Updated: Mar 27
Layth Matthews talks about what it means to invest in uncertain times - from cash to bonds and stocks. He also covers the housing market and what mortgage borrowers should consider in this volatile market.
Mark Whaley (MW)
Welcome to the Rigden Financial YouTube channel my name is Mark Whaley and today
is March 9th, 2022. I'll be asking Layth Matthews, President and Lead Planner at Rigden Financial about investments, interest rates, and other helpful topics to assist in your financial planning. Today I wanted to ask you about what your thoughts are on the current investment environment, but particularly about defensive investments in these particularly uncertain times. Can you tell us your thoughts?
Layth Matthews (LM)
Yes, well the last few weeks or months or years (laughter) there have been a few things to worry about. The more you reflect back you realize that actually there's been stuff to worry about for a long time (laughter) so the topic of how to invest in uncertain times is either passè or very appropriate all the time because uncertainty is always with us. There are a number of things you can do to try to minimize the extremes and and that's really all you can do as an investor because the nature of investing is is taking on some risk in the pursuit of some higher rates of return and the skill or the goal is to not take on more risk than your potential return merits.
So how would you go about doing that? The current investment environment is particularly tricky because we have this war going on in Ukraine and that's kind of spooky. There's all kinds of commodity movements going around, and we could talk about that later but generally the most straightforward way to mitigate risk in a portfolio is to diversify. You diversify both by asset classes - the three main asset classes would be cash, bonds, and stocks.
Cash is just money in the bank. Bonds are investments that just commit to paying you a certain level of interest over a long period of time long or short. Stocks can be anything so you can sort of boil it down to those three asset classes just simply because stocks can represent everything from real estate to commodities to financial businesses to industrial manufacturers. First thing is you might diversify your money into those three categories then within the stock portfolio which is generally going to be the most volatile you can diversify by management style.
First of all you can buy a fund. You can buy a mutual fund or a segregated fund and this is a huge advantage right away because you're diversifying among potentially hundreds of different companies and any individual company if you're lucky you'll buy microsoft at 250 bucks and it'll go to 250 000. But that's really like buying a lottery ticket and we'd all be richer than bill gates if you could be sure. The alternative is you take a little risk with a lot of money and you divide that money up so that's diversification. You can also put some of the money with investment managers of these funds who have a certain philosophy. There are different philosophies - one philosophy might be very value oriented so they scour the stock market for bargains. Another investment manager might be very growth oriented so they're trying to get their money into the companies that are growing the fastest like Apple and Google and Tesla so you might combine those two investment philosophies in your portfolio. Last but not least you want to globalize your portfolio and that's because it's a global market things are changing all the time - Canada for example is heavily commodity oriented so we do well at certain phases in the economic cycle. You can't always predict when those are coming or whether the stock market already reflects that but there are certain times when Canada is a place to be, but if you diversify you can participate in a lot of different trends. So that's the first thing.
You know cash and bonds are usually the safe haven assets and people have been
interested in those - normally you might go to that but it's a little bit trickier now. There's
been a lot of criticism of bonds lately because interest rates are very low and
when interest rates go up a bond that guarantees a lower interest rate will go down.
So you can lose money in bonds temporarily. If you hold it to maturity you won't lose any money but who wants to do that you want to make your money.
Also because of the pandemic governments have been using monetary policy and fiscal policy much more proactively they've been creating new money. Basically they lend money into the banks very cheaply and the banks just flood the economy and that keeps people employed through the pandemic. It's an employment strategy and that's been good and it's kept us from a depression - on the other hand if you're pumping that kind of money into the economy you get some weird things like the real estate boom has kind of gone wild you get inflation and I'm not sure how we back out of that. Warren Buffett says is that you should buy productive assets. That's the safest place to put your money so that means stocks. In other words, buy companies that are proactively looking for opportunities and position themselves intelligently. The way I translate that is: never underestimate the ability of human beings to make a buck because we're very inventive and we're always anticipating so why not pay somebody else to to do that for you.
On the other hand the role of having cash and bonds in the portfolio dutifully, is that you can do rebalancing so the value of it is temporary so cash and bonds don't do much for you long term, but they're really valuable in the short term.
If you have a fund that automatically transfers for you or if you want yourself will systematically meet with your advisor and rebalance periodically then what happens is you you end up buying low and selling high so if the stocks are way down you shift your rebalancing to the original asset allocation and and then you put more money in stocks if stocks are way up well maybe it's time to take a little bit of those profits and move them over to bonds. If you buy a fund that does that for you it's going to happen automatically this is a very nice thing. If you're drawing income from your investments that stability is even more valuable just because the nature of drawing money from a portfolio you really need stability. It's very valuable too because you could be selling it all the wrong times and things like that.
So does the automation help me with that if I'm drawing funds?
Yeah it's going to give you stability because every time something goes way up there's going to be a some of that gain is going to be shifted over to the other asset class. The the critical thing for all investors in hard times and good times really is to identify an asset allocation whether it's 30% cash and bonds and 70% stocks or maybe it's 35% or 40% cash and bonds and 60% stock. Find an allocation with the help of your advisor that you can live with and you can sleep at night. The next thing is how is it rebalanced - so you can automate this which is a really nice thing to do or you don't have to if you're a longer term investor you can start out with an allocation, a balanced allocation, and then let your winners run and in the long run you know what'll happen is your stocks will tend to dwarf the value of your cash and bonds because they'll grow faster but you'll experience more volatility in the short run. If you're able to withstand that, that'll probably be the best long-term rate of return. If you're drawing money out you really need that stability because otherwise the value of your portfolio can go down quite rapidly in a down market. So anyway that's probably more detail than you needed (laughter).
Right, so what does that mean for mortgage borrowers right now? You talked about the housing market a little bit, how would you advise us there?
Well the particular circumstances in the world right now make this really complicated because what we were seeing before Russia invaded Ukraine was a kind of a clear indication of inflation that was sort of influenced by the monetary policy to bring us out of the pandemic. Now what's happening is we have commodity prices going up potentially. Look at oil prices they're zooming way up and and what you have to understand is that a strong rise in oil prices is equivalent to an interest rate hike there's even economists out there that do the math and say well if the oil goes up this much it's the same as if the federal reserve raised the rates by a quarter point or a half a point. That means that the central banks will be a little bit slower they will be a little bit more cautious about jacking up the interest rates. So, again, variable rate mortgages may be better because the central banks can keep those prime rates down. On the other hand the fixed rates which are more internationally determined they may continue to rise. I'm not as worried about interest rates in the short run because we have so much uncertainty in the world and the central banks don't want to make it worse.
So, to make a long story short investors really should, how shall I say they, should probably be buying - there's a famous line from Baron von Rothschild who started one of the famous investment banks in England who said the time to buy is when blood is running in the streets. That sounds a little bit morbid and so anyway I regret that - but I will say that you know even when there are other types of scares in general it's probably safer – I mean think about it the Nasdaq index is down 14 15 percent from the beginning of the year — that's a lot cheaper than it was on December 31st. It's safer to buy at a 14 discount than it is to buy full price so that's how that goes.
Okay well thanks so much
Yeah you're welcome.
All right until next time