The Psychology of Investing
I hope everyone has received my last newsletter in January. In it, I hoped to brace everyone for the inevitable bad news to come.
Since then, our mutual fund statements have arrived and even though most of us were prepared for the bad news, reality hits home when we tear open our own statements.
For myself, I rarely look at mutual fund statements as I consider them to be a snapshot view at particular moments in time.
I know that stock markets go up and down in value - sometimes a little, sometimes a lot and one thing for sure is that I won't be cashing all of my investments and my entire net worth on the exact day of my retirement. Savings are to be accumulated over a long period of time - decades perhaps and divested over a long time. Often, the length of time we save and spend our savings is about equal. One thing for sure, we all wish that our savings will last longer than we do.
A warning is warranted though at this point in time and history. Some investors that have braved the steep market declines of last October and November with stoicism are now starting to waver as we enter the bear market psychology of exhaustion and demoralization.
In this part of the cycle, economic news will generally get worse before it gets better. Previous stock market lows may be tested and new lows may be set. The stomach gets butterflies. Perilous times indeed.
In this phase, we risk moving to "capitulation" which marks the bottom of a bear market and usually, the start of a new bull market. In the process of capitalization, we will start second guessing ourselves. Should I be abandoning ship, get out with a significant loss and invest what's left in a GIC at 4%? Well, we could do that but it will take 13 years to just get back to even. With interest rates plummeting, even a 4% GIC is hard to find these days.
Therefore we must ask ourselves the question: Will the stock market have the ability to recover in the next 13 or more years?
If the answer is no and if one believes that the economy/stock market will not recover at all for the next decade and a half, then you and your financial advisor need to make some difficult decisions.
If on the other hand, you believe that based on history, there is a more than a good chance that the markets will be higher in the next 15 years, then the best course of action may be to stick with the financial plan and let the economy recover on its own.
How we view the world around us and whether the glass is half full or half empty can be a far more important determination of investor success (or failure) than any other factor.
Many clients are due for their annual review soon and these questions should be/will be discussed at these meetings. If you have not seen me in at least the last 12 months, I strongly urge you to contact me so we can do a proper portfolio review and ascertain if your investments are appropriate given your current risk profile.
Crisis, danger, opportunity
“The Chinese use two brush strokes to write the word ‘crisis’. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger – but recognize the opportunity.”... John F. Kennedy, April 12, 1959
The U.S recession by historical standards is getting long in tooth and is now, 14 months old.
The optimistic forecasters are saying that the recession (in the U.S) is nearing an end. The pessimistic forecasters say no, the economy is in way too bad shape and no recovery is on the horizon until late this year at the earliest. Still though, it is encouraging to see that they are talking about this year as the turning point.
Most stock market historians agree that the forward-looking stock market will recover first. Typically, it should start to recover about 5 months before the economy turns around.
There are other positive factors at work that could hasten the recovery process.
If for instance, you have a variable rate mortgage of say, prime minus 1/2%, your mortgage rate is at an all-time low of 2.5%! Yes you heard right, a 2.5% mortgage and your monthly mortgage payments are dropping freeing up more disposable income.
In the short term, interest rates are forecasted to go down even lower. Even credit card interest rates are as low as 4.75%. Even with the "credit crunch", new loans for qualified borrowers are cheap.
Here is another good thing. Journalists were complaining when oil hit $147 a barrel and they are complaining when oil hit $40 a barrel. At today's prices, cheaper oil and gas for energy consumers and business has a very big simulative effect.
Whether you agree or disagree with the government's January budget or how it was implemented, those billions of dollars will be hitting the ground running. Even politicians and bureaucrats are talking about fast tracking dollars so they can be used right now.
Investors are awash in a sea of cash. Cash reserves are building. The most popular mutual fund in January was a money market fund - which is essentially cash. However, as interest rates drop closer and closer to zero, investors will be seeking a return on their capital at some point.
Last year's move from stocks to cash was astonishing - the move back could be equally astonishing.
In the meantime, be mindful of JFK's quote.
Interest rates
Interest rates continue to drop at an alarming rate – great for borrowers, not so good for depositors.
Canada’s largest banks are paying an unexciting 1.0% for a 1 year term GIC and 2.2% for a 5 year GIC. Even these low rates can expect to drop further as the Bank of Canada has lowered rates another 0.5% on March 3, 2009.
With a bit of careful shopping, I can obtain a GIC rate of 2.5% and 4.25%1 respectively – close to double the normal rate.
Please note that GIC TFSAs are now available. A 5 year GIC TFSA is yielding 3.7%.
If you have purchased a daily interest type of TFSA at a banking institution, I would strongly recommend that you transfer it out to a fixed term GIC as short term rates continue to be pummeled. Please contact me if you would like to increase your return on TFSA accounts using guaranteed investment certificates. TFSA are those new Tax Free Savings Accounts that the federal government introduced last year.
RRSP season
By the time you are reading this, RRSP season has come and gone.
The 2009 RRSP season will likely be the slowest in several years. According to a recent Bank of Montreal poll of over 1500 Canadians, one-third plan on cutting back their RRSP contributions and one-quarter will not contribute to their RRSP this year.
Unless your annual income or employment outlook has drastically changed, it is vitally important to keep saving and maintain a monthly RRSP contribution plan and/or a yearly RRSP “top-up” if required.
Web Resources
I signed up for my first ISP (Internet Service Provider) in 1996 and have been online for about a dozen and a half years. There are teenagers that believe that the internet has always existed – a scary thought indeed.
We can thank the internet for giving us the ability to do more work in less time, dealing with hordes of email and wondering who exactly, invented spam.
For those of you that have access to the internet and the billions of pages of information out “there”, here are a couple of relevant links that you may wish to visit.
www.knowingpays.ca – this site is an offshoot of Invesco Trimark and shows off some cutting edge web based technology. Despite the high tech gloss, the “bear market handbook” is a must see for all investors. Good historical perspective in there.
www.dshort.com - if you like charts about bull and bear markets going back as far as the 1800’s, this site is for you. Of popular interest is an overlay chart of the big bad bear markets of the 1930’s 1970’s, 2000 and now. Note the length (in months) of all of these stock market declines. Updated daily.
1 interest rates as of Feb 26, 2009
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