Here are some headlines from New York Times :
“The Israelis only consider a ceasefire after a Palestinian defeat”
“The Saudis cut their oil production by 10% to put pressure on the United States”
“White House orders delay on trade with Russia”
“North Korean fighter jets reportedly clash with Israeli planes in Middle East”
“Europe is worried about the contagion of oil problems”
“The price of electricity on the rise”
“Things will get worse before they get worse”
Are these headlines raising your stress levels? They certainly make mine rise. Would you invest money after reading them?
If the answer is no, you lose.
These titles were published in October 1973, exactly 50 years ago.
An amount of $1,000 invested in a balanced portfolio (60% in American, Canadian and international stocks, and 40% in bonds) in 1973 is worth $65,000 today, an average annual growth of 8.7%.
I smiled this week when the financial podcast Animal Spirits listed these headlines. It’s because when listening to the news or reading the newspaper, it’s easy to have the impression of going through an extraordinary era. Maybe things were bad before. But they really will, Really bad today.
I do not want to minimize the problems affecting the lives of millions of people, with climate change just beginning to affect our lives.
But when reading the news day by day, it’s easy to fall under the influence of chronocentrism, or to believe that the period in which we live is richer in crises and significant events than past periods.
This makes us feel like doing something like investing is riskier than before. That we could already have a clear idea of what was coming, but that the future is now indecipherable. That we must therefore opt for caution.
All periods are indecipherable. All eras refuse to give us a clear idea of what is coming. The world has always been an unpredictable place, full of dangers, crises, risks.
Discouraged
A survey carried out by the firm Nanos Research showed this week that more than 50% of Canadians believe that their personal financial situation has deteriorated since the start of the year. Also, almost one in five people expect property prices to fall.
Many readers are discouraged.
“There seem to be only clouds for the next two years,” Roch wrote to me, who fears that “the predictable stock market falls will make a big hole in [ses] investments”.
No stock market fall is predictable. Let me repeat: no stock market fall is predictable. If a fall was predictable, it would have already happened.
To understand this, I invite you to keep a logbook. At least once a month, write in your journal what you believe the markets will do in the future.
Then, every six months or so, reread it.
You’ll realize what researchers have observed for generations: predictions about the future of short-term markets are as reliable as flipping a coin.
Seek certainty
Yet, objectively, things are going pretty well in the economy.
The recession predicted by absolutely everyone for almost two years is still only a hypothesis. The unemployment rate has been falling for several years in Quebec, Canada and the United States. Household incomes are reaching record highs. We don’t hear much about it, but wage growth has even outpaced inflation, offsetting the losses caused by price growth.
If an expert had predicted all this a year ago, he would probably have been laughed at.
How are financial assets doing? Generally good. Over the last 5 years, Canadian stocks are up 40%, including dividend reinvestment. US stocks are up 60%.
A portfolio of index funds focused on growth (80% stocks, 20% bonds) is up 5.63% per year on average for 5 years. Even a balanced portfolio (60% stocks, 40% bonds) is up a little more than 4% per year. And that includes the 2020 crash, the 2022 bear market, and the worst period for bonds in over a century.
How to behave in the face of uncertainty? We should not act based on the news. We should continue to invest every payday, or whenever we have money.
“Waiting for falls” to invest may seem logical. It’s a cognitive bias that works to impoverish us, because I don’t remember if I told you, but falls are unpredictable.
Some purchases will occur in a rising market. Others, in a declining market. Crises will arise. Headlines will be scary.
The worst thing an investor can do is panic. Let your emotions control your investments. Desperately seeking certainty in a world that has never offered any.
“The stock market is a way to transfer money from the impatient to the patient,” said Warren Buffett.
Let’s invest accordingly.
Putting the BMW before the horse
My text last week, which focused on luxury, sparked a lot of reactions.
Nicole writes: “Real luxury? It’s being able to fall asleep at night without being tormented by bills to pay. And to know that we have a financial cushion in the event of a problem. »
Several readers also took pleasure in describing their high lifestyle to me and listing the prestigious cars that are in their garage. Porsche, BMW, Audi, Mercedes…
This left me with the impression that we often confuse “lifestyle” and “wealth”.
The lifestyle is what we see. Wealth is what you don’t see.
Imagine a hockey player who lives a rock star life until age 34, then retires, goes through a divorce and goes bankrupt. Is he rich? I would say he never was.
The word “wealth” and the word “independence” are inseparable. A couple who earns $800,000 per year after tax, spends $725,000 and has investments of $600,000 has a big lifestyle. But he is not rich. This couple is one burnout, an accident, job loss, divorce or recession of financial ruin.
I have nothing against luxury purchases. But I am in favor of setting priorities.
In my mind, filling your RRSP, TFSA and RESPs, having little or no debt and having the equivalent of a decade or two of our annual spending in financial assets or rental real estate is the absolute minimum required before even think about choosing a BMW as a personal vehicle, purchased with cash, of course (except for people who have to impress potential customers or partners. In these specific cases, the vehicle can have a marketing function and generate much more than its value in income).
For the majority of us, choosing a means of transportation that is costly to operate, maintain and repair will daily harm our ability to enrich ourselves and gain independence, to decide how we spend our days, not depending on the state of the economy, a career that could cease to captivate us, or a boss that could turn out to be toxic.
“Every penny in your hand adds a penny to the power to determine your future,” wrote American industrialist John D. Rockefeller in a letter to his son, written 117 years ago.
Nothing has changed.