The stress test

Stress. Can it kill ya?

Probably not. But it helps get you to the finish line faster. Stress can breed depression, anxiety, gut issues and even dementia, like Alzheimer’s. Stress can accelerate aging and lead to premature death. Yikes.

And what do people stress about the most?

Money. Making it, keeping it and running out of it. Core to money anxiety is fear. Sadly there’s an entire industry in place which makes its own money by scaring the crap out of ordinary souls who worry about loss.

That brings us to Ted, in Alberta. “Should I believe the gloomsters?” he asks. “What about this?” And he sends me the invitation below – a session on collective paranoia and panic set for Edmonton the very next day after the Bank of Canada’s landmark June rate decision.

So Ted has an RRSP coming to term (at age 71), and frets the world might end (or at least a bank fail) before he does. What to do? So much stress.

I will soon put my RRSP (frankly in bank Mutual Funds) in a RRIF, I’m sure many would like a column on which way to go. I know you like B&D ETF’s and I think annuities look heavy with fees. What is most secure. We always say if charter banks go, the lawn goes into potato patch, and chickens on the back deck – though we are not that gloomy and we know that fear sells out seminars.

You betcha, Ted. That’s a headline designed to put bums in chairs and cash in the ticketbox. I know. For years I criss-crossed the country giving financial lectures on behalf of big funds and big banks. Any time the markets were choppy or taking a dump, those lecture halls were SRO. (One night I presented in Calgary, and outdrew Bob Dylan who was performing across the road. He got four thousand. I got six. He had a band. I had a projector. People are weird.)

As Ted reminds, RRSPs run out of steam in your early 70s and must be cashed in (fully taxable) or converted to an annuity (don’t do it) or rolled over into a RRIF (the best option). Thereafter income needs to be drawn from the RRIF and added to taxable income – but it’s just a dribble. The initial withdrawal rate is a titch over 5%, rising to 7% by early eighties and 12% by ninety. The key to making this money last, of course, is to keep it growing apace with the required cash flow.

A GIC won’t do it – especially since rates will be drifting lower over the next couple of years. Annuity don’t pay much better, come with fees, and are designed to go to zero eventually. So if you live to 95, this may cut into your heli-skiing budget. The best bet is to treat the RRFIF exactly as you (hopefully) did your RRSP – loading it up with low-fee, liquid ETFs and in a way that gives balance and diversity. A big chunk of that is maintaining life-long exposure to equity markets, and particularly those of America.

But, Ted says as he fingers his fear-seminar ticket, what about banks crashing, markets tanking and the need for potatoes and numerous chickens?

Key is remembering that at age 70 you probably have 15 more years. Hopefully twenty. And when you do depart this mortal coil, you might also wish to leave liquid assets behind for the kids to fight over. A low-octane GIC or high-fee annuity probably won’t do the trick of providing life-long cash flow and still generating an estate nestegg. Over this long period of time, odds are far higher that a B&D exchange-traded fund portfolio will.

For reference, recall what the stock market’s done over the last 20 years – two decades which contained lots and lots of reasons to wake up at night in a cold sweat, fearing disaster, loss, turmoil and collapse. Markets crashed when the dot-com bubble burst in 2000. Following that was the greatest terror attack ever on any western nation – Nine Eleven, in September of 2001. Then came America’s longest war, in Afghanistan. Next was the subprime mortgage crisis, the collapse of major Wall Street banks and the global credit crisis which nuked stocks in 2008-9, before a recovery. The auto industry almost bankrupted. American real estate blew up. There were debt crises in Europe, Greece, Portugal, Venezuela and Brazil. After that came Covid, the global pandemic, millions dead and the 2020 stock market dump. The Chinese property market tanked. Russia invaded Ukraine, pitting it dangerously against NATO. And Hamas attacked Israel, leading to mass casualties in Gaza and the threat of a new Middle East conflagration.

And what did Mr. Market do over these 20 years? Here’s what…

This is a chart of the S&P 500 stock market index, inflation-adjusted using the headline CPI and each data point represents the month-end closing value. It’s accurate to the close of trade on Friday. And what does it tell us?

Simple. The market reflects the steady advancement of technology, the growth of the global economy, the sum of human progress and investor optimism that tomorrow, next year or decades to come will be better than now. So far, so good. Downturns, panics, scares and reversals have been sharp and short. Advances have been steady and sustained. Those who invested, stayed invested and slept through the emotion, did just fine. That goes for people like Ted, too, who want regular and recurring income from their portfolio. Once they learn to stop tracking their accounts every week, month or quarter, the stress melts away.

Stay home on the 6th, pal. You’ll live longer. And better.

About the picture: “This gorgeous Russian Blue came into my life in January,” writes Heather. “He was found on the doorstep along with another cat over Christmas.  He is smart and funny and a pure delight and sometimes a bit goofy.  Finnegan, according to the vet, was born around August 1st last year.  He said Russian Blues are nice cats.”

To be in touch or send a pcture of your beast, email to ‘[email protected]’.