Some of you may be feeling uneasy with the heightened volatility in the financial markets recently. After a much longer than normal period of rising markets and an unusually extended period of relative calm, investors have become more sensitive to volatility. With much of the world on vacation, markets are typically slow during the summer; however, reduced trading volume can exaggerate otherwise modest market moves. Headlines over the summer have been reporting a growing list of concerns with renewed weakness in oil and commodity prices, lingering fears about Greece, and political and military tensions in various regions of the globe. However, the main catalysts for the recent market upheaval are threefold:
1) Uncertainty around central bank policy and the US Federal Reserve’s decision on whether or not to raise interest rates
2) News of China’s slowing economy
3) Reaction to China’s “Casino” stock market
Our need for certainty can cause us to jump to conclusions about the outcome and meaning of events that have yet to fully play out, which often exacerbates the situation unnecessarily. Financial markets do not like uncertainty, and with the proliferation of Exchange Traded Funds (ETFs) and High Frequency computerized trading models, the speed and magnitude of market volatility can be significant.
China’s economy has grown at an accelerated rate over the past few decades to where it is now the world’s second largest economy behind the U.S. However, it is slowing down as it matures and transitions to a service and consumption-driven economy, which is having an impact on other economies around the world. That said, the Chinese government is expected to remain in control of its transition with significant policy flexibility to respond as it deems appropriate. While China’s economic growth has slowed, its growth rate still remains the envy of the world relative to the other developed economies. As the global economy evolves, countries must and will adapt in order to survive and thrive.
China’s stock market has often been called a casino with share prices bearing little connection to underlying economic conditions. Hoping to promote more stock market investment, a couple of years ago the government relaxed its previously stringent rules around margin trading making the stock market more accessible to the masses. In a country where gambling, though illegal, is part of the culture, this proved irresistible as both unsophisticated small investors and opportunistic wealthy ones entered the stock market in droves. According to Bloomberg, more than 40 million new stock accounts were opened between June 2014 and May 2015. The influx of “hot” money from novice retail investors helped push the Shanghai stock market up by 150% in less than a year. Fearing stock prices were rising too fast, Chinese authorities announced new restrictions on margin trading in June of this year, causing the stock market to fall prompting retail investors to flee the market faster than they rushed in. The result? A 43% drop in less than 3 months. That said, only an estimated 5% of households in China have active accounts, so despite the large absolute numbers of retail investors, the market affects a small segment of the overall population and is less systemic than many fear.
While news around China’s stock market, its slowing economy, and its sudden currency devaluation may have contributed to the recent wild volatility in global financial markets, it’s helpful to keep in mind that downturns are fairly common and are a normal function of financial markets. Throughout history markets have climbed a “wall of worry” with intermittent setbacks and they will continue to do so over time. It’s a law of nature that to gain something we must give up something. Over the 20 year period ending June 2014, the cumulative returns of the Canadian Government Bond Index were 3.22 times more than the 91-Day T-bill Index, and the cumulative returns of the Canadian Stock Market Index were 5.67 times more than the 91-Day T-bill Index. While we gain certainty with T-bills, we give up returns and while we give up certainty with bonds and stocks (in the short term), we gain higher returns in the long term.
Market fluctuations (up and down) provide opportunities for actively-managed, globally diversified portfolios. The key to realizing the benefit of these opportunities is to remain invested and allow the portfolio managers to do the job they were hired to do. While we should expect to see continued volatility, it is important that we remain patient as various markets will present attractive entry points for portfolio managers to enhance future returns.
Warren Buffett NYT Editorial
The month of October has been known to cause a fright not just for trick-or-treaters but for financial markets and investors as well. This year it kind of lived up to its reputation, which was helped along by the media.
With stock markets in Canada and the US reaching record highs in September and the subsequent sharp decline into October, there was a lot of nervousness and conjecture over whether it was the start of a large and prolonged downturn.
When a market declines by 10% or more (like Canada’s TSX stock market did), it is referred to as a “correction”. As of Oct 15th the TSX dropped by more than 11% from its record high on Sept 3rd. In the US, the S&P 500 dropped by more than 7% from its record high on Sept 18th.
Three weeks later as of Nov 7th, the TSX has risen by almost 6% taking it out of correction territory, but still leaving it down 6% from its high on Sept 3rd. However, if we go back one full year to Nov 7, 2013, the TSX is up by 10% even having gone through its recent correction. The S&P 500 has broken new highs after rising more than 9% since Oct 15th. Again, if we go back one full year, the S&P 500 is up by more than 14%.
In the eyes of the media, markets approaching correction territory is a news event, and there were plenty of headlines to strike fear and uncertainty into many investors. Was it frightening stories like plunging oil prices, the Ebola outbreak, the Fed ending its QE program, or ghosts from Europe’s past? Those who look to the media for financial advice get a steady diet of opinions and predictions about what the markets will do – and therefore their investments – as well as unsolicited advice on what to do about it.
As Warren Buffett pointed out in his Oct. 16, 2008 oped in the NY Times:
“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.”
I think investors will find it more beneficial to have some broader context on:
how markets behave over time
how professional active portfolio managers use market behavior to add value
implementing and adhering to a personalized long-term strategy
following the rational guidance of a financial advisory team
This context should allow investors to relax more when these corrections occur and take market downturns in stride knowing they are to be expected; they are temporary; and that they are in good hands with the expertise and guidance of professionals.
There’s an old saying that “markets climb a wall of worry”, and they have been doing so for hundreds of years. There will always be events that trigger fear and cause markets to go down, but history has shown that market downturns are less frequent and of shorter duration than market gains. Check suitable and adequate evidently write my paper http://writemypaperinca.com/ our help has all necessary to write a bunch of paper creating as essays, college papers, master thesis speedily and fresh and unique.
An analysis of 93 years of Canadian stock market data (S&P/TSX Composite) from 1920 through 2013 provides the following context:
the market has positive years more than 70% of the time
the market has negative years less than 30% of the time
rises in the market tend to be of greater magnitude than declines
the market gained more than 20% thirty three percent of the time
the market declined more than 20% less than five percent of the time
gains in positive years produce more than double the losses in negative years
in over 90% of market corrections since 1950, the market was up 12 months later by an average of more than 25%
Market volatility is always more pronounced and unpredictable in the short term; however, market movements smooth out and are more predictable over the long term. This is why it is so important to stay invested through the short term fluctuations so one can realize the benefits that the market provides over the long-term.
Short-term volatility in the markets can provide opportunities to enhance investment returns by making quality investments available at discounted prices. Astute portfolio managers monitor daily fluctuations in the market and position their portfolios to capitalize on these opportunities. They will also take a more defensive position by taking profits and holding higher levels of cash when markets and individual holdings become over-valued. This helps limit downturns in their portfolios compared to the overall market.
Investing for your retirement is not only a long journey toward a future destination, it is a journey that continues long after you’re there. Attempting this journey without following a personalized long-term strategy is like trying to navigate through a jungle without a map and without an expert guide – you are easily thrown off whatever course you are blindly following and you fall victim to the unfamiliar terrain and all the scary sights and sounds that jump out at you unexpectedly.
If you have a map and an expert team guiding you, the obstacles on your immediate path will cause sidesteps along the way, but will not throw you off course as you have the support to stay focused on forging ahead toward your destination.
As it turned out, Halloween wasn’t nearly as frightful as investors feared only two weeks earlier. I wonder though, how many succumbed to the scary sights and sounds leading up to it.
For years I have encouraged clients to allocate a small portion (5% – 10%) of their invested assets to gold and silver as a strategic component in their portfolios, as it provides true diversification by protecting purchasing power and managing risk and volatility over time.
I have attached a 1-page PDF info graphic on gold’s role in a portfolio for your reference.
For those who have incorporated gold and silver into their portfolios and subsequently experienced the sharp declines over the past three years, the following will put that into a more positive context..
Isn’t retirement supposed to be a time in life when you get to relax in your home and enjoy those around you? A time to relish in the luxury of not having to wake up to your demanding alarm clock beckoning you to work. Unfortunately, retirement for most Canadians is just that, the alarm clock.
Link to CBC Article
Due to lack of proper financial and cash flow planning for retirement Canadians are finding themselves returning to the grind of the workforce and getting part time jobs. Along with this dramatic lifestyle change they are also selling the one thing they have worked so hard to enjoy, their family home.
According to a survey done by the Bank of Montreal, 59% of Canadians expect to have a part time job and 49% expect to sell their home or property. I think it’s safe to assume that most Canadians do not want this for their retirement. I have included an article, Many Expect Inheritances, Kids To Fund Their Retirement which includes shall we say, some interesting facts with regards to how Canadians are planning their retirement!
No, this is not a new trendy item on a lunch menu. I have attached a study by BMO Nesbitt Burns, Sandwich Generation Squeezed by Caring For Parents and Kids. The sandwich generation is our generation and the financial priorities we have are overwhelming. Between paying down our mortgages, caring for our aging parents, funding education for our children, and our retirement savings, our financial responsibility plates are full. The study by BMO Nesbitt Burns has stated that these demands and responsibilities that we’re facing are leaving each of us more than half a million dollars short of our retirement. Please take a look.