Stock markets across the world are at all time highs. The German, the British, the American indexes are all near 52-week highs. A quick glance at all the markets and you’ll soon realize that pretty much all markets have been up since President Trump was elected. Despite all the hoopla of Trump bringing the world’s economy to its knees, it just hasn’t happened. It’s a testament of how intertwined the world’s economies are and how one man doesn’t have the power to destroy it all.
Despite the record breaking gains, Canadian investors may be wondering where all their returns have gone. A quick look at the TSX and it will show that Canada’s stock market is actually negative for the year to date. This despite the fact that the Bank of Canada has said that our economy is on fire and has been forced to raise interest rates in consecutive meetings.
All these positive signs haven’t led to much gains for Canadian investors. Even a balanced portfolio might be sitting in the negative right now. If all of these markets are at all time highs, why are Canadians getting shafted? Why didn’t we just buy condos instead and reaped the benefits of triple digit leveraged gains? Why even have a balanced investment portfolio at all?
It’s Not A Conspiracy
What really gives me the kicks when people talk about stocks is how there is a conspiracy against them and that’s why they are losing money.
“The banks are siphoning all their gains, that’s why they have record profits”.
“The government is taxing everything and thus my gains are lost”.
“Corporate CEOs are paying themselves exhorbitant amounts. That’s why my money is gone!”
To that, all I can say is, “Sure everyone is conspiring against you. See that car outside your window? It’s the government. They have eyes on you. Actually they have eyes on your money, and the moment you fall asleep they are going to break into your house and steal it from under your mattress.” How realistic does that sound? I really don’t have much patience to argue with the doomsayers. Their world is ending anyways.
There are valid reasons why a Canadian may have a struggling portfolio through 3/4 of the year, but the conspiracy theory isn’t holding true. At least to me it doesn’t, but it probably does hold true to young Millennials that are still struggling with getting full time jobs or swimming in a sea of debt.
It’s Not Time To Panic
As outlined already by the Bank of Canada, the economy is booming in Canada. 4.5% growth isn’t something that comes around often. The same goes for America where profits at corporations are growing and jobs are being created monthly. Ditto for the European continent. There is nothing in the world economy that suggests that there is an imminent decline or a repeat of 2008. In fact, all the central banks in the world are deciding to raise interest rates as they no longer feel it is necessary to keep interest rates at an artificially low level.
That’s why it’s important to stay calm. Nothing is happening. Remember that markets don’t always go up forever. If it did, then I would be more scared. There is no such thing as a sure investment. Investments portfolios will always have good years and bad. All of these short term movements don’t matter. What matters is what happens in the long run. Many investors think that it’s necessary for a balanced investment portfolio to be positive every year. It doesn’t.
On a monthly basis, real estate agents remind us of how well prices have done year over year. On the stock market we get feedback on a daily, hourly or even minute basis. Drops and declines are always over exaggerated by the media. Drama is what sells news. But if the stock market only reported performance on a year to year basis, then the story would be different. Volatility would be a lot lower. We would hear reports of increases most of the time and life investing in stocks would be boring.
Where’s All My Money Going?
All this positive rhetoric means nothing when Canadian investors aren’t joining the party. So what are the gains so terrible this year for Canadian investors. For one if a Canadian only invested in home grown stocks, the stock market in Canada has been terrible. The year-to-date for the TSX composite index is actually -0.75%. You read that right it’s negative!
Without diversification, Canadians have essentially been holding onto a market that is falling in value. Never good news. But what of all the gains that international stock market have been reaping? Where has the money gone to for balanced portfolio investors?
That’s a simple question. One only has to look at what the Canadian dollar has been doing over the last year:
Since the beginning of the year the Canadian dollar has been on a tear. It has risen from the depths of the low 70 cent range all the way to the 82 cent range. That 10.23% gain that the Canadian dollar has appreciated has essentially wiped out most of the international market gains. It’s important to remember that when investing in stocks outside of Canada, those investments are made in dollar denominations that are not Canadian.
This means that if someone holds US stocks, the value of those stocks are now 10% lower because of currency fluctuations. Given that the S&P 500 in the US is only up 11.68% then most of those gains have been completely wiped out.
Additionally, rising interest rates have made fixed income investing a loser this year:
A typical bond fund like the Vanguard Aggregate Bond Index ETF is actually down 1.77% this year. This is the typical behaviour of bond ETF funds. When interest rates rise, bond prices fall and thus there will be capital losses for bond holders. Does this mean that bonds should be sold? Of course not. Bonds are there to keep the volatility of a balanced portfolio down. Should stock markets crash, what’s going to temper the fall if bonds are not in the portfolio?
Stick To The Plan
With Canada and bonds struggling, is it time to sell off all these assets? Quite the opposite. Stick to the original plan that was set out at the beginning of the year. If a balanced portfolio was built based on 40% fixed income and 60% equity then make sure those ratios are still met. Since bonds have fallen and stocks have risen, there might be a larger gap that is starting to form. Keep to your ratios!
Don’t panic if there is a small stock correction. These things happen, and after many long years of big gains, it’s not uncommon for the stock market to take a breather. Remember that it’s the long term performance of an investment portfolio that matters. Not tomorrow, not next month, not end of year, but 25 years from now. Stick to the plan, throw your feet up, enjoy a cocktail and bask in whatever good summer weather Canada still has to offer before it gets cold.