investment planning

Horatio Alger¹ was an American writer of novels about impoverished boys rising from humble backgrounds to middle-class security and comfort through hard work, determination, courage and honesty. His writings were characterized by the "rags-to-riches" narrative, which continues to have a formative effect on many entrepreneurs today.

Like many young adults, Lindsay took what her parents had to say with a grain of salt when it came to money. A new college graduate with an entry-level job, she was more interested in spending her paycheques than saving them. Saving was for later, she thought. Life was for living. When her father raised an eyebrow or offered advice, she brushed him off.

Then came the financial collapse of 2008. Lindsay lost her job and moved back into her parents' basement, regretting immediately almost every dollar she had blown.

With Canada and many other countries practicing physical distancing or participating in complete lockdowns because of the COVID-19 virus, thoughts are turning to what the world may look like after the restrictions have been lifted.

Many people are expressing a desire for life to return to how it was before the arrival of this public health emergency. However, it is likely that some aspects of our lives will have been irrevocably changed because of COVID-19.

Warren Buffett has a classic rule when it comes to market volatility:

“Be fearful when others are greedy and greedy when others are fearful”.

Investor anxiety normally tends to rise in step with market volatility because most people are concerned about trying to pick the best time to buy or sell. For instance, making investment decisions would be infinitely easier if there was complete certainty about when markets were headed for a bear market or a correction.

The recent market turmoil triggered by the COVID-19 virus (and its possible impact on economic activity) brings to mind some observations by legendary investor Warren Buffett. During his years of investing, he has famously stated that in the short-run (days, weeks, and months) the investment markets are a voting machine. People buy and sell investments based on price momentum, or their emotions regarding how comfortable they are with the price direction over a few days or weeks.

There is a legend about a successful financial advisor in Warren Buffett's stomping grounds of Omaha, Nebraska. It is reported that this advisor has learned the art of communicating the basics of wealth building with the local farmers. The advisor, who we will call Fred Smith, greets clients in his office with a window behind his desk that overlooks fields of blowing wheat and corn.

Brent and Darlene really enjoy their 'toys' and their lifestyle. In the last few years, they bought themselves a big screen TV, a stereo system, two expensive new vehicles, a ski boat and took a tropical vacation, mostly on credit. They also used their credit cards to pay for numerous restaurant meals, theatre tickets, hockey games and other expensive outside entertainment. It wasn't long before they were carrying a balance from month to month. The credit charges and payments quickly became a burden.

In his early July testimony before Congress, US Federal Reserve Chairman Jay Powell. Mr. Powell stated that the Fed funds rate will be reduced, given lower than expected U.S. inflation. This follows on the heels of President Trump’s demands for lower interest rates to help support the economy and more specifically the US stock market. As anticipated, in late July the US Federal Reserve lowered interest rates for the first time in over ten years but at the same time signaled that there was no certainty that further rate cuts would occur during 2019 or beyond.

Over the next several years, governments in advanced countries will likely continue to struggle with mounting debt burdens and the associated rising costs of servicing that debt. It is also noteworthy to remember that total government debt continues to increase every year because of deficit spending.

So how does the Law of Large Numbers apply here? Simply put, at some point the whole debt situation could defy the ability of a government to control a national economy and the response to ever increasing debt burden costs. Here is a definition from Investopedia:

A major Canadian financial institution ran an investment promotion earlier this year that promised attractive returns for GIC-type investors, who needed higher returns to generate income. While dealing with an advisor from this particular institution on another matter, the conversation turned to the details of their offer.