Categories
Investing

11 Market Charts: Dividend Drawdown, V-Shapes, And More

Here are the top investing and economics charts and graphs from the previous week:

Market recovery of 2020 losses

Source: A Wealth of Common Sense

V-shaped economic recovery in China

Source: Invesco Canada

Former luxury brand consumers are now looking for a good bargain

luxury market supplemental
Source: Visual Capitalist

Tourism contributed $1.8 trillion to the US economy in 2019, 8.6% of GDP

Travel and tourism contribution to GDP in absolute terms
Source: Visual Capitalist

Spending at Big box stores doing alright

Source: Visual Capitalist

Dividend drawdowns throughout the past century

Source: A Wealth of Common Sense

Dividend drawdowns correlated to stock price declines, but not a 1 for 1 relationship

Source: A Wealth of Common Sense

Covid-19 was the 3rd leading cause of death in the US between February and May

Personal savings rate hits record high of 33%

Unemployment picture in the US starting to improve, believe it or not

Beer and wine sales skyrocketing in Canada

Categories
Real Estate

1989-1996 Canadian Housing Collapse Looks Eerily Similar to Today

I recently wrote a couple articles proposing that Canadian real estate might be on a downward spiral. So far it has declined 10% on average since February. Some parts of the GTA have already experienced declines of up to 18%.

Hundreds of thousands of Canadians have deferred their mortgages. While some may have done so fraudulently most were in genuine financial distress, as millions of Canadians suddenly lost their jobs.

Unfortunately, these deferrals simply kick the can down the road – payments are piling up as is the interest on the deferred interest. Many of these mortgages will enter default. Many people who can no longer afford their homes will sell. Overall, the supply-demand dynamic is changing for the worse.

CMHC recently issued a report saying Canadian home prices could decline by up to 25% by the end of 2020. Others researchers have argued for larger declines.

As expected, those with a vested interest have cast the CMHC report as inflammatory. Many Canadians simply are in denial that a significant housing decline could happen.

Very smart people are sometimes unable to see breaks from normality. Remember when Federal Reserve Chairman Ben Bernanke was in denial about the US housing collapse?

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

Ben Bernanke, February 15 2006.

Bernanke said this (and many other similar quotes suggesting housing market stability) right when the US housing market was collapsing.

Nobody has a crystal ball, but frankly I find it appalling – but not surprising – that people are so quick to dismiss the possibility of a similar significant decline in Canada. Especially given the weak economic and consumer fundamentals. The fact is it is very difficult for people to accept discontinuous breaks in their reality, just as many couldn’t in February when it was clear that Covid-19 was growing into a global pandemic.

None of this is new. Canada experienced a very similar situation 30 years ago when home prices declined between 1989 and 1996, taking 13 years to recover. At that time immigration didn’t help, falling rates didn’t help and reduced housing inventory didn’t help.

Today, I came across a great thread on Twitter by @ExtraGuac4Me. The thread showed that the same denials were happening in 1989 – right before housing fell by 28% on average.

I’ve pasted the thread in its entirety below:

Before dismissing CMHC’s report, consider this: in 1989, pre-recession, Wood Gundy suggested Toronto home prices would drop by 25%. TREB called the report “inflammatory” & OREA stated “a large price decline is unlikely because the real-estate market doesn’t work like that”

Image

Mortgage rates then fell dramatically by over 500bps (5%!!) over the next few years. This was a significant drop in borrowing costs that cannot be understated.

And no, immigration did not fall in 1989. It went from about 191k in 1989 to 256k by 1993. Also, more immigrants chose major city centres in the 1990s compared to the 1980s. Yes, more immigrants came to Canada and even more went to the Toronto area.

Image

In the end, despite increased immigration to Canada with more people moving to the Toronto area and a substantial reduction in interest rates, prices fell 25% with many condos facing 35%+ declines.

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Get your free copy of my guide to surviving the economic crisis:

Categories
Life

25 Life Changing Dale Carnegie Quotes

Dale Carnegie was born in 1888 into poverty on a farm in Missouri. Over time he overcame his humble beginnings, eventually becoming a globally recognized American writer and lecturer.

He developed a number of courses and wrote numerous books on self-improvement, sales, interpersonal relations, public speaking and corporate life. His seminal work was a book called “How to Win Friends and Influence People”, a bestseller that remains popular today.

His work has inspired millions to become more effective and successful at work and life. Below are 25 of his most influential quotes:

  1. “It isn’t what you have or who you are or where you are or what you are doing that makes you happy or unhappy. It is what you think about it.”
  1. “Don’t be afraid of enemies who attack you. Be afraid of the friends who flatter you.”
  1. “Develop success from failures. Discouragement and failure are two of the surest stepping stones to success.”
  1. “You can make more friends in two months by becoming interested in other people than you can in two years by trying to get other people interested in you.”
  1. “Any fool can criticize, complain, and condemn—and most fools do. But it takes character and self-control to be understanding and forgiving.”
  1. “When dealing with people, remember you are not dealing with creatures of logic, but with creatures bristling with prejudice and motivated by pride and vanity.”
  1. “Success is getting what you want…Happiness is wanting what you get.”
  1. “Everybody in the world is seeking happiness—and there is one sure way to find it. That is by controlling your thoughts. Happiness doesn’t depend on outward conditions. It depends on inner conditions.”
  1. “Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no hope at all.”
  1. “When we hate our enemies, we are giving them power over us: power over our sleep, our appetites, our blood pressure, our health, and our happiness.”
  1. “People rarely succeed unless they have fun in what they are doing.”
  1. “Remember, today is the tomorrow you worried about yesterday. ”
  1. “Talk to someone about themselves and they’ll listen for hours.”
  1. “If you are not in the process of becoming the person you want to be, you are automatically engaged in becoming the person you don’t want to be. ”
  1. “Be wiser than other people if you can; but do not tell them so.”
  1. “Actions speak louder than words, and a smile says, ‘I like you. You make me happy. I am glad to see you.”
  1. “Our thoughts make us what we are.”
  1. “Knowledge isn’t power until it is applied.”
  1. “The best possible way to prepare for tomorrow is to concentrate with all your intelligence, all your enthusiasm, on doing today’s work superbly today. That is the only possible way you can prepare for the future.”
  1. “Nothing can bring you peace but yourself.”
  1. “You can conquer almost any fear if you will only make up your mind to do so. For remember, fear doesn’t exist anywhere except in the mind.”
  1. “Be more concerned with your character than with your reputation, for your character is what you are, while your reputation is merely what others think you are.”
  1. “One reason why birds and horses are not unhappy is because they are not trying to impress other birds and horses.”
  1. “One of the tragic things I know about human nature is that all of us tend to put off living. We are all dreaming of some magical rose garden over the horizon – instead of enjoying the roses that are blooming outside our windows today.”
  1. “You can’t win an argument. You can’t because if you lose it, you lose it; and if you win it, you lose it.”

Categories
ETFs and Funds Income Investing Investing

3 Canadian Preferred Share ETFs for Steady Income

I’ve met many people over the years who love their dividend stocks. They buy Canadian staples like Royal Bank, TD, BCE and Enbridge for their consistent, growing (usually) dividends.

If you’re an income investor, there’s nothing wrong with this for the equity portion of your portfolio. But there’s a way to get the fixed income side working harder – by using preferred shares.

Preferred shares are hybrid securities that pay dividends (often fixed). Preferred share dividends must be paid out before common share dividends, making them a more reliable source of income.

In the event of a dissolution or liquidation of the issuer, preferred shareholders’ claims on assets are senior to common shareholders but behind debt holders.

The share price of preferred shares can change significantly but tends to be more stable than common equities. This is a positive and a negative, depending on how you look at it. Preferred shares don’t participate in the upside profits from ownership of the company and usually have no voting rights unlike common shares. However, they might decline less than common equities from the same issuer in down markets.

Because preferred shares are often redeemable at a specified par value and pay a fixed dividend, they can have similar characteristics to bonds. Namely, they are more interest rate sensitive than common shares. Because of this, at times the prices of preferred shares can move in different directions to their common stock counterparts.

A big benefit over corporate bonds for Canadian investors using non-registered accounts is certain Canadian preferred shares are eligible for the dividend tax credit. (I.e. a 5% yield on an eligible Canadian preferred share is worth more after tax than 5% on a similar bond.) Another advantage over bonds is the higher pre-tax yield. Of course, this is because bonds are ranked higher in a company’s capital structure and tend to be less volatile.

As you can see, preferred shares are an asset class that belongs somewhere between stocks and bonds. As such, they can be used to fine tune a portfolio potentially replacing some of the equity or corporate bond portion, depending on an investor’s individual situation.

Warning: Over the long-run you’d probably be better off NOT using preferred shares as an equity substitute. They don’t participate in the upside – that’s a big tradeoff for an investor with a long time horizon.

There is a lot to look for when buying individual preferred shares:

  • Credit quality
  • Yield to call/redemption
  • Liquidity
  • Term to maturity – perpetual vs retractable
  • Payment provisions – fixed, floating, re-settable
  • Dividend policy – cumulative vs. non-cumulative
  • Other features

Ideally, a portfolio of preferred shares is diversified by issuer and type. Quite frankly the dumb/lazy investor like myself has no time or energy for this kind of research and maintenance. Instead, I prefer to use an ETF.

Below I’ve listed 3 of the largest preferred share ETFs that are traded on the TSX:

iShares S&P/TSX Canadian Preferred Share ETF (CPD)

This ETF provides exposure to a diversified portfolio of Canadian preferred shares and can be used to diversify sources of income beyond traditional government bonds and GICs.

Key facts (as at May 25, 2020):

  • Yield: 6.05% (trailing 12mth distribution yield)
  • Distribution Frequency: Monthly
  • Top 3 Sectors: Banks (35.83%), Insurance (20.98%), Energy (15.67%)
  • Management Fee: 0.45%

RBC Canadian Preferred Share ETF (RPF)

This ETF provides access to a diversified portfolio of rate-reset preferreds in a single ETF. The ETF is actively managed by investment teams with expertise in company-level fundamental research, credit analysis and interest rate forecasting.

Key Facts (as at May 25, 2020):

  • Yield: 6.81% (dividend yield)
  • Distribution Frequency: Monthly
  • Top 3 Sectors: Financials (59.70%), Energy (22.60%), Utilities (14.80%)
  • Management Fee: 0.53%

BMO Laddered Preferred Share Index ETF (ZPR)

This ETF is designed for investors looking for higher income from their portfolios. The ETF invests in a diversified portfolio of rate reset preferred shares and has lower interest rate sensitivity than the full preferred share market.

Key Facts (as at May 15, 2020):

  • Yield: 6.81% (distribution yield)
  • Distribution Frequency: Monthly
  • Top 3 Sectors (May 25, 2020): Diversified Banks (39.17%), Oil & Gas Storage and Transportation (21.43%), Life & Health Insurance (7.53%)
  • Management Fee: 0.45%

Categories
Real Estate Wealth

Canadian Housing Prices Down 10% Since Feb

Canadians aren’t working.

Employment has collapsed, as much of Canada slowly emerges from Covid-19 quarantines. In fact, the number of employed persons in Canada is near a 15 year low (see chart below).

This probably underestimates the problem because it doesn’t include people who are still technically employed but not receiving a paycheque. Many of these people will undoubtedly be added to the unemployment rosters soon.

Canada Employed Persons

It’s no secret that Canadian households are up to their eyeballs in debt. Debt requires money to service, making Canadians highly vulnerable to a negative change to their incomes. The current change is probably the worst we’ve ever seen, putting all forms of household debt at risk of default.

Hundreds of thousands of Canadians suddenly can’t pay their debts and have deferred their mortgages as a result – especially in Quebec, Alberta and Ontario (see chart below). But as I explained in a previous article a mortgage deferral is not a free lunch. The deferred payments are simply adding to what the borrower already owes. (In case you weren’t paying attention, that includes interest on deferred interest.)

All mortgage deferrals do is delay the inevitable. The ability for Canadians to start paying their mortgages again in the future is dependent on employment picking up very quickly. Unfortunately, this doesn’t seem likely. It could take several years for joblessness to shrink back to pre-Covid-19 levels.

The massive volume of mortgage deferrals is a stark warning sign: The Canadian housing market is on the verge of collapse, and with it the Canadian economy.

Simply put, when people can’t pay their mortgages, either they sell and become renters or the bank forecloses and sells the property for them. Either way, a lot more distressed sales enter the market, putting downward pressure on prices. Couple this with a dearth of buyers – due to general economic weakness – and housing inventories rise, again pushing prices down.

It’s only been 3 months and housing prices in Canada area already down 10% across the board. Some parts of Toronto are already down 18%.

While these numbers might not sound huge, they are. A 10-18% change within 3 months is massive! Unless the unemployment situation resolves quickly, by the end of 2020 prices could be down 20-30% across the board.

This isn’t just a housing market issue. The entire Canadian economy is overly dependent on housing and housing-related activity to drive GDP growth. A housing slump will be felt across the entire Canadian economy, with the drag lasting for years.

Ironically, if the housing market declines significantly it will open the door to home ownership to Millennials and Gen Z, which until now were locked out of the market.

Categories
Small Business

Free Websites for Toronto Small Businesses

If you run a small business in Toronto, check this out:

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Here are the details:

Leveraging Toronto’s technology community, the City of Toronto and Digital Main Street have brought together a range of partners to build and optimize online stores for Toronto’s independent businesses and artists at no-cost.

Thanks to volunteer developers, business students, and corporate partners, Toronto’s independent small businesses and artists can access ShopHERE to get their online store built and launched with hands-on support throughout the entire process in just a matter of days.

What do you get:

Choice of an online store customized with their information, branding, logo, etc.

Hands-on assistance setting up and launching their online store.

Training to support their online store, including topics such as digital marketing, shipping and inventory management.

Access to free tools to help support the launch of their online stores.

Here are the requirements:

Be a business located or artist in the City of Toronto that:

  • Pays commercial property taxes in the City of Toronto (rents or owns commercial property)
  • Have fewer than 10 employees or fewer than 25 employees if they are a restaurant or bar
  • Not be a corporate chain or franchise
  • Or must be an artist located within the City of Toronto

Learn more or sign up here.

Categories
Small Business

7 Opportunities for Entrepreneurs Right Now

With change comes opportunity. Look, I’m not making light of the tragic situation. Over 96,000 Americans are dead because of the current Covid-19 pandemic. Many more will die.

However, we still need to make a living. And now is a good time to consider the opportunities opening up due to the massive upheaval the world has just experienced.

Before I continue, in no way do I suggest taking advantage of shortages or vulnerable people. Quite the opposite – I think there is opportunity for entrepreneurs to genuinely help people and businesses impacted by the changed world.

Consider this a brainstorm session. I won’t get deep into the pros, cons, feasibility of each idea. But I hope to kick start some ideas that you can run with and make your own.

If you have any of your own stories, please share them. I’d love to learn more about what you’re doing.

Here are some quick ideas. I’m just dumping them on the page as I enjoy an adult beverage. No editing. No second-guessing. (So please excuse the mess…hopefully a string of words below sparks something in you.)

1) Masks

I’m not talking about hoarding or flipping medical n95 masks. Those need to go directly to medical staff.

Instead, I think there is a big opportunity to create and sell cloth-based masks for the general public. Suddenly, a new product category exists and is ripe for innovation.

What can be done to add value to the mask, which is generally viewed as a commodity? We’ve already seen the plain black masks, but where are the designs? Where is the branding? The differentiation? Hmmm…

2) Virtual events, entertainment, tourism

Large jam-packed events – like conferences and concerts – aren’t coming back anytime soon. Even smaller in-person events are likely to decline in frequency, as business travel wanes and people remain hesitant to meet in person any more than necessary.

There are many existing companies that got into the virtual events business almost overnight. These companies probably could use help.

There is also an opportunity to build and promote your own virtual events. Because overhead costs (e.g. space rental) have been slashed, virtual events require fewer attendees and can be profitable with smaller audience sizes and fewer sponsorships. This creates the opportunity for smaller highly targeted events. At the same time, the potential audience for a single event has suddenly gone global – anyone with a good internet connection is now a potential attendee.

Finally, the total cost to attend conferences (beyond event tickets) has dramatically fallen, opening up the option to audiences that were previously out of reach.

3) Servicing remote workers

A huge segment of the workforce is now working from home. Many of those people will never return to a normal office again.

After a while, sitting at the kitchen table in your pajamas gets real old. People need a proper physical space with proper ergonomic equipment. But what else will people need when working from home? What are the new problems these folks will need help with? Possibly, time management, segmenting work from home, new home distractions, social isolation, new methods for staying relevant, etc.

Businesses that manage a remote workforce will also need help working through the implications. What are the best practices? Will any intermediaries be needed? What tools are needed? What business challenges arise?

Essentially, new situations create new problems that require new solutions.

4) Retail

Retail?!? Yes…and that’s not the gin talking.

Some big retailers with a lot of cash and access to credit will stay afloat during the Covid-19 economic disaster. Unfortunately, many other retailers will die – either voluntarily or via bankruptcy. As this happens, the bigger, stronger retailers are salivating at the market share they will get to absorb.

The CEO of Macy’s recently said that $10 billion of retail sales will be up for grabs. Why should Amazon and Wal-Mart be the only beneficiaries?

Customers will be in transition. Brands will disappear. Regional competition will fall in areas. Surviving small retailers will need help. Commercial real estate rents might decline in areas. More retailers will need an online presence and delivery options.

You’d think there’d be a few opportunities for new ideas. Amirite?

5) Virtual everything

Every brick-and-mortar business has started providing online services in some way. While most people are familiar with online shopping, until now few would have ever considered online fitness classes, therapy sessions or doctor visits. Yet, that’s what we’ve all been doing for months now.

I think many will continue to use virtual services in the future for the convenience. Who wants to waste 2 hours going to the doctor’s office (and paying for parking) just to get a prescription refill?

So businesses that previously required an expensive physical presence can now be created in a basement. Suddenly, the barriers to starting many types of small businesses have fallen.

6) Online learning

This one’s simple. Do you have something to teach? Then build a brand and teach it using the multiple avenues available online. Videos, subscriptions, online teaching platforms, etc.

People have been warming up to online learning for a while, but I think the lock-downs have only accelerated this trend. The entire public school and college system has gone online, legitimizing what was once considered ‘alternative’.

While traditional brick-and-mortar institutions have the brand value, they also come with an enormous price tag. People have increasingly questioned the ROI of college education. Now, with the realization that most of the glitzy peripherals isn’t core to the college education, the door is open to new 100% virtual educational providers.

7) Homesteading

Previously, people that bought skids of T.P. and canned soup were called preppers. Today, we’re all preppers, aren’t we?

This all started with the Great Toilet Paper Panic back in March. Now we’re all baking sour dough and starting vegetable gardens. I think people have discovered the comfort in having a few life skills, and many will become lifelong closet homesteaders.

What can you offer those who want to make their own wine or repair a broken fence? How can you help them achieve their objectives? What would you need if you were starting a new hobby?

***

OK guys. Brainstorm’s over. Take what you want and discard the rest. Ideas are connected, so think about the second and third order effects of some of the problems and opportunities described above.

Perhaps more importantly, start fast and start small. Learn whether you can make $1. Because if you can make $1 you might be able to make $10, $1000, $100,000 and so on. Better to fail fast and find out early.

Categories
Income Investing Investing

40 S&P 500 Companies Raised Dividends During the Covid-19 Crisis

Note: Table below best viewed on desktop PC

If you’ve watched CNBC lately all you see is doom and gloom. If it bleeds it leads, so naturally media has a bias to publish scary stories. And there have been plenty over the past couple months.

Many of these recent stories included high profile dividend cuts at companies with big brand names: American Airlines, Expedia, Southwest Airlines, Walt Disney Company, Estee Lauder, General Motors, Hilton Worldwide, Boeing, Ford, Macy’s, Gap, Nordstrom…just to name several.

This is enough to make a dividend investor want to wait it out on the sidelines.

Despite the negative news about dividend cuts, the number of positive (increases) and negative (suspensions and decreases) dividend actions is surprisingly balanced.

The negative actions make sense and there are undoubtedly more cuts to come. But the increases?

Put yourself into a corporate executive’s shoes. The economic shit-storm is no longer a surprise to any executive choosing whether or not to pay dividends. Many corporate executives now have enough information to determine whether their company can continue to pay – or even raise – dividends. So many companies are indeed in a position to raise dividends.

Consequently, since March 1st 40 companies in the S&P 500 have voluntarily chosen to INCREASE their dividends. Some by significant amounts.

For those relying on a dividend for retirement or investment income, a dividend suspension can be quite a shock. However, if you’ve been following my suggestions you are properly diversified and fairly insulated from the negative shock from a single holding or sector.

In fact, if you’ve been following my articles (Could Covid-19 Trigger a 2008-Style Financial Crisis – February 26, 2020) you might have avoided the crisis altogether.

But that’s in the past. Like the executives leading these corporations, what you need to do now is think about the future. Executives typically don’t raise dividends when the see a dark future for their company.

Which companies increased dividends? Below I’ve listed them in order of % dividend increase. The average increase was 7.44%, ranging from 0.36% to 78.57%. Personally, I think any company raising dividends by 5% or more in this environment has to be pretty confident about the future.

Note that one company initiated dividends in May (Otis Worldwide Corp).

Company NameTimingTickerNew RateOld RateChange %SECTOR
Otis Worldwide CorporationMAYOTIS$0.80$0.00n/aIndustrials
Newmont CorporationAPRNEM$1.00$0.5678.57%Materials
Dollar General CorporationMARDG$1.44$1.2812.50%Consumer Discretionary
Progressive CorporationMARPGR$2.81$2.5111.95%Financials
Ross Stores, Inc.MARROST$1.14$1.0211.76%Consumer Discretionary
Baxter International Inc.MAYBAX$0.98$0.8811.36%Health Care
American Water Works Company,APRAWK2.202.0010.00%Utilities
Globe Life Inc.MARGL$0.75$0.698.70%Financials
General Dynamics CorporationMARGD$4.40$4.087.84%Industrials
Costco Wholesale CorporationAPRCOST$2.80$2.607.69%Consumer Staples
American Tower CorporationMARAMT$4.35$4.047.67%Real Estate
CME Group Inc. Class AMARCME$5.90$5.507.27%Financials
Ameriprise Financial, Inc.MAYAMP$4.16$3.887.22%Financials
PepsiCo, Inc.MAYPEP$4.09$3.827.07%Consumer Staples
Apple Inc.APRAAPL$3.28$3.086.49%Information Technology
Johnson & JohnsonAPRJNJ$4.04$3.806.32%Health Care
Equity ResidentialMAREQR$2.41$2.276.17%Real Estate
Procter & Gamble CompanyAPRPG$3.16$2.986.04%Consumer Staples
First Republic BankAPRFRC$0.80$0.765.26%Financials
Kohl’s CorporationMARKSS$2.82$2.685.22%Consumer Discretionary
UDR, Inc.MARUDR$1.44$1.375.11%Real Estate
Kinder Morgan Inc Class PAPRKMI$1.05$1.005.00%Energy
Citizens Financial Group, Inc.APRCFG$1.50$1.434.90%Financials
QUALCOMM IncorporatedAPRQCOM$2.60$2.484.84%Information Technology
Applied Materials, Inc.MARAMAT$0.88$0.844.76%Information Technology
MetLife, Inc.APRMET1.841.764.55%Financials
TE Connectivity Ltd.MAYTEL$1.92$1.844.35%Information Technology
Nasdaq, Inc.APRNDAQ$1.96$1.884.26%Financials
Expeditors International of WaMAYEXPD$1.04$1.004.00%Industrials
Travelers Companies, Inc.APRTRV$3.40$3.283.66%Financials
Cboe Global Markets IncMAYCBOE$1.44$1.393.60%Financials
Southern CompanyAPRSO$2.56$2.483.23%Utilities
Xilinx, Inc.APRXLNX$1.52$1.482.70%Information Technology
Colgate-Palmolive CompanyMARCL$1.76$1.722.33%Consumer Staples
American Tower CorporationAPRAMT$4.45$4.352.30%Real Estate
Norfolk Southern CorporationAPRNSC3.763.682.17%Industrials
People’s United Financial, IncAPRPBCT$0.72$0.711.41%Financials
Cardinal Health, Inc.MAYCAH$1.94$1.921.04%Health Care
International Business MachineAPRIBM$6.52$6.480.62%Information Technology
Realty Income CorporationMARO$2.80$2.790.36%Real Estate
Categories
Investing

The 60/40 Portfolio is Dead

If you use an investment advisor, I’d bet that your portfolio is some derivative of the standard 60/40 allocation. That is, your portfolio is made up of 60% stocks and 40% bonds.

Yeah, you might be +/- 10% here or there and how you fulfill those broad allocations might differ from others, but ultimately most portfolios are pretty much the same. More specifically, most portfolios are exposed to the same general factors.

The 60/40 portfolio has worked fairly well over the past 40 years. After all, the world has experienced a once-in-a-lifetime secular disinflation that provided a tailwind to both stocks and bonds. In addition, the correlation between stocks and bonds generally remained low, helping to reduce volatility along the way.

Unfortunately, the 60/40 portfolio hasn’t always worked. The chart below shows the correlations within the 60/40 portfolio going back to 1883. There have been long periods during which stocks and bonds were highly correlated, largely eliminating the diversification benefits of the 60/40 portfolio.

The New Investing Paradigm

The modern asset management industry was built on the underlying assumptions behind the 60/40 portfolio. That’s because institutional memory tends to overweight recent history. Unfortunately, the next 40 years might look very different from the last 40 years.

From around 1980 to today, the world has benefited from a secular disinflation created by improvements in computing, communications and global trade. Consequently, inflation and interest rates steadily declined from the double-digit era of the early 1980s.

This long-term decline in rates was like a rising tide for all asset valuations, and provided the economic backdrop for the 60/40 (or similar) asset allocation.

Note: interest rates are a key determining factor when valuing securities. A higher interest rate results in a lower present value of future cash flows – i.e. lower asset prices.

The world is now facing a reversal of some of these trends. Massive monetary expansion, helicopter money and de-globalization are all emerging forces that could push inflation upward. While the last 40 years saw a continued decline in inflation, the next 40 years could see the opposite.

There are no guarantees of course, but this seems like it could be the next ‘black swan’. Nobody is expecting inflation. However, it has happened before. The early 1960s to about 1981 was a period of rising inflation and rising rates, as shown in the chart below.

If a long period of rising inflation and interest rates occurs again, both stocks and bonds will face major headwinds.

A Portfolio for a New Investing Era

If the 60/40 portfolio is dead, what else could investors do? Below I will examine four model portfolios using data (sourced from PortfolioCharts.com) going back to 1970 to see what allocation can withstand both investing eras:

1. All Stock Portfolio

As the name suggests, this portfolio is made of 100% US stocks. Aggressive? Yes. But many people under 30 run portfolios that are nearly all stocks.

2. Traditional 60/40 Portfolio

First proposed by John Bogle, this portfolio splits allocation between the total US equity market and intermediate bonds. While precise allocations and fulfillment methodologies may differ, the risk-return characteristics of most modern portfolios generally align with this model – don’t let all the bells and whistles fool you.

3. Permanent Portfolio

This portfolio was first proposed by investment advisor Harry Browne as a way to provide stability throughout economic cycles. To do this, he included growth stocks, precious metals, government bonds, and Treasury bills.

This is the first of the portfolios examined that goes beyond the traditional, potentially providing stability and growth in a new investing era.

4. Golden Butterfly Portfolio

Like the Permanent Portfolio, this portfolio is meant to perform well during all investing environments. This portfolio has the higher returns associated with the All Stock Portfolio, but the lower risk levels associated with the Permanent Portfolio.

The chart below summarizes the broad asset allocation for each of the four portfolios. Note, these are just models – guidelines investors might use when constructing their own ideal asset allocation.

The Risk Experience

Despite what you might have heard, investing isn’t just about chasing returns. First and foremost, investing is about managing risk. What risks? The risk of losing money, the risk of losing purchasing power, the risk of making mistakes caused by an emotional response to volatility.

An investment with high long-term average returns is pointless if investors sell every time markets decline by 20%. Unfortunately, it is extremely difficult to manage human emotional responses to market gyrations. So portfolios should be constructed to accommodate these emotions. That means, investors crave more stable portfolios that lose money less frequently and have shallower drawdowns when they do lose money. The first chart below shows this data for the four portfolios, with the Golden Butterfly Portfolio as the clear winner.

The second chart shows the longest time to recovery each of the portfolios ever experienced. Can you imagine being underwater for 13 years? That was the longest recovery for the All Stock Portfolio. Shockingly, the 60/40 portfolio’s longest period to recovery was a whopping 12 years!

Portfolio Returns

The four charts below show the rolling 10yr forward returns for each of the portfolios going back to 1970. For example, this means that the bar over 1980 shows the 10yr return an investor would have experienced if they invested from 1980-1990.

What becomes clear by looking at these charts is that the All Stock and 60/40 Portfolios break down in certain environments. In contrast, the Permanent and Golden Butterfly Portfolios provide a much more consistent experience across investing eras.

All Stock Portfolio

Chart Source: PortfolioCharts

60/40 Portfolio

Chart Source: PortfolioCharts

Permanent Portfolio

Chart Source: PortfolioCharts

Golden Butterfly Portfolio

Chart Source: PortfolioCharts

The following chart encapsulates the entire data set into a single average, worst and best return figure. While the Golden Butterfly Portfolio average return is 1.6% (160 basis points) below the All Stock Portfolio, it provides a much more stable experience. Indeed, the Golden Butterfly Portfolio’s worst 10yr return was POSITIVE 4.1%. It is much easier to manage emotions when that’s the worst case experience.

Moving Forward

Remember, the portfolio data above encompasses two distinct investing eras. The point is to show what might work across different eras, not what worked only during the disinflationary era of the past 40 years.

The Permanent and Golden Butterfly Portfolios performed well across eras because of their allocation to gold.

Gold’s investment characteristics are very different from traditional assets like stocks and bonds. In particular, gold tends to outperform during periods in which stocks and bonds underperform. This is important as the world enters a new investing era that may not be favourable to the standard 60/40 portfolio.

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Work

The One Skill To Get Your Career Moving Faster

There is one thing you can do to instantly raise your credibility at work or any other area of your life. This one thing will set you apart from your colleagues because people will perceive you as a confident leader. This one thing will raise your profile because you are able to do something nobody else wants to do.

That ‘thing’ is public speaking.

I hate public speaking. It causes me immense stress. Getting in front of a crowd freaks me out. But if you’re like me, now is the time to give it a go.

We’re all working from home at the moment. In-person meetings and presentations have been replaced by virtual presentations, a much more comfortable way to present to a group. For introverts like me, this is a great opportunity to ease into public speaking.

Moreover, while your colleagues are fading into the background because they’re remaining silent, you now have the opportunity to stand out by taking a leadership role.

When It Comes to Presentations, Preparation is Key

Whether in-person or virtual, presentations are still a ton of work.

For every slide I present I generally require an hour of preparation (if I want to come across as polished and prepared). A 30 minute presentation with 15 slides will require about 15 hours of work, including research, storyboarding and practice.

Anyone can do a great presentation if they invest the time and energy.

The entire process is excruciating. But preparation means the difference between confident orator and rambling buffoon. Don’t let this scare you. Anyone can do a great presentation if they invest the time and energy.

Of course, someone who has been presenting for years will do a better job than someone who rarely presents, but they can both do a great job that impresses their audience.

Presentations Are An Investment in Your Career

The investment will pay off. I have used this strategy at my work over the past several years to manufacture my personal brand. I hate it but it works. By speaking on numerous occasions about forward-looking research topics, people now perceive me as a thought leader. I like to think their perception is accurate, but without me making the effort nobody would know. Presenting is perhaps the fastest and most effective way to shape how others perceive you.

Indeed, because of this manufactured perception I have been able to purposely adjust the calculus of my career so that I spend more time doing the work I’m most interested in. On the whole, by doing something nobody else wants to do I have bought myself more freedom and flexibility to plan my day.

Take The Initiative and Start Small

Whatever your job – no matter where you sit in the hierarchy – you can benefit from taking the initiative to present in front of a group.

Your presentation doesn’t have to be directly related to your role. Talk about something interesting related to your industry. Or talk about something you recently learned that others might find helpful.

Start small and start with a topic you know well. Also, start with an audience you already feel comfortable with. These small wins will begin set you apart from your colleagues. You can grow from there.

Over time, you will become somewhat more comfortable. However, even the most accomplished presenters like Sir Laurence Olivier get stage fright. So don’t expect it to go away completely. Instead, develop coping strategies – the most critical being preparation and practice. 

If you don’t take the initiative to develop your public speaking skills, your career will eventually hit a wall. Almost all mid-level and senior positions require the ability to communicate verbally to a crowd. So investing in this one skill is critical to setting yourself apart and keeping your career moving in an upward direction.