For the 2021 Calendar Year

Canadian Inflation was 4.8% in December 2021

S&P U.S. Aggregate Bond Index returned -1.4%

S&P Canada Aggregate Bond Index returned -2.48%

S&P500 returned 28.71%

S&PTSX60 returned 28.05%

FTSE Developed All Cap ex North America returned 9.1%

As of July 27, 2022…

Canadian Inflation rose to 8.1% in June 2022

S&P U.S. Aggregate Bond Index is down -8.38% YTD

S&P Canada Aggregate Bond Index is down -8.94% YTD

S&P500 is down -15.58% YTD

S&PTSX60 is down -9.44% YTD

FTSE Developed All Cap ex North America is down -17.90% YTD

Imagine you are relaxing in a boat and it is a very calm day on the water, barely a ripple. You are really enjoying your time, soaking in the sunshine, and can’t fathom how your situation could change. Now, imagine one or two waves start to hit the side of the boat. Even though these waves are still quite small, you are accustomed to mirror-flat water so even small waves can feel huge. These waves continue to grow and grow into storm-sized waves and a lack of experience captaining a boat during severe storms can put you in a dangerous situation. During these times, the best thing that you can do is batten down the hatches, remain calm, and whatever happens do not abandon your ship.

This is a great metaphor to help explain the vastly different results from 2021 and 2022 YTD. Everyone was quite happy at the end of 2021 after high-return, low market-volatility year and most financial firm analysts were predicting greater volatility but nothing out of the ordinary and continued positive returns. This is the main reason that I don’t let any market outlooks weigh into my decision-making as a wealth advisor. Analysts can make educated guesses but, in the end, it is still a guess and anything can happen. I write about this in a previous article from December 22, 2021 titled “Forecasts & Fortune Tellers.” So, back to the example, what were believed to be seemingly small issues, that were thought to be transitory, at the end of 2021 acted as the beginning ripples that led us to the storm waves that we have so-far experienced in 2022.   

2022 has been the result of multiple global events to get us into this situation; China’s zero-Covid policy, Russia’s invasion of Ukraine, and a pandemic legacy of over-monetary and fiscal stimulus has led to supply-chain disruptions, commodity shortages, and excess demand igniting inflationary pressures not seen since the 1970s. A diversified portfolio is (usually) one way to minimize negative markets. Markets normally work in a way that if one asset falls then another usually rises, which acts to stabilize the portfolio. However, diversification has its limits. When everything goes down together, there is little that can be done to protect the portfolio. Even hiding out in cash is a guaranteed losing bet when inflation is running in the high single digits. I’d rather give myself a chance to beat inflation by investing my long-term money in the great companies of today at sale prices rather than guaranteeing an after-inflation loss by hiding out in cash.

This is one of the most difficult ideas to grasp as an investor. It can seem like the world is coming down all around you and, as a long term investor, these are the times that you should be trying to deploy excess cash into the market because the potential upside return is higher when markets are down than when they are continually achieving new all-time highs.

It’s also completely okay if you don’t have extra funds to invest when markets are down but, as long as you are invested in a globally-diversified portfolio, you should stay the course at this point. Major changes to your investment portfolio should have been done when the market was still achieving all-time highs. Remember earlier when we thought of ourselves relaxing in the boat? Now is where you should have already battened down the hatches and are remaining calm. Your boat is your only savior during the storm, your boat has experienced lots of storms like this in the past and it was continue to experience lots more storms like this in the future. Whatever you do, do not abandon ship.

If you ever feel like you need some help at the helm of your boat (portfolio) then do not hesitate to reach out below. I’ve experienced many storms, just like this one, in the past and I’ve made sure that none of my clients have ever abandoned ship at the wrong time.

Email me at info@financerx.ca.