Happiness Is A Market Pull-Back

happy face


In a diversified portfolio, there are three asset classes, stocks, bonds, and cash. I have covered differences between the three classes elsewhere, today I want to focus specifically on the role of cash. You may have heard, “Cash is King.” People say this because cash is liquid – you don’t have to find a buyer for your cash. You don’t have to wait for a settlement or escrow period to expire. Cash is also very safe. When the market is going up, it is hard to watch your cash earning .15% (give or take .10%—yeah, it’s that bad.) But when the market is falling off a cliff, it can be quite comforting—if not peaceful—to see that cash balance tucked safely away.

Where does cash in your account come from? It can build up from dividend payments from your stocks or ETFs (if you are not reinvesting your dividends), interest on your bonds, or cash contributions you make to the account—monthly or lump-sum. I will discuss the annual investment of cash in a future post on rebalancing. In this post, I want to talk about gunpowder.

One of my most favorite mentors likes to say, “Keep your powder dry!”

What does she mean? The phrase derives from the 1800s when soldiers were crossing the river and who required gunpowder to, you know, shoot their gun. It essentially means to be prepared and save your resources until they are needed.  

Take a look at the following chart to see how this might apply to investing:

stock market pull back

If you have not spent a ton of time looking at charts, let’s walk through this one step-by-step (you can click on the graph and/or print it if you want a larger version): 

  1. The investment we are looking at is CDZ-T (iShares S&P TSX Canadian Dividend Aristocrats Index ETF).  It is a Canadian ETF that invests in high-dividend paying stocks that have a history of raising their dividends year after year.  (A) 
  2. The chart is showing us the price history over five years. The X-axis (horizontal) is showing you the monthly periods going back to and starting September 2010. The Y-axis (vertical) has the price of the ETF ranging top to bottom from  $28 – $19. (B)
  3. For example, if we put our finger on the point marking January 1, 2013—and move it up—we can see the price on that date was $23. (C)

OK, what can we infer from this line (price journey) on this chart? 

First, it has been a bumpy ride! I have seen much, much worse, but there is for sure some turbulence here. And this chart does not even include 2008/2009, which was like, the epitome of evil. 

What else does this graph reveal to us? Yes, from September 2010 – September 2015 the price of this ETF has moved up.  And quite nicely. 

Let’s take a closer look at what I mean: 

CDZ-T Price History
Source: Globe Investor

(again, you can click on any of these charts for a larger image)

Now we see a clear straight line (in orange) from about $19.30 in September 2010 to $24.50 in September 2015 (today). The simple arithmetic return is 26.9% (24.50 – 19.30 = 5.20 / 19.3 = .269 x 100 = 26.9%). 

However, ETF and mutual funds returns are reported to include reinvested dividends and compounding. Understanding that, the financial press advises us CDZ-T returned an average of 8.98% per year, over the five year period. 

CDZ Final
source: Morningstar Research

Remind me what is this post about again?

Oh yeah! Keeping your powder dry. 

Today is September 1, 2015; the market is down (again), and I am not going to fib—there have been some dark days over the past few weeks. Here is an excerpt from my journal during the flash crash on August 24, 2015. 

I want the market to go right back up. Now. I want all of this discomfort and regret and self-loathing to go away. I want to go back to feeling smug, to have my portfolio go up each and every day. I want to go back to feeling like I am a special person who the market loves and never hurts.* 

What did I do? Did I climb into bed, pull up the covers and binge watch on Netflix (which was down 7% by the way!)?  Well yes, yes, I did do that. But that got boring, and so I took my own advice, dusted off some dry powder I’d been saving for when needed, and I bought some CDZ-T.  I purchased mid-date at $23.25 which, with an annual dividend payout of $0.91 gives me an annual dividend return of 3.91%. Yes, that’s right 3.91% on a low-fee, well-diversified dividend aristocrat ETF.  And? According to past results, there’s a high probability I can add capital appreciation (an increase in the price of the ETF) to that return.  

My God, it’s like Christmas! 

Yes, CDZ-T could go lower, it could go higher—I don’t know, despite all my [insert ritual here] sessions, I still can’t predict the market. But did just see four horsemen ride past my window? Nope. And neither do I think the world is ending. Meaning, I still think Canadian banks and utilities and telecoms are going to continue to do just fine, maybe even thrive, over the next 20 years. So if I can pick up CDZ-T at a few cents more than it was in January of 2013, you better believe I’m going to make that move. 

If you haven’t heard it before, you’ve just heard it here first:  Keep your powder (a healthy cash balance in your account) dry, because happiness really is a market pull-back. 

Why Investing Is A Lot Like Weight Loss

I have been investing for over 25 years, and I know what it takes to be a successful investor. What I had not realized was how similar the actions and beliefs relating to investing were so close to the choices and thoughts related to weight loss.

Have you ever tried to lose weight? I have. Earlier this year I committed to a change in lifestyle I assumed would be an entirely physical undertaking. I was wrong. Even just to get to the starting line of weight loss, you have to get the mindset right.

After losing 20 pounds, I can tell you that successful investing looks a lot like successful weight loss. Obvious likenesses between the two aside — expensive products, conflicting “expert” advice, confusing strategies — there are three similarities that will see you through to the investing finish line.

You have to play the long game.

When I started to lose weight earlier this year, I weighed myself every day — sometimes twice a day. The results would throw me into various tailspins. It’s working, I have to buy all new (smaller) clothes! Or, it’s not working, no more food today!

And then I remembered how when I had started investing, over 25 years ago, I used to check the stock market almost hourly. I had to know what exactly was going on with my stocks. If they were going up, I was euphoric, and if they were going down, I was devastated. Should I sell everything? Should I buy more?

Not only was it unproductive, but it was a ridiculous waste of valuable time.

The daily or weekly (even monthly) fluctuations in your investments are just noise. Ignore them. Focus on the big-picture, long-term trend. For me, that is up for investments and down for weight. If that is working, relax and go for a walk or play with your kids.

You have to automate as much as you can.

The number one thing you can do to create a successful habit, and this includes starting to invest, is to automate as much as you can. Automation means little or no decisions, and in the case of investing (or losing weight), this is a very, very good thing.

Automating means a certain amount of money is deducted from your paycheque or bank account each month. And that you track your investments in a portfolio tracker. It also means you have annual review with yourself or a fee-only planner. The initial effort in setting up your automated contributions is the hardest part. After that? Rebalance once every few years and just follow the plan. Relax, go for a walk, play with your kids.

You have to believe in a future you.

How old are you? Are you going to be alive in 30 years? In 40 years? I am 43. I believe I am going to be alive in 30 or 40 years. I don’t want to be sick, diabetic or obese. I want to be healthy, and I want to be wealthy. That means taking steps today (no pun intended!) to prepare for a future me.

When I am 75 and living a still-active life, I don’t want to depend on the government for a few hundred dollars a month. I don’t want to have to ask my children for money. I don’t want to be consumed with regret about the choices I made in my forties.

What does this mean?

To have a decent apartment in my 80s, I have to take a pass on purchasing a new iPhone every year. And I have to put even a small amount of money each month into a well-diversified, low-fee investment. If I am doing that then we both know what I can do: relax, go for a walk, play with my kids.

It has never been easier — or as important — to start investing. What are you waiting for?

This post was originally published at The Huffington Post.