of a serious downturn could radically alter planned retirements. That question, more than “how much can I make?”, or “When will the next recession hit?”, should be central to your conversations with your financial advisor.

As of writing this, more chaotic news has led Trump to acknowledge that his tariff war may indeed cause a recession, but he’s undeterred. The world is unpredictable, economic cycles happen, and economists are historically bad at predicting recessions. These facts should be at the center of financial planning and they will better serve you as an investor than the constant desire to see ever more growth.

So whether Donald Trump has markets panicked, or a trade war, or really bad manufacturing numbers out of Germany, remember that you aren’t investing to do as well as the markets, or even better. You’re investing to secure a future, and ask your financial advisor (assuming it isn’t me) how much risk do you need, not how much you’ve got.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

The Cost of Advice

Everyone’s focused on the cost of investing, they should be looking at the cost of not having help.

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I regular question I receive is whether fees are to high. This isn’t a perplexing question, it always makes sense to see whether you could, or perhaps should, be paying less. But from a financial planning perspective the questions seem to dominate an awful lot of initial meetings that I have.

For clarity, I think its important to point out that within my own practice we’ve done a lot to increase transparency about our fees and have done what we can to make costs explicit and earn our keep. Years ago, while working for a mutual fund company, I was shocked to learn that some advisors never wanted their clients to know how they were getting paid, or how much. This always struck me as a poor business practice and given the public focus on the expense of financial advice means that I’m not alone in that assessment.

The focus on fees has also paid results to investors. While I have no data on Canada, in the United States mutual fund fees have dropped by nearly 50% since 2000. Canada has been following suit (to what degree I don’t know) but I haven’t had a meeting with a mutual fund company in the last few years that hasn’t spent time highlighting the cost of the investments, or a recent cut to MERs. Much of this has been aided by the arrival of ETFs (Exchange Traded Funds) which have also been on a mad rush to cut costs. Today there are even 0% cost ETFs, although the true costs of those products remains opaque.

And yet, much of this seems like a secondary problem. Costs have rapidly dropped but little attention is being paid to more worrying trends. Investors do badly without help, and financial advice is worth a great deal more than the cost of receiving it.

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The 2019 Quantitative Analysis of Investor Behavior is the most recent annual report produced by Dalbar (Dalbar is an independent provider of business practices in the financial space – you can learn about them HERE), which looks to compare investor behavior against market returns. Produced annually the report stretches back decades and its findings are conclusive. People do badly as investors, and frequently stay just ahead of inflation and well behind market returns. For instance, in 2018 the S&P 500 had a -4.38% return, while the average equity fund investor averaged -9.42%, and the Average Equity Index Fund Investor returned -7.22%.

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These results speak for themselves, but it shows that the greatest enemy to maximizing investor returns are not the fees, but the behavior of investors. Even when investors hold low cost index ETFs, they still underperform markets. The reasons for this are complex, but have much to do with the human mind and its limitations in facing an uncertain future (best captured by the growing field of behavioral economics). A good example of his is found in the report’s Guess Right Ratio, a ratio based around the inflows and outflows of funds to determine how often investors have correctly anticipated the direction of the market. You might be surprised to learn that investors have guessed correctly 50% of the time over the last 13 years, but that guessing right didn’t translate into more money, since investors guessed wrong in a larger magnitude than they ever guessed right (in other words people made bigger bets when guessing wrong) and one wrong guess would wipe out months of correct bets.

Dalbar 3

If there is a place where investors and advisors need to improve, it is how much work is being done for investors at all. The rise of “Robo-Advisors” seemed to solidify a type of investor experience, one in which 75% of investors admit to only communicating with their advisor once or twice a year, and up to 68% never spend more than an hour with their advisor a year, and 31% of investors have never discussed their investment goals. That gap seems one worth closing, and one that cannot be capably done through automated systems, or through impersonal financial practices. The cost of good financial planning seems to be worth it if it improves your returns, gives you comfort in your long term planning and helps make your retirement a success.

As always, if you have questions about fees, performance or your financial future, please don’t hesitate to give me a call or send a message.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared  by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

Wealth in all Stages of Life

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My associate, Kimber, frequently points out that my bookshelves contain a number of real “downer” books on death. She’s not wrong: I have an abiding interest in what it means to grow old and how we die. My bookshelves creak under the weight of Greek and Roman philosophy texts, medical studies about aging, and financial guides for estate planning and preparing heirs. This interest goes back years for me, as part of a philosophical question about what it means to not just live, but also die well.

I’m not alone in this seemingly macabre fascination. Many others, including other philosophically minded people, ask similar questions regarding the difference between being rich and being wealthy. In simple terms, being rich is relatively easy (okay, maybe not easy – but certainly easier to define) while being wealthy asks us to consider what it is that makes us happy beyond material acquisition.

In one respect, this has been the great achievement of Western societies. By enshrining a key number of rights and making them central to our society, we have removed barriers to free association, free movement, freedom of religion and freedom from oppressive institutions. To get up every morning and know that the government isn’t going to seize your lands, punish you for your beliefs or race, or force you to pick up and flee your home in the night is the path towards building wealth. It’s possible to be rich in China, but it is not possible to be wealthy in the same way.

Being wealthy in life also grants the possibility of being wealthy in death. To know that your affairs are in order, to choose what happens to your physical remains, to be able to bequeath in confidence your assets to another generation and even help your children or grandchildren are all things that, until relatively recently, did not always reside in one’s control.

When we were choosing our new trade name, I briefly toyed with the name Walker FINANCIAL Management. But given our 25 year history, the things we’ve helped people do or try to do, limiting our scope to merely the finances of our clients seemed narrow and imprecise. While its true that my role in people’s lives is to help accumulate and save, my job is to help people save for things. I manage money so that children can get an education without leaving school encumbered by massive debt;to help people buy homes and pay down mortgages faster; to help families travel; to help retirees enjoy their time free from worry; and even to facilitate one generation helping another. We’re in the wealth business, not the financial business.

Which brings me back to my abiding interest in dying. I periodically like to point out that we, as a society, are getting older. Demographically, we will feel the effects of a population age across multiple aspects of our society. From health care to real estate, our greying society will challenge us in unique and surprising ways. How we face those challenges will determine how well we preserve our wealth, and it will mean tackling tough questions around independence, lifestyle, and even death.

So, while Kimber looks at my bookshelf and thinks I’m a bit of a downer, I look at it as the next big stage in building and preserving wealth. That’s why we’re Walker Wealth Management of ACPI.

If you have questions about wealth and aging, please give us a call! We can provide retirement planning, help you to find good solutions for Wills, Trusts, and Estates, and walk you through the different questions you should consider when considering passing on assets to heirs.

Trends Investors Should be Sceptical About in 2018

Trends are a big deal in the investing world. Even if you aren’t going to pour over mounds of financial data sometimes trends are all you need to know about to successfully invest. Lots of people have beaten “experts” because they followed a trend rather than become intimate with the financial fundamentals.

It should be no surprise then that trends also dovetail nicely with investing hype and stock market bubbles. The trend is your friend only so long as it still makes sense. In fact being able to understand why the trend is occurring maybe the only thing that saves you from being an apocryphal lemming running over an apocryphal cliff.

In the movie The Big Short, Christian Bale’s character is shown to be a maverick who correctly bet against the housing market. But his bet, notably, was based on reviewing all the underlying mortgages that made up the mortgage backed securities and how the presence of sub-prime mortgages and rising borrowing rates tied to grace periods in the investments would lead to a housing collapse. There were a lot of people on the housing boom trend, but not many on the big short side. What separated them was knowledge about fundamentals.

Trends represent an essential aspect of investing that we typically discourage; betting on outcomes when the fundamentals are opaque or in dispute. Here are a few that we think investors should be wary of.

20160903_LDD001_0Self Driving Cars: In reality you aren’t likely to come across too many investments in this space. I’ve seen some through venture capitalists, but as a growing field and surrounded with lots of hype there is every reason to believe that firms will increasingly be looking for investors outside the venture capital space.

In principle self driving cars sound awesome and could radically change how we live and get around. Lots of companies are excited by the prospect of a self driving vehicles, including insurers and freight firms. However the entire enterprise depends on being able to eliminate the human component completely. That seems less likely and anything short of that (like having a driver always ready to take back control at a moment’s notice) will make the biggest benefits disappear. Beyond that there are also numerous other aspects that haven’t been considered. The cars will have to stop for all pedestrians, so what’s to stop pedestrians from just walking into traffic knowing that the cars will always stop? Or more terrifyingly, the potential for hacking cars and creating accidents with malware?

Those kinds of hurdles don’t get much attention in the fawning media coverage of self driving cars, but they represent the challenges that need to be comprehensively addressed before investors come to believe that this trend is safe and reliable.

Marijuana Stocks: I’ve written about the concerning hype regarding marijuana stocks before and haven’t had a reason to change my opinion since. One of the biggest reasons that investors should be excessively cautious regarding marijuana is because its still illegal. One of the lesser reasons is that as it transitions into a regulated drug, it will be more likely to be treated like cigarettes and alcohol.

In Ontario it has raised ire of prospective sellers that the LCBO would like have control over the sale of pot. In the United States, where marijuana is a Class A drug and regulated by the federal government, it was still unclear whether the federal government would get involved with states that had voted to legalize the drug. Yesterday the Attorney General, Jeff Sessions, announced that federal prosecutors will be allowed to decide how much energy to put into federal enforcement, rescinding the Obama era policy of staying out of the way of states the vote to legalize its sale.

2860534_1280x720This kind of regulatory uncertainty should give investors real pause when they consider which companies to invest in. Most marijuana growers have no profits and only debt and are betting on big returns once markets open up. They would not be the first companies to badly misread what the future holds.

Bitcoin: Whatever is attracting people to Bitcoin at this stage, most serious investors are keeping back. The common chatter is that no one is sure what is driving the price up except demand. Bitcoin is meant to be an alternate currency, one protected by the blockchain and whose algorithm should limit the physical number of total bitcoins in the world. While that may all be true, investors aren’t treating bitcoin that way. Instead prices have fluctuated violently, reaching peaks of $20,000 USD and falling sharply to $13,000 USD. Currently its trading at just over $14,717 USD.

CaptureCurrencies that are subject to incredible volatility are not normally appealing to investors. In fact stability is the key for most currencies, and the Bitcoin phenomena should not be an exception to this. Bitcoin’s intellectual champions point out that it is a versatile currency and a store of value, but if you were a retailer how would you feel accepting payment from a currency that can drop 30% in one day? As a consumer it also would trouble you to pay $5 worth of bitcoins one day only to find out it was worth 1000% more a month later. Currencies work because people will readily part with it for other goods confident that the value is roughly consistent over time.

Bitcoin, and by extension other crypto-currencies lack this basic property, and instead operate in an expensive, unregulated market with little oversight. Investors should give extensive thought as to whether Bitcoin represents good value for money.

As 2018 unfolds, no doubt there will be more ideas that will seem credible but may have little to offer investors except brief excitement. Scepticism remains an investors best accomplice when assessing excitement and investment hype.

The Ballooning Cost of Growing Old

Senior Couple Enjoying Beach Holiday Running Down Dune
The reality about retirement is that this bit can be fleetingly short compared with the scope of being elderly. 

Getting old is something that comes to us all and is rightly considered a blessing of our modern world. Free from most wars, crime and disease the average age of Canadians continues to rise, with current life expectancy just over 82 years.

But being old is no fun. From your late 70s onward quality of life begins to decline in a multitude of ways. From a media perspective we tend to focus on outliers, like the oldest marathon runner, or the oldest male model, men and women who seem to exemplify youth well past their physical. In truth though the aging process is simply a battle that we have gotten good at slowing down.

20696006In his excellent book Being Mortal, author and practicing surgeon Atul Gawande goes through the effects of aging, the limits of science to combat it and how we could be using medicine better to improve quality of life for the elderly. It’s a great and sometimes upsetting read that I recommend for everyone.

One of the great challenges that looms on the horizon is the cost of an aging population. The dependency ratio for the elderly (the metric of people over 65 against those between the working ages of 20-64) is rising, putting higher living costs on a smaller working base. In Canada the dependency ratio is expected to climb to 25% by 2050, and is currently at 23.77% as of 2015. That may not seem like much, but in 1980 (the year I was born) the ratio was 13.84%.

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Since old age is also the point where you consume the most in terms of health care costs we should be aware that Canada’s population isn’t just aging, but that our retiring seniors are poised to become the biggest and most expensive demographic; financially dependent on a shrinking workforce and more economically fragile than they realize. That’s a problem that nations like Japan have been struggling with, where old age benefits are extensive, but the workforce has dwindled.

In other articles we’ve touched on the various aspects of the rising costs of old age. I’ve written about: the importance of wills, the impact of an aging population on our public health care, how demographics shift both investing patterns and warp our economic senses, why seniors may be getting too much of a break economically, how poor land management has made cities too expensive and that’s hurting retirement, and how certain trends are making retirement more expensive. Often these are written as issues in a distant (or not too distant) future. But increasingly they won’t be.

This past week eight long term care facilities have said they will be leaving Toronto. As part of a bigger project, long term care spaces are being rebuilt to meet new guidelines. A new facility is larger, more spacious and designed to maximize medical care. However land costs within Toronto are proving to be too high to be considered for the updated facilities. Why is that? The government pays $150 a day per bed in a facility like the ones leaving. From that subsidy costs for maintenance, nurses, janitors, medicine and food as well as the profit of the business must all be extracted. Margins are thin and building costs in the city are huge. Six more facilities are also considering leaving the GTA for cheaper land.

 

Toronto's City Hall, Nathan Phillips Square. (Shutterstock)
Toronto is a wonderful city, but we’ve done a bad job of making sure that we can still afford to live here. 

 

Eric Hoskins, health minister for the province, is arguing that the subsidy the government provides is enough, but he is already embroiled in other fights with the medical community. In 2015 the ministry cut doctors fees and began clawing back previously earned money as well. Currently lots of people in Ontario struggle to see their family doctor, and there are 28,000 elderly waiting to get access to long term care facilities, and only 79,000 beds. Coincidentally this is also the year that the Ontario Liberals balanced the books. Something about that should give us pause.

This is the reality of getting old in 2017. Costs are rising and are expected to continue growing. Some of this you can’t avoid, and many of us will end up in private retirement homes, assisted living situations, dependent on the government or even family. But there are steps that can be taken to protect assets and insulate against protracted medical or legal disputes.

Here’s a list of eight things that can help you with retirement and your estate:

  1. Keep an updated will and a named executor young enough to handle your affairs. I know it goes without saying, but its extremely important and many of us don’t do it.
  2. Ensure that you’ve got a Power of Attorney (POA) established and that it is current.
  3. Make sure you have a living will and discuss with your family your expectations about how you want your life to end.
  4. Look into your funeral arrangements while you can. It seems macabre, but funerals can be wildly expensive and burdensome to thrust onto grieving family.
  5. Create a space where all important documents can be found by your next of kin and with a detailed contact sheet so people can help settle your estate.
  6. Look into assisted living options early and consider what you might be able to afford. Have your financial plan reflect some of these income needs.
  7. Consider passing along family heirlooms early. Is there a broach, or a clock that you would like to see in someone’s hands? These conversations are easier to handle when you are well than when you aren’t, and downsizing frequently involves saying goodbye to long loved possessions.
  8. Big assets like houses and cottages should be discussed with family, especially if there is a large family and the assets might need to be shared. A lot of family strife comes from poor communication between generations and among siblings.

There will be much more to say about getting old, about protecting quality of life and managing the rising costs of living on fixed incomes. We gain little from sticking our heads in the sand and hoping that we will be healthy and strong to the day we die. In reality our retirement plans should better reflect not our most hopeful ideas of retirement but instead our greatest concerns and seek ways to preserve our quality of life.

Vexed by the VIX

This past week a number of articles spilled forth regarding the VIX index being at record lows. If you aren’t familiar with the VIX, that’s quite okay; the VIX is an index that tracks the nervousness of investors. The lower the VIX is the more confident investors are. The higher the VIX, the greater the concern.

At first glance the VIX seems to clearly tell us…something. At least it seems like it should. The index is really a measure of volatility using an aggregate of prices of options traded on the S&P 500, estimating how volatile those options will be between the current date and when they mature. The mechanics aren’t so important for our purposes, just that this index has become the benchmark for the assumed fear or comfort investors have with the market.

So what does it mean when the VIX is supposedly at its lowest point in nearly a quarter of a century?

Historic VIX
This is the historic performance of the VIX. Data provided by CBOE.

Because we live in the 21st century, and not some other more primitive time, we have the best technology and research to look to when it comes to discerning the meaning of such emotionally driven statistics. Its here that the the area of study of behavioural economics and investing supposedly cross paths and that we might be able to yield some useful insight from the VIX.

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What is this, 2007? Might as well be the stone age!

Or not.

The holy grail of investing would presumably be something that allowed you to accurately predict changes in the market based on investor sentiment. Though over time stock markets are meant to be an accurate reflection of the health and wealth of an economy, in the short term the market more closely tracks a series of more micro events. Investor sentiment, political news, potential scandals as well as outside influences like high frequency trading and professional traders pushing stocks up and down all make up daily activity.

The VIX seems like an ideally suited index to then tell us something about the market, and yet it probably isn’t. The problem with research into behavioural economics (and its other partner, big data) is that it is great at telling us about things that have already happened. The goal, that we could use this information to change or alter human behaviour, is still a long way off (if it exists at all). Similarly the VIX is basically great at telling us stuff that we already know. When markets are bad the VIX is high. When markets are good its generally low.

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Bad forecasting can lead to terrible outcomes.

Thus, the VIX represents a terrible forecasting device but an excellent reminder about investor complacency. When markets are “good” (read: going up) there is a tendency for investors to ask for more exposure to those markets to maximize returns. If you feel uncertain about the future, investors and financial advisors are less likely to “drift” in terms of their investing style, but if people feel very good about the future their far more likely to take their foot off the breaks.

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Yesterday’s selloff followed news that Trump’s Russia problem wasn’t going to go away, but remain a permanent feature of his administration.

Real market panics and crashes tend to be triggered by actual structural problems. 2008 wasn’t the result of too much confidence about the future from investors, but because the market itself was sitting on a bubble. That the VIX was low only tells us what we already knew, that we weren’t expecting a financial crisis.

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We can hope.

With markets down sharply yesterday its tempting to see that this level of investor complacency/confidence harbingered the most recent sell off. But that’s not the case. Trump is, and remains, a kind of nuclear bomb of unpredictability that must be factored into anyone’s expectations about the markets. But what we should do is consider the VIX a mirror to judge our willingness and preparedness to deal with unexpected events and market downturns. If you’ve started to assume that you can afford growing concentration in your portfolio of high performing equity or that you don’t need as many conservative positions, you should take a long hard look at why you feel that way. Maybe its just because you feel a little too confident.

Like everyone else.