Surprise!

RBC was the first to cut its prime rate. Now it’s 6.7%. By the end of the year, it should be south of 5%. In an unexpected move this week, the Chinese central bank dropped rates. Twice, actually. That country is suffering lousy economic growth and an eye-watering real estate meltdown.

The US Fed will hold steady this month, then cut in September. Our guys have reduced the cost of money twice. Once last month. Once yesterday. Two more to come in October and December.

You might also have noticed the stock market had a cow yesterday. The S&P 500, flying high for months, tumbled more than 2%. The Dow and TSX, as well as the Nasdaq, also plopped. The main reason was soft earnings in the tech sector, second-thoughts about silly, absurd, otherwordly, destined-to-corret valuations of companies like Nvidia, and a profit plunge at crazy Elon’s car company.

This year markets have been led higher by a surge in the capital value of the Mag 7 stocks. That was great until it wasn’t. Then investors smelled smoke and trampled on over into small caps, driving the Russell 2000 wild.

And didja hear about Cloudstrike? After is crapped all over the global IT platform, that company shed a third of its value in a heartbeat.

There are lessons here.

As this blog has detailed in the past, owning individual stocks poses significant risk. You can’t control sovereign monetary policy. Investors have no great insight into corporate earnings. There’s no way you can protect yourself from some goof on Zillenial social media putting out a crowdy short call on your favourite company, or from a tech darling screwing up. Companies like Tesla routinely experience huge swings in share price. And crypto – even grandaddy Bitcoin – is more volatile than stocks by a factor greater than ten.

A famed JP Mortgan study found there’s a 40% chance that any individual stock will lose 70% of its value. That is considered a ‘catastrophic’ loss. With tech companies included in the survey, the odds climb closer to 60%.

Some companies recover from that kind of disaster. Most don’t. Others take years to crawl back to former valuations. Lots of investors – especially retired wrinklies – don’t have the time to spend waiting or the stomach to do so.

So, diversify. Owning individual companies because (a) you’re smarter than the market, (b) you got inside info from somebody who had none, (c) the Reddit Kitty guy told you to buy or (d) you like that ad they did with Ryan Reynolds, is courting risk. People should own growth assets like equities for reasonably predictable long-term growth, not to gamble on an immediate capital gain.

So, while Tesla, Nvidia, Alphabet and others have taken a spike lower, the S&P 500 is up 14% on the year. Over the last ten years, the index has delivered an average annual give of 12.58%. Adjusted for inflation, the return (including dividends) is 9.52%.

As this pathetic blog has told you, having a balanced and diversified approach to investing also means holding some boring, less-sexy stuff, like bonds, real estate investment trusts and preferred shares. The equity portion of the portfolio (60%) should be in thirds – maple, US and international. A quarter of the holdings overall should be denominated in USD (my colleague Sinan will be explaining the details in a few days). Keep a cash weighting of 2% or so, and use a near-cash ETF to hold that. Of course, everything in all accounts should best be in ETFs with high quality and liquidity.

What can you expect from this?

Over the past forty years the B&D has averaged just over 7%. Some years are great. Some suck. But the point of having fixed-income and growth assets together is that in most cases they will move in opposite directions. When equity risk is high, investors tend to move into bonds. When interest rates and bond yields fall, stocks do better. Bond prices rise. Meanwhile equity-based ETFs keep churning out dividends just like stocks. And investors reaping gains through capital gains and divvies pay less tax than those who rely on GIC or bank account interest.

Here’s the main point. The future is murky. Not only do we face short-term volatility (Trump v Harris, the potential for American civil strife, Putin, Gaza, Xi and Kim), but there’s considerable worry about the world when wildfires eat whole towns in Alberta, the second-largest economy on earth has serious structural flaws and the two hottest days in the history of the planet both happened in the same week. This week.

Where is wealth safe?

Lots of people are learning Canadian real estate may not be the place. Or an EV company. Or AI. Even a bank. This is the era of surprise.

About the picture: “Thought these two spoiled beasts might look good headlining your blog,” writes Josh. “Thanks for the daily sanity check and helpful advice that I try* to follow.  The fact that these two continue to influence our life decisions clearly show that making rational decisions all the time is hard. We do love them though!”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.