2022 Economic and Investing Update

Retirement Income Planning, Calgary

2022 Economic and Market Update

It's a bad news/good news story! There are several events taking place that serve as a backdrop to understanding what's going on in the world and what they mean for us. The bad news first.

1. Inflation. You may not understand it, but you certainly feel it. The most significant impact is in food, transportation cost, real estate, and wages, but the list is growing. The governments and central banks threw everything, including a lot of easy money, and the kitchen sink, at the pandemic and now they have to deal with the fallout. You have heard about the push/pull debate in which inflation would be temporary while others say this is going to stick around longer than most think. There are a lot of factors contributing to the high inflation rate. There have been many supply chain issues. Wage growth as employers are struggling to find workers from a dwindling pool of qualified applicants, or half their workforce is out because of infections.

2. Interest rates. The main tool that central banks use to control inflation is to raise or lower interest rates. The problem right now is that the economy has heated up from unusual and temporary issues, that may very well resolve themselves over the next few months as the pandemic declines. People returning to work, fewer restrictions. There are a lot of unusual disruptions that have created the problem of inflation. It's a difficult conundrum and everyone, including the market, is looking for some direction.

3. Energy crisis. The price of WTI is in the $85/barrel range. the whole world is struggling to stay warm in the winter and cool in the summer.

4. Geopolitical risk. Russia is camped out on the border of Ukraine, ready to invade. While the rest of the world looks on. There's a conflict between China and the USA. Here's a global conflict tracker where you can see all of the tensions taking place. Believe it or not, the US mid-term elections are later this year.

5. The pandemic. Most think it's coming to an end and we are all cautiously optimistic as we have heard that before. It's disrupted everyone's life in a way that we never dreamed and we all just want to get on with living.

It's with this backdrop in mind that we look at the current events to try and understand what's going on and what impact that will have on investing and trying to create retirement income in 2022.

We don't make predictions.

We are retirement income, investment, and tax planners, not stock pickers or market timers. However, we are working with our planning and full-service clients to determine where to allocate their investment dollars for the coming months to preserve capital, get risk-adjusted returns, and deliver sustainable income.

Our Process

To determine the best way to allocate investment money for our clients over the next 12 to 18 months includes attending webinars from several key investment firms like Manulife, Sun Life, Dynamic, Nicola Wealth, and a few other investment strategists we listen to. We gather information from leading experts and follow their guidance on a consensus basis. 

Typically, the information among these key teams of strategists will have some similar treads (consensus) and we move forward based on this information. Rarely is it necessary to make sweeping changes within an investment portfolio, but the key to long-term success is annual rebalancing and allocating money in the right areas of the market and the world.

Side note: The last place anyone should be taking investment advice from is the media. If you do, you will live in a constant state of fear and panic. 

Some of the keys to careful investing that are always in style:

1. Patience.

2. Don't make long-lasting decisions based on temporary events.

3. Avoid emotional short-term moves. The pain of loss is felt 2 times more deeply than the joy of gain.

4. Proper diversification is important, both geographically and across various asset classes.

5. Follow the big money.

6. Cash flow is king. 

7. You have to manage risk and not confuse it with volatility. 

8. The market is a beast and no one fully understands the beast. You can't outsmart the beast, you can't conquer the beast, nor do you need to. You just need to keep up with the beast.

The past 3 calendar years have been amazing on the markets and there has been significant growth in the 20%+ range each year. It's not a reasonable conclusion that the markets should pull back simply because they have done well for 3 years. However, double-digit growth in the 20+% range is unlikely in 2022, especially in the US.

There are 3 central themes for this year according to Philip Petursson at IG:

1. Transition from rapid reopening to normalization.

2. Equity market returns will return to more historic norms in the 5-9% range.

3. The bond markets in 2022 will be about the transitory inflation story that wasn’t – and what central banks are going to do about it.

Let's look at the good news and some points for 2022:

1. An end to the COVID pandemic.  

2. An end to the restrictions.

3. Supply chain disruption is easing

4. Inflation is peaking, but will normalize throughout the year. As the pandemic comes to an end this should have a positive impact on the job market, on the supply chain, and ultimately, inflation.

From Manulife: "Our inflation model suggests CPI will trend lower from current levels of 6.8 percent but will likely remain above three percent through the third quarter of 2022. Inflation will remain a concern throughout 2022 but receive nowhere near the level of attention it’s receiving today."

5. Pent-up demand. There are still a lot of people waiting to get out of the house, get life back to normal and go on a vacation. 

6. Return to more normal growth. 

7. Energy crisis can benefit Canada. This past week, President Biden is vowing to bring down the price of oil. It's a concern. I guess he shouldn't have cancelled keystone after all. Political hay today and a dog's breakfast tomorrow.

8. Electrification of the automobile industry. It's happening, but not as quickly as the politicians want it to. I think people forget where the power has to come from - it's not just the plug on the wall. Over the long haul, this is still a good thing and they'll eventually figure this out. 

9. Canada to outperform. We have what the world needs - natural resources, oil, gas, precious metals. As long as the federal government doesn't screw it up too bad, we should benefit from what's happening in global growth. There are a lot of good companies in Canada with better valuations than in the US. 

10. The US will have more moderate growth, but there is now a shift from the big growth tech companies that don't make any money, to the value side of the market, like older, larger, dividend-paying companies which could be in the industrial, financial, energy, utility, and consumer staple space. 

11. Emerging markets could finally emerge. China and the rest of the South Pacific had a bad year in 2021 and will likely have a resurgence in 2022. 

12. Cash and bonds are still a drag on one's portfolio. They have been for the last 5 or 6 years. However, this trend should start to reverse soon. As interest rates normalize, bonds could become a more worthwhile option, especially ones with shorter duration.

13. Cash is king. Companies that can generate cash flow and reward investors with regular dividends and some growth are still great investments for retirees seeking stable income and long-term growth. The high-flying tech names that burn through cash like a drunken sailor are not going to make it.  

14. Fixed income alternatives. The lack of opportunities in fixed income is forcing retirees to take on more risks. This isn't a problem for clients in the accumulation phase. It just doesn't make any sense to allocate any amount of money to fixed income and get near-zero or negative rates of return. So what's a guy to do? Well, I think there are several things you can do. You can use a managed portfolio like the Nicola Core Portfolio which has a low standard deviation and an average rate of return of 7% since 2000. It has a ton of cash-flowing assets within the portfolio that they own and operate. There are some here in Calgary, but the bulk of the real estate is across Canada and the US - so very diversified.  

15. Canadian dollar is expected to increase. Our dollar is linked to the price of oil and trades in correlation. Oil is starting the year off on a tear and the dollar should run-up as well. 

16. There are not enough homes so the prices keep going up. The fear of increasing mortgage rates will most likely drive the market in 2022. Alberta is set to lead the country in economic growth, so you may see a lot of people moving here.

Headwinds:

More COVID crisis. Environmental catastrophes. Government interference and political instability. There are always things beyond anyone's control. The Nasdaq is currently in correction territory and down 13%. The DOW has shed 6.34%. The TSX is only down about 2.9%. 

Where's our money?

Our portfolio is slanted towards growth. We have about 40% in the US which is a mix between growth and value. We have about 30% in Canadian Equity. We have 25% in an International Value Fund and about 5% in the emerging markets. 

Our Recommendations:

1. You have to ride out the storms and we are once again in the midst of one.

2. Always be prepared for the next storm and have many alternative sources of income.

3. Buy the dips. If you have the cash to invest and TFSA, RRSP, RESP contributions to make, then this is the time. If you are still in the accumulation phase then you might want to consider bi-weekly contributions so that you can dollar cost average into the markets.

4. Don't read the mainstream media - their objective is to sell advertising and make money from peddling fear and panic. They sensationalize everything to get an emotional response.

5. Don't be ruled by fear and panic. Take a rational and disciplined approach.

6. Don't get caught up in the fear of missing out on fads. Crypto is a fad. ESG is a fad. NFT is a fad. Work from home is a fad. These things may be here to stay to some degree, but at this moment they don't make any money. What's always in style? Companies that make stuff or provide services and are profitable.

7. Diversify by sector and geography. Proper allocation is the key to long-term investment success.

RISK

Here are some valuable lessons that we need to keep at the forefront.

Risk cannot be avoided. 

It must be acknowledged and managed properly. Sitting on a large sum of cash. We are seeing this more and more as people struggle with investing in what is perceived to be a risky market. There's no more risk in the market now than there ever was. It's always been risky. In a sense, it's not the risk it's the volatility. These are two different things and should not be confused. Volatility is the deviation from the normal pattern. How do you manage risk when investing?

There's 2 parts to this answer.

Firstly, you have to determine objective. If your purpose is to earn long-term growth then you know with a great degree of certainty that your money will grow in a properly diversified portfolio over time. The market has proven this to be true historically again and again. When your objective is creating cash flow to fund your retirement - it's a different story. However, you can have more than one objective with different pools of money, even within the same account type, like a RRSP or TFSA. 

Secondly, you have to determine time frame. If you have a window of 5 or more years, then you can afford more risk. There will definitely be some ups and downs, but the odds are pretty good that you'll have a positive return after 5 years. On the flip side, if your time frame is shorter than 5 years you have to readjust the portfolio. If your time frame is 1 year than you should probably stay in cash or buy a short-term GIC.

The problem arises when we have improper expectations.
Think about a couple of things:
You can't determine who's going to win the hockey game in the first few minutes - anything can change in 60 minutes. 

We determine our level of success too early.
Sometimes you make an investment and it immediately grows and you think, "I picked a winner". No, you got lucky on the timing. Your returns will average out over a longer time frame. Let's imagine 3 people invested $100,000 for a 10-year window and didn't make any changes.



If you had the luxury of choosing one of these investment options, which one would you choose? 
 

We get confused about value. 

Our problem is we want to know that we received the best value or got a good deal when we make an investment purchase. The thing is we can be near-sighted and not look at the grander scheme of things. 
Over the course of 10 or 20 years a few cents or dollars isn't going to have a huge impact on your wealth.


The cost of doing nothing.

We convince ourselves that doing nothing is not costing us something. It's not true. Nothing is just hard to measure. Most people have done nothing for the past 2 years of the pandemic and you think it has not cost you something in lost time and lost health. You just lost 2 good years of retirement. Your cash has been losing purchasing power to the tune of 5%. 

We can be impatient. 

We want to save a $1000/month and be a millionaire by December. What's driving cryptocurrency? People trying to get rich quick. We have met with hundreds of millionaires over the past 5 years. How did they do it? They got a job, saved regularly, paid off their mortgage, still drive a 10-year old car, took advantage of their employers matching pension, they made sacrifices, they were smart with their money, they were consistent, and now they can enjoy the fruits of their labour. There's no quick fix or special formula. 

The fear of missing out.

Opportunities are like buses, if you miss this one, there'll be another one in a few minutes. If you miss a dip in the markets, I can pretty much assure you there'll be another one at some point.

The key to success at anything is having a game plan. Wether you are going on a trip, getting married, playing hockey, building a home, or preparing for retirement. If you don't know what you are doing get help. If you lack confidence in your future get help. You don't have to figure all of this out on your own. 

Learn more about our services and process.

Fee Only Retirement Income, Investment, and Tax Planning,

Willis J Langford BA, MA, CFP

Nancy R Langford CRS 

 


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