Updates for March 2020
Scroll down for later posts during the month of March 2020.
As everyone is aware, stock markets around the world have turned down of late caused primarily by fear from the coronavirus and what will be the effect to the economy and your portfolio. I know it's stressful for investors, so I thought I would provide updates on my website, that I hope answer some big picture questions. It is difficult but important to be patient at these times as markets will settle down in time. No one has a crystal ball in these situations but I will show some data below of other major events from history. But first a few comments on investing and portfolio diversification.
First and foremost, if you work with a qualified financial advisor, you will likely have a well-diversified portfolio that will hold a blend of cash, bonds and equities. The exact mix is referred to as "asset allocation" and it's determined when you complete a risk questionnaire with the help of your advisor. The appropriate portfolio is based upon your goals, needs and investment time horizon. Click here for a sample risk questionnaire.
So why not hold all stocks? Psychologically most people don't have sufficient risk tolerance to handle the potential decline that happens from time to time. So therefore they may capitulate and sell low, crystallizing the loss. Bonds in general are less volatile than stocks and therefore bonds provide a cushion as compared to the volatility of an all stock portfolio. In an all stock portfolio, for example in the 2008-2009 financial crisis, Canadian stocks went down 35% in 2008. Click here to read more.
In addition, further diversification is also achieved by allocating across different asset classes within the cash, bond and equity realm. Looking at the multi-color table to the right, as an example, we can see how volatile the "emerging markets" equity class is, (see the fuschia colored squares). Going right to left, following the black arrow, it clearly shows the volatility as the returns swing wildly from top to bottom over time. Click here to review the entire article of Periodic Table of Annual Returns for Canadians.
When there is uncertainty such as the coronavirus effect on the economy, the market becomes extremely volatile. There is no other way to say it but remain calm and as time passes (it may be a month or more), things will calm down. We have been through these traumatic events many times over the past 20 years that I have been an advisor. Here are just a few events in the past that were provided recently by of the portfolio managers I work with and that within a year, markets were positive. SARS is possibly the most vivid for Canadian but it's been 17 years now since that event, so most would not remember that event in the market. The 12 month return after identification of the virus was 32.2% for the S&P 500.
Tuesday March 3, 2020 - Monetary Policy Change.
Monetary policy refers to the adjustment in interest rates. The US Federal Reserve cut interest rates by 1/2 %. In Canada, the Bank of Canada also did the same. This is felt to help support economic growth and was a global response to the "coronavirus". Click here to read more.
A couple of observations here. Bond prices are "inversely proportional to interest rates". That means when interest rates go down, the value of a bond goes up. While that is not enough to make up for the percentage drop in equites, it definitely helps cushion the portfolio losses.
Sunday March 6, 2020 - Non-Opec Meeting
OPEC (Oil Petroleum Exporting Countries) is made up of 13 oil producing countries in the Middle East and is primarily headed up by Saudi Arabia. In a nutshell, at the meeting OPEC was trying to get Russia to reduce oil production which would increase demand and therefore prices. By Sunday, March 8, 2020 it was clear the Russians were not going to agree to cuts, therefore the Saudi Kingdom hiked oil production and therefore using basic economic theory, increased supply which reduced demand causing oil prices to plummet on Monday March 9, 2012. Whether Saudi Arabia can keep this price artificially low remains to be seen.
This in concert with the concern over the coronavirus spread worldwide combined with whether China will be able to refill the "supply chain" as they are beginning to return to work in various industries, also setup Monday for a fall. For those who don't know what "supply chain" means, it's the hole chain of items from various countries that are required to produce a product. China is a major global supplier in the "supply chain" for many good we consume in North America.
Tuesday March 10, 2020 - Slight Rebound in the Markets via Fiscal Policy Stimulus
US markets rebounded Tuesday as the administration is planning fiscal stimulus to help the economy longer term in 2020. The Canadian Federal government is talking possible fiscal policy stimulus too but details were not available at this time.
Wednesday March 11, 2020 - Canadian Federal Government budgets $1.1 B for Coronavirus Effects
Early Wednesday, the Canadian Federal government announced over $1 billion for a variety of measures meant to reduce the risk that the virus will spread rapidly. Read more here.
Other governments around the globe announced measure to tackle the problem and lessen the effect to their economy. These factors will improve a rebounding economy but do not make a stock market turn positive. That clarity will come as the effect of the coronavirus subsides in time.
Friday March 20, 2020 - Audible Stories
I will have a work related email out next week, however, for the weekend I thought the following might be of interest, especially as we have to remain primarily at home.
I came across something that's free and you don't even have to subscribe to use it nor give your email. It's called "Audible Stories" and this is what it's about.
For as long as schools are closed....kids everywhere can instantly stream an incredible collection of stories, including titles across six different languages, that will help them continue dreaming, learning, and just being kids. All stories are free to stream on your desktop, laptop, phone or tablet.
Explore the collection, select a title and start listening.... Click here to listen to Audible Stories
Monday March 23, 2020 - The Vital Importance of Social Distancing
Click here to read my latest post ....The Vital Importance of Social Distancing
This article shows why we need to practice "social distancing" and how it can help fight the spread of the coronavirus, that originally started in Wuhan, China.