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One of the billion-dollar hedge fund managers who comments on this pathetic blog – or maybe it was your BIL who owns four Tesla shares – told us Friday there’d be a 12,000 point crash on the Dow tomorrow (Monday). That would wipe away 4% of the market’s value. This is consistent with scary Jeremy Grantham’s recent rant that $35 trillion in market value is about to be erased as stocks plunge by 40% before they bottom.

Let’s review this.

Why would financial markets have a cow just as we are looking at emerging full-force form a two-year global plague? After all, the bond market says otherwise (rising yields forecast inflation, not recession). Commodities say it ain’t so (oil hit a seven-year high last week on expected increased demand). Corporate earnings confirm it (year-over-year growth in 2021 was 45%). The labour market denies it (back to pre-pandemic levels in Canada and the US). And the performance of markets themselves over the last twelve months (ahead 27%) belies the moans of doomsayers.

In short, Putin-vs-Ukraine, Omicron, inflation and rising interest rates are vexing, but not terminal. Markets are gyrating because of headlines and investors taking profits as central banks start to remove the punch bowl of cheap rates, but they’ll get over it. They always do.

In short, if you woke up today worrying about your portfolio, well, you have the wrong portfolio. And you have most likely lost perspective.

Remember what history shows. The biggest threat to markets at this moment is a hike in the cost of money. That comes because inflation is hot, there are more open jobs than available workers and the pandemic has made everything more expensive. Look at houses. But rising rates are a sign of economic expansion, not contraction. They are meant to moderate an overcharged economy, temper growth and dampen demand for credit.

How have stocks, for example, done during these tightening cycles? Just fine, as it turns out. What spooks investors far more are recessions – times when earnings fall, unemployment rises and CBs have to cut rates to stimulate investment. That’s not now. The opposite.

Okay, so what’s up with recent losses?

As of this weekend, the S&P 500 is down 8% from the all-time high it touched a few weeks ago – on January 3rd. Could it fall more tomorrow? Is Drake a tedious egomaniac? Of course. But, so what? The odds of this being the start of a bear market as opposed to a garden-variety correction seem low – given the factors stated above.

Keep your perspective. What happens in the next day, or week or month (even year) will have little or no bearing on where your TFSA, RRSP or joint non-registered account sit in five years, or the day you need money to buy a house, send your kid to medical school or retire by the sea. Financial markets can be volatile and irrational in the short-term (and usually are). But it almost always ends up okay. The best tool you have to ensure that is time – assuming you didn’t blow the load on meme stocks or cypto.

Given enough time, there’s nothing markets won’t overcome. Jumping in and out simply augments risk. How do you know when to exit? When to re-enter? Missing a few of the best days is way more consequential than avoiding a few of the worst. And hiding in cash, GICs or HISAs for years is a recipe for penury in retirement for most people. That’s not safe or smart. Sadly most will not understand that until it’s too late to recover.

Try to remember that corrections are normal. They’re good. They blow off excess speculation, weed out the cowboys and help re-establish sound valuations. The things that cause them seem monumental at the time, yet are scarcely recalled a few years later. Higher returns in the long run are only possible because we endure losses in the short term. Without these blow-offs, prices would become completely detached from economic reality because of human nature. So, we go too far. We get spanked. We move on.

Here’s a little summary worth remembering. Most years have corrections. In fact since 1950 there have been 36 corrections, ten bear markets and six crashes. The average draw-down per year has been just under 14%, and yet the average annual gain since the S&P 500 index was created (1957) has been 11%. Conclusion: anyone who ignored the routine, normal, terrifying dips did swell.

In summary. Anything can go wrong. Putin could invade. Omicron could birth another evil variant twin. Inflation could rage and rates jump (check back here on Wednesday). We could see a tsunami, terrorist attack or a Celine Dion revival. None of this can you control, nor should prevent you from waking up and celebrating each day.

So invest in a diversified way. Eschew individual stocks. Go with index ETFs. Have global exposure, not just maple. Be invested across many sectors, and in large and small enterprises. Have balance with insurance-type fixed income assets. Get interest rate protection with preferreds and other floating-rate securities. Use the tax shelters you have been given, fully. Understand pullbacks are normalities, not punishments. Forget the bears. They almost always have something to sell. Ignore the noise. It’s just distracting.

Focus on what matters. You know.

About the picture: “This is my son’s girlfriend’s sister’s chienne,” writes Leslie. “Edmonton born, living in Paris, and vacationing in BC — on a day trip in Vancouver area recently. She doesn’t need your blog, as life is already as good as it gets, but I do.”


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