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Ch-ch-changes, self-mastery and the stock market

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zenmarketFear, greed and change

The more things in the market change, the more they stay the same

Ah, the markets … If you want to do a great study on fear and greed, look no further.

In summer 2012, I posted Is it better to have invested, and lost investing, than never to have invested at all? (There may have been a little bit of cheek in that title.) The market had taken a bit of a beating after hitting highs in early 2012. Investors were piling into bonds, driving bonds higher and higher. Everybody was piling into Apple, and Apple would soon make an all-time high.

I still don’t know what I was waiting for
And my time was running wild
A million dead-end streets
Every time I thought I’d got it made
It seemed the taste was not so sweet
So I turned myself to face me
But I’ve never caught a glimpse
Of how the others must see the faker
I’m much too fast to take that test

— Changes, David Bowie

Ch-ch-changes: Turn and face the strain

Just when many investors had given up on the markets and run to bonds, bonds peaked and the markets went on a tear. To date:

  • European and U.S. stocks outperformed
  • Many had avoided European and U.S. stocks because of the various end-of-the-world scenarios hitting the headlines hard at the time
  • Apple began its more than 33 per cent decline, losing one-third of its value or more than $230 billion
  • RIM (now Blackberry) more than doubled in value (though it has pulled back lately)
  • Government bonds/treasuries haven’t done a lot while the stock markets have done well
  • Dividend-paying stocks had a good year
  • Gold didn’t glitter
  • More than $140 billion of announced U.S. M&A deals in February alone

Fashionably late doesn’t work in the markets

Suddenly, retail investors felt they might be missing the party. And they were. As these investors came back, a virtual upward spiral led to:

But, is this different than what’s gone before?

Financial information burning holes in space

The avalanche of information that surrounds the stock markets and much larger bond markets is daunting to say the least. Few can digest the information outside of financial professionals. Even Warren Buffett, by far the most successful investor I can think of, will tell you financial professionals don’t know exactly what the market’s going to do — and Buffet says he doesn’t care, in the short-term.

So, what’s an investor to do in the digital age when information travels so fast it seems to burn holes in space?*

Eat what’s good for you

Well, the flood of information’s always been there. The tools of dissemination have just changed. You still need to be intelligent about what you consume.

If you have a good plan, and the conviction to stick with a good plan, you will do well as an investor over time. Being an investor is sort of like being a business owner. You have to be strategic, and you have to devote some time to future growth. That was true fifty years ago, and it’s true today.

More wrong than right

Boys and girls who cry wolf will eventually be right, but are more wrong than right

Mayan calendars, financial crises and the boys and girls who cry wolf will test the mettle of who you are and what you plan to do. It’s always been that way, and it’ll always be that way.

There will be corrections, but there will be long moves forward. You’ll read about high fees and why ETFs** are better than mutual funds, and, in some cases that’s very true, but, what’s even more true is:

  • If you’re avoiding the markets because you’re overwhelmed with information, talk of high fees and the fear that the end is nigh, remember there will always be reasons to set your hair on fire. Markets will correct. Markets will advance. And you’ll always be able to find bad news if you look for it.

The strategy of sticking to your strategy

Get a strategy. Stick to it.

Despite everything, the stock market is still the greatest engine for wealth creation the world has ever seen, and mutual funds are the single easiest investment for the average investor to participate in. The 1 per cent have known about equity markets for a very long time. Information about wealth creation has been widely available for a long time.

While the world may be changing rapidly, especially with respect to communications, investing basics, for the average person, haven’t changed. In a sea of change, there’s still a pattern that holds true.

Keep working your garden

I once watched a gardener working on a Japanese garden. Imagine if he changed his plan every hour and began creating a different garden … Would he ever achieve the aesthetic harmony he set out to?

What separates people from the rest of the animal kingdom is our ability to use our minds. If wealth creation, concerns over retirement or just understanding the great forces at work around us register with you, take a few steps forward.

If you’ve ever watched a baby learn to walk, the kid who’s running like the wind a couple of years later first learned to move forward with a few wobbly steps leading to some serious tumbles as ambition and confidence grew.

Want more information about investing?

Get informed.

Click here for more about bonds/fixed income investments.

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

Click here for articles about dividends/dividend-payers.

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*I’m a fan of social media when used judiciously. Please see my post Social cosmology: Social media is creating its own multiverse and the series of posts that came before it.
**ETFs are wonderful products, but you need to have a trading account in order to buy them. If you’re struggling to keep track of your mutual funds, a trading account may require more time than you’re willing to invest.

Related articles:

$1 Million Invested in Stocks in 1935 is Worth $2.4 Billion Today (If You Held On) (

Teachers’ Pension CEO Says Plan Should Take More Risk (


Written by johnrondina

February 19, 2013 at 4:05 pm

Part Two — Get the balance right

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Can we simplify asset allocation?

Yes, we can.

Watch out for rebalancing fever

It’s possible to get rebalancing fever. Be careful. Like all manias, there are dangers. If you start rebalancing your portfolio every time there’s a slight move, you may find you have no more time for anything else – not to mention creating potential tax liabilities.

In “Let’s think about assets” I also discussed rebalancing. A five per cent portfolio drift is a good measure of when you need to act. The time frame for a five per cent change in your stock or bond allocation depends on markets and economic conditions, investor sentiment and the ever-changing universe of moving parts and multiple players in a global economy. It’s a fluid investing universe.

Automatic for the people

The key with asset allocation is to make it automatic. The sun will rise. The sun will set. Investors rebalance their portfolios.

Eliminating emotion from your rebalancing philosophy makes it more effective. When you rid yourself of the “noise”, you can gain focus, discipline and the ability to implement.

Check your portfolio at least once a year. If you do, you should be able to catch when your portfolio needs rebalancing. When your allocation has strayed enough, rebalance. During times of great volatility, like this past August, have a peek to see if your allocation has moved enough.

Do your emotions get the best of you? Stick to looking at the percentages of your different allocations rather than the dollar values of investments. Market corrections and severe volatility have a way of making investors, especially novice investors, weak in the knees.


There is one overarching rule to rebalancing:

•             Stick with your plan

Once you have decided on a plan of action, abandoning your strategy makes it useless. So why do so many investors flee their plans when the going gets tough? Because they’re allowing emotion to eat into their strategy. Often, the cause is assessing yourself as a more aggressive investor than you really are.

Everyone is superhuman when there’s no kryptonite around.

What’s an investor to do?

Use market corrections to re-evaluate your risk tolerance. Corrections are opportunities. Not only do they show who you really are as an investor, but they reveal inevitable bargains.

Remember, assessing yourself openly and honestly as an investor is very important. After all, this is a conversation with yourself (and your advisor, if you use one).

In the end, every investor has to take a certain amount of responsibility for their investment decisions. We should expect good counsel, transparency and best practices, but we are the best evaluators of ourselves – especially during market volatility. The financial crisis and the resulting market drop clearly demonstrated that many investors couldn’t take the heat. That’s okay.

Know thyself. Then move forward from there.

When it all comes down to it, remember, if you’ve been sitting in GICs for the last few years, you have missed out. (See “Bonds: Why you should love the unloved investment”)

Invest in You Inc.

The thing some investors miss when they rebalance their portfolios is that rebalancing really is taking stock of you. When the media becomes shrill and volatility is very high, this is a strong signal to look in the investment mirror and ask:

•             Who am I?

•             What’s going on?

•             Where are the opportunities?

All we are is all we are

No one ever knows exactly what the markets are going to do. Rarely are great opportunities uncovered by knee-jerk reactions to our most basic fears. We are who we are. But we can all step back from ourselves, think, and reflect:

Fear is a great motivator, but so is stepping outside of fear and looking out at opportunity. Opportunity is like a good neighbour. Often, the potential for good fortune knocks at the door in an unusual form. It’s up to us to recognize it.

Meanwhile, there may be shrill voices on the street and much gnashing of teeth.

Part One is here.

Find out more: Asset Allocation can be easy as A, B, C

Part Two — Bonds: Why you should love the unloved investment

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Count bonds. Forget about sheep.

5-year chart comparing Canadian government bonds and the S&P/TSX 60

In the two years before the financial crisis, government bonds underperformed. Stock markets were hitting all-time highs and few investors were interested in bonds. However, as the risk premium for stocks was rising and stock indices in Canada and the U.S. were hitting highs, shrewd investors were reallocating their portfolios to include more bonds.

Bonds were unloved, but they were cheap, and when stock markets came down in a hurry, bonds acted like the buffers they are: they rose while stocks were coming down in portfolios.

The case for bonds in a portfolio as a permanent asset seems pretty solid. Let’s take a look at the last six months.

6-month chart comparing Canadian government bonds and the S&P TSX 60

Over the last six months, stocks have finally gone into a correction. Stocks have been incredibly buoyant since the bottom of the 2009 crisis and have performed very well. But corrections are a normal part of the investing landscape. Corrections are healthy since they clean out the speculative element in the market periodically. Investors, on the other hand, especially average investors, aren’t huge fans of volatility.

Looking at the chart over the last six months, we can see that government bonds turned up as the markets headed down. Bonds are doing what they do, once again: smoothing out returns by acting like insurance in your portfolio.

Equities hit home runs, but bonds keep you from crashing into the catcher’s mitt and getting called out at the plate.

Equities should outperform bonds in the next few years because bonds have made out well recently, but good diversification together with prudent asset allocation suggest the average investor should have some bonds in the asset mix. Recent news has shown us how commodities and stock markets can change direction in a hurry.

The debt situations in Europe and the U.S. illustrate the importance of having Canadian bonds in a diversified portfolio. Canadian bonds are in a good place when it comes to quality these days.  Just when many were saying Canadian bond returns had peaked and there was no future investing in them, boom, sovereign debt issues exploded in the media – again. Both recent history and the last few days are excellent reminders of why bonds have a place in the average investor’s portfolio.

Canadian government bonds may not work in a get-rich-quick scheme, yet when it comes to your portfolio, it pays to think. Think of bonds as insurance. Think of bonds before you go to sleep. In times of volatility, count bonds and forget about the sheep.

Part One is here.

Update: Foreign investors are also loving the unloved investment in Canada.

Bonds: Why you should love the unloved investment

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Over the last couple of years bonds have been unloved. Interest rates have bottomed. Equities are historically cheap. The economy’s getting better.

Why debate any of the above? Surely, there’s some truth to these statements, and if you pay any attention to the financial news, you’ve heard them all.

Despite the lack of love for bonds, here are some reasons to hold bonds close to your heart through thick and thin, but especially through thin.

In 2009, when it seemed the earth had opened up and was swallowing investors and their portfolios whole, what did bonds do? They did what they’re supposed to do. Bonds acted like investment insurance. Bonds digested the increasingly bad news and turned that news into concrete returns. Interest rates plunged as governments moved to respond to economic fears, some rational, others less so.

Bonds or GICs?

How did bonds do vs. GICs?

The chart compares the Dex All Government Bond Index with 1-year GICs. Over three years, the bond index outperformed GICs by about 14 per cent. That’s roughly seven times the return. If you were invested in an ETF or a mutual fund holding Canadian government bonds, you would have made out well. And your investment would have been more liquid since GICs generally tie-up your money for the period you’ve agreed to invest for.

Stocks or bonds?

Bonds vs. equities

Over four years, if we compare bonds and stocks using the Dex Bond Index and the S&P TSX 60 Total Return Index, which includes dividends, we see that bonds outperformed. Of course, considering that the correction of 2009 was one of the deepest since the depression era, this isn’t much of a surprise. Bonds returned about 22 per cent while the S&P TSX 60 returned about three per cent over that period. It was an excellent period of outperformance for bonds.

The last few years, the financial media has been full of stories about why bonds won’t be the best of investments in the future. True. Bond prices are historically high at the moment, but every story should include that bonds tend to insure a portfolio – and they should always be part of a proper portfolio. Because they outperform, as demonstrated by the charts, when the stock market gets beaten down (see the financial crisis of 2009), bonds should always have their place in your portfolio.

No bonds? Your tolerance for risk had better be high. Bonds outperform when times are tough, and as bond assets rise they take some of the edge off the equities that are falling in your portfolio.

Why does this bond outperformance happen? Because during tough times, investors put their money in high quality investments like government bonds. Governments also tend to lower interest rates during times of financial turmoil. When interest rates go down, bonds become more valuable because the rates of interest they pay are more valuable when compared to new issues carrying lower interest rates. And that’s exactly what happened over the last four years. Bonds went from underperforming equities to outperforming them as jittery investors jumped into the asset class, and governments lowered interest rates in order to provide liquidity during the crisis.

Want to see a great infographic about bonds? (Somewhat U.S.-centric but still educational.)


Stay tuned for Part Two.


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