I will begin by wishing everyone a wonderful new year full of good health and happiness. Let’s focus on what we can control, our own actions, whether individually or together for the betterment of all and to reflect positive outcomes. 

Currency and The Annual Migration South: One question we tend to receive each fall relates to currency and the value of the Canadian dollar. This is generally its relation to the US Dollar, however, a growing interest in the Euro as clients look to exit Canada for warmer climates from November through April. There are several factors affecting the Canadian dollar, however, a major one is it is closely tied to resources and as resources go, so does the value of our currency. However, there are other considerations, such as the equity markets “here compared to there” and of course debt levels and credit ratings. Over the past 18 months, the USD has been very strong against several currencies – not just ours. One way to avoid the annual angst over currency exchange rates is to invest in those other currencies. If you plan to travel to the USA or Europe, invest regularly in companies that trade in that currency and do so in an account that trades in that currency.  

Canada represents only about 3% of the global investment opportunities while the USA is about 30%. The American and European markets offer much more diversity. 

There is no “Caterpillar,” no “Coca Cola” and no “L’Oréal” in Canada. Our home market is heavily weighted in resources (oil/gas, mining, and forestry) and these comprise about 35% of our stock market. Concentrated financials make up another approximately 35% which leaves little room for industrials or major global brands Not only do you gain access to other markets that have produced historically strong returns, you have protection through currency hedges or even better actual foreign currency accounts you can use for travel.

Diversity: This is why many clients through us have a USD RRSP and or non-registered accounts for this very purpose. Diversifying outside of Canada is wise and provides a method to protect yourself against a falling Loonie and gain access to a more robust listing of proven investment opportunities. Don’t get me wrong…we do have some here. Brookfield Asset Management, Empire, and our banks are a few…but the list is not long when compared to other countries. Recall, these are all valued in Canadian dollars which is of little help when traveling south and you find yourself getting ~ 75 cents USD for each Loonie. By embracing diversity and diversification you can add value over time and be ready when one market or one currency is favourable as opposed to the homegrown one.

A final word on stock markets: 

Often, the biggest risks in a typical year are not usually from out of the left field – although, in 2020, this did occur with the COVID-19 outbreak. Most often they are hidden in plain view. As Mark Twain once said: “It ain’t what you don’t know that gets you in trouble, it’s what you know for sure that just ain’t so.” The risk appears when there is a very high degree of confidence among equity owners for a specific outcome that doesn’t materialize. Thus, aside from the risks of trying to time markets, which is futile, some top global risks for investors in 2023, could be:

1. China’s reopening – A torrid recovery could inflame inflation.
2. Central banks overtighten – A global concern that rates will still need to rise further to quell inflation. I personally see this being the case.
3. Ukraine war broadens – Escalation and broadening scope is a risk with Putin.
4. Mortgage shock – renewals at higher rates and subsequent defaults and foreclosures
5. European energy crisis – Could impact broad manufacturing if natural gas is throttled. 

In 2020, economies around the world were worse than anyone had forecast due to Covid which was not expected. In 2021, most countries had a surprisingly rapid recovery and incurred a lot of debt to keep people “in the money” when economies shut down. This reminds us that the risk of surprises is not always to the downside and that it’s possible that after a year of challenges, a market upside is possible and at times swift. Despite the poor performance of stocks during 2022, markets may have already priced in some of the negative trends gathering momentum in 2023. Should those trends reverse, it may help push stock market performance to the upside.

For those who were worried about the ups and downs in 2022 or the possibility of a recession in 2023, there is light. Your investment time horizon is one of the most important factors in helping you decide whether or not to buy stocks and real estate. By the way, housing prices fell along with stocks in 2022 – have you seen how much? They don’t publish your house price in the paper each day but I assure you it’s down by a good amount depending on your location. The good news is these asset classes usually perform relatively well over five-year and 10-year periods. This is why we always recommend stocks be housed in that third “silo” of asset allocation which is designed for long-term growth best thought of as 10 years or more in duration. Silos one and two are for short and medium-term investments and provide balance/safety in the interim. Since most clients are investing for long-term growth or retirement income to keep pace with inflation spanning decades, I suggest asking yourself the following few questions to gain more comfort about stock ownership during difficult markets; 

1. Do your investments (RRSP, TFSA, or Non-Registered Account) have a time horizon of at least five years and more appropriately, 10-plus years?  Yes, then you will own stocks because we recognize their higher potential returns, increasing dividends, inflation protection qualities, and tax deferral. You own them for future or current income needs or to leave a growing legacy to your heirs down the road. You know time smoothens out the ups and downs. 
2. In all of history have the stock markets (TSX, S&P 500, etc.) fluctuated up and down…sometimes too large degrees like 1981-82, 2008-09, or during COVID?  Yes of course. 
3. In each of these setbacks – all of them throughout all history, did these stock markets rebound to reach a new high after each crisis”? Again, the answer is Yes. Then lastly, if this is so, and believe me – it is… 
4. How is it possible then that so many people lose money investing in stock markets? The answer is an unsuitable time horizon and behaviour. People allow their emotions to corrode the carefully constructed framework for investing success. Sadly, this seems to occur over and over again without ever learning from history. 

The bottom line is that investing is simple – but it is not easy. Recessions have happened many times before and they will occur again along with other disruptive events. By understanding history and applying research, using good judgement and sticking to your financial plan, owning a diversified portfolio of a high-quality proven mix of public/private securities and real estate, plus working with a knowledgeable, experienced advisor, you will succeed in creating wealth. Reading “The Richest Man in Babylon” should be mandatory in the education system three times. Grade 6, 8, and again grade 12 before heading to university so its lessons are ingrained.  

Planning Advice to keep you out of Financial Trouble.

If you are a younger reader (or know one) and want to avoid financial difficulties down the road, read the above-mentioned story. If Arkad could learn the secret of wealth creation, anyone else can. Spend less than you earn. Save 10% of all your net earnings and invest prudently and regularly starting with your first job. Didn’t do that? Then make it a new year resolution to begin in 2023. Then, never touch these investments for anything that depreciates in value (car, boat furniture, etc.) or a trip. The remaining 90% of your net income is budgeted and used to pay for these items. 

Last, but equally important, don’t get scared out of quality investments because of a temporary decline or news headlines. You will see many in your lifetime so recognize these for what they are – buying opportunities. If you follow these rules, it is very, very unlikely you will ever be in financial trouble. You will learn to view economic downturns as opportunities instead of worry-filled angst and failure when you are prepared. You will be able to assist your children and others you care about. And lastly, for everyone, remember; As spring follows winter, recovery follows a recession. Be not afraid.

Best wishes,
Michael