knowledge

Fear, it is said that before the river enters the sea it trembles with fear. In front of her she sees a vast ocean, but the river cannot go back. The river needs to take the risk of entering the ocean because only then can the fear dissolve. It’s not about disappearing the fear into the ocean but becoming the ocean – Khalil Gibran.  

In life how much do we play small because of fear? How much don’t we know that is costing us? I’ve been investing for 14 years now and it always amazes me at the amount of information that people don’t know about their finances and how financial markets work. Mutual fund fees, inflation, recession patterns to interest rates, factors that affect our life and future. So, my commitment has been to educate others so they can create more wealth and choice for themselves.

Let’s take a look at recessions. A global recession is not a question of if, but when. As of 2019 we are more than 10 years into a bull market, the longest in financial market history, so we are overdue for a recession. A recession is often measured by two quarters in a row of negative growth. The government is accountable for communicating when the country is in and out of recession through the Bank of Canada and/or Minister of Finance.

Bond yield curves are a common warning signal when inverted, or when short-term interest rates are higher than long-term interest rates. The second metric has to do with the relationship between value stock returns minus growth stock returns factoring economic growth going forward.

Great investment returns are not just about maximizing risk, they are about maximizing investor tolerance in various economic climates.  For most investors, growing wealth is linked to their ability to harvest the power of compounding returns, and the first rule of compounding is to never interrupt it. A natural reflex for many investors will be to get out of time before a recession happens, then get back in when it’s over. Although logical, market timing is very difficult to pull off. Even if an investor manages to find the right time to get out of the markets, they may miss the right time to buy back in affecting the gain of capital that could have been realized by timing the market.

Portfolio diversification in alternative asset classes such as real assets can help balance portfolios in volatile markets to compound an investment over a long period of time. Many investors will have an urge to react; the key is stepping back and asking what did specific asset classes like real estate or equities do during previous recessions. Fantastic returns tend to happen after a recession, so maintaining some faith and liquidity to be able to invest during a recession is important to capitalize on these opportunities. Are you ready?

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