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He’s right on the mark. The so-called black swans, world-changing events which used to occur perhaps once every five years, have become commonplace. How many of these major geopolitical developments could have been predicted a year ago?
To say that we live in uncertain times is a massive understatement. As the professor pointed out in his lecture, events are unfolding at an unprecedented pace and it is impossible to forecast how all the conflicting forces will play out. In short, expect the unexpected.
That brings me to your personal finances and what you should be doing about them in the turbulent world of 2015. Ever since I wrote my first personal finance book almost 30 years ago, I have stressed the importance of moderation and balance in portfolio building. I have never advocated extremes – selling all your stocks or bonds, for example – because history has shown us that markets are unpredictable. Just when it appears a clear trend has been established, something unforeseen breaks the pattern. That’s truer than ever today.
Look at what’s happened in the bond market. Last year at this time everyone assumed that interest rates would rise in 2014, reflecting an expanding North American economy. That would have a negative impact on bond prices, which decline when rates rise.
Meanwhile, as it became apparent that the American economy was the only one gathering meaningful momentum, hot money from overseas poured into U.S. Treasury bonds, driving down yields and pushing up prices. That had a rub-off effect in Canada and our Universe Bond Index ended the year with an advance of 8.8 per cent, beating the S&P/TSX Composite Index in the process.
That trend has carried on into 2015, buoyed by the surprise Bank of Canada rate cut on Jan. 21. As of the close of trading on Jan. 23 the FTSE TMX Universe Bond Index was showing a year-to-date gain of 3.06 per cent. That was about triple the advance on the TSX at that point.
You have two choices in these circumstances. One is to try to time the market cycles – sell most of your bonds when you think prices are near their peak and move into equities. When stock indexes hit record highs, reverse the process.
The alternative I have always preferred is to maintain a balanced portfolio, with asset weightings that are appropriate to your age and risk tolerance level. For example, a 65-year-old who wants to protect her retirement savings from loss might choose a mix of 65 per cent bonds, 15 per cent cash, and 20 per cent equities. A 30-year-old who hopes to make a killing in his Tax-Free Savings Account might go with 80 per cent equities, 15 per cent bonds, and five per cent cash.
The important point is to settle on a portfolio mix that works for you and stick with it. Don’t be moved off it by the news of the day and events you can’t control. That’s the best antidote I know to today’s unpredictable world.