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Opportunities

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Humans are weird. As this pathetic blog has documented, we crave things other people want and buy them at ascending prices. We run and hid when the same stuff is retreating. It’s as if individual reason is routinely surrendered to herd mentality. And that’s crazy.

We’ve documented this mightily with houses. It’s the same with financial assets. Look at the Reddit-Robinhood crowd, for example, piling into bloated junk like GameStop or vacuous crypto, just because everyone else was. And now the pendulum’s swung to the other side, timorous folk think a 20% correction from all-time record highs for the S&P 500 means the markets is going to zero. They recoil.

We all understand the situation. Post-pandemic full-employment, with the airports jammed, food inflation, gas at two bucks, war, China zero-Covid and rising interest rates have changed the narrative. Maybe there’ll be a recession. Maybe just a spanking. CBs are aggressive now but may dove out. We just dunno.

What we do get is that things which cost a lot more in February are cheaper now. That includes real estate – but given the fact it takes up to six months for mortgage changes to really have an impact – we’re likely nowhere near the bottom. If you buy with cash and plan to live there for years, no matter. But with 20x leverage, it could be a wild and painful ride.

Financial assets are different beasts. The volatility of the last few days gives us a good clue, as markets vacillate between huge gains and withering losses. Says my trader buddy Ed Pennock: “It’s way too early to announce that we saw the bottom. But, a lot of people are doing just that. The 10Y yield broke support at 2.81%. It got down to a 2.7% handle. The yield has blown out by 40 bps in a matter of weeks. The Analyst from Pimco who said she was buying treasuries at 3.2% is a genius.”

So if bond yields are retreating noticeably (they are) and investors are lined up to buy stuff at 20% less than it cost ten weeks ago, what’s the message? Don’t we still have inflation-Putin-CBs-Xi-Mr-Supply-Chain to fret over?

Yes. But assets like ETFs are not the same as bungalows. You can always find a buyer. You can sell with the click of a mouse. There’s always liquidity. And so long as the economy is growing, people are employed and companies are making money, the direction will be up. Recall that 85% of the time since WW2 markets have gained ground. They have retreated only 15% during that period.

Here’s what that looks like, nicely charted by the econs at Scotiabank:

Looking at that chart, do you seriously believe an economy coming out of two years of pandemic with pent-up consumer demand and a record heap of household savings is in peril? That two or four or six or eight interest rate increases will be any more consequential than tightening cycles in the past? Or that after recovering from sell-offs and draw-downs 100% of the time historically, it will be different now?

If so, stop reading. Because we’re about to meet Melissa.

“Long-time reader, adore the blog,” she says, just to ensure that I like her. “Eternally grateful for the advice. I have a quick question. I remember you mentioned it once before in a post a while back but what are your thoughts on dollar cost averaging? Is it a stupid way to invest?

This is how I’ve been investing, every month when I get paid I put away a certain chunk of money into my TFSA to buy my ETF’s. But I have a 10k line of credit with Tangerine bank at I think 2.45% interest. Do you think it would be a wiser idea to borrow from this to invest right now? I’m thinking its a great time to buy some ETF’s on sale but I don’t have a chunk of my own cash to put in right now. And I’ve never done this before, until I saw you mention something about this in one of your posts. Is it generally a better idea?

Dollar-cost averaging is fine. Your set contributions buy more when prices decline and less when they swell. Over time you pretty much pace the market. But you also miss opportunities. And this may be one of them – if you have a long-term investing horizon.

If M uses the ten grand the orange guys are offering in the form of a LOC, she need pay only interest – twenty bucks a month. Then she can deduct 100% of these payments from her taxable income, dropping the effective cost to (probably – depending on her income) less than 2%. At a time when official inflation is close to 7%, this is free money.

More importantly, she will buy assets that may be 20% cheaper than weeks ago, with overwhelming statistical odds they will recover recent highs over the coming weeks/months. That would yield a capital gain which, if realized, is 50% tax-free.

But both tax-deductibility and the cap gains gift depend on her investing in a non-registered account, not a TFSA. Worth considering. In fact, most people would benefit in retirement from a non-reg account (and all married couples should maintain a joint version, for tax reduction and estate planning).

So you can moan and fold like the wusses below decks, or you can be a man like Melissa. (Did I just get into trouble?)

Career Opportunity

Over the past few years several blog dogs have ended up as colleagues at Turner Investments. Their contribution has helped this become one of the larger financial practices in the country, serving clients across the nation. So I am grateful. And here we are – hiring again. Wisely, I am coming here first in the search for another Administrative Assistant. It’s a permanent job with decent benefits like the privilege of working with a crusty blogger-advisor. Location is Toronto. Bay Street. You need to come to the office daily and wear pants. Start date is immediate. Having financial education is great (CSC, for example), but we train. If interested, send a note and your CV. Email me at [email protected].

_________________________________________

About the picture: “Hi Garth, meet Dixie,” writes Lori. “Your newest blog dog, ten week old bichon/poodle mix.  Fresh from her bath, should have called her dynamo!  Have loved reading the blog since forever, thanks!”


Source: https://www.greaterfool.ca/2022/05/24/opportunities/


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