Every investor these days has an eye on the markets, interest rates, inflation, comments from central banks and thoughts of a recession. Everyone wants to know, “When will it end? What is going to happen? What can I, or should I, do about it now?”
If you think that anyone really has the answers to these questions then please let me know who it is. What will follow is purely my opinion as an observer with many decades of experience. I can only tell you what I think and put to pen and paper what questions we should be asking ourselves.
First, let’s cover inflation. The cost of things are going up. The easiest thing to note is the price of gas for your car. It’s always gone up and down and we expect that to happen. What we fail to recognize is that it goes up and yes it goes down, but it never seems to go back down to the lowest point before it went up! Long term, gas prices have kept creeping up. When I first started driving, the price of gas was $.70. And that was for a gallon, not a litre. That is inflation. Some manufacturers are trying to trick us into thinking that they aren’t raising prices. They aren’t on the surface, but instead of increasing the price of their goods, the size of their packaging, or the volume of product in the package, is getting smaller. In these cases, the amount of food that a budget buys is getting less and less.
There are many factors that influence the cost of these goods: raw materials, transportation of the raw materials, assembly to finish the products and, of course, labour.
We are in a time of lower unemployment. You see signs all over that businesses are hiring. Workers are demanding higher wages, not only because workers are in short supply and can command a higher price, but because they need to earn more to cover their increased costs of living.
It’s a bad chicken-and-egg analogy: pay more for labour, then you have to charge more for the goods or service, then the consumer has to earn more to pay for the increase. When will the cycle stop? This contributes to higher inflation.
How are governments going to lessen inflation? By increasing interest rates, which directly increases costs to businesses, which then slows business expansion and growth. It also slows the hiring of employees. But does it really? If businesses are short-staffed now, how can they operate with even fewer employees? How can they even hire anyone if they have to pay that employee more than before?
If the central banks expect to increase interest rates to stop or slow inflation should they be doing it at 0.50% or 0.75% at a time? Does it make sense to rip off the bandage and increase rates 2%, 3%, or 4% and be done with it?
How important is it to announce that an economy is in recession? The definition of recession is two consecutive quarters of negative GDP growth. That explanation I think is rear-view mirror thinking. What does it matter if it’s already happened? How important is it to say we are in a recession? What happens if the first quarter has negative growth, the second quarter experiences no change and the third quarter has negative growth? Are people expecting an increase of interest rates to have an instantaneous impact on GDP growth? My thought is that it takes several months of rapid growth to ramp-up an economy, so economic slowdowns shouldn’t happen overnight.
I will remind you that we have just come through a pandemic that the world has never seen before. It was basically a worldwide shutdown. There’s no textbook that covered “what if?” in this situation. Nobody really knows what will happen. You can easily find experts that say it’s going to get worse, and just as many will say it’s over and things are going to get better.
Ok. Enough economic talk. What do we do as investors to help us weather this storm?
We need to ask ourselves six things:
- Are the companies that we own in danger of going broke and closing down?
- Is there any risk to a dividend being cut or lowered?
- Do we have too much in any single stock, - like more than 10% of the total portfolio?
- Are any of our holdings particularly sensitive to interest rate changes?
- Will my financial plan be affected if I sold holdings and just held onto the cash?
- Are we worrying and losing sleep because our portfolio has declined in value?
One needs to answer these questions to make sure that one’s portfolio is properly diversified and, more importantly, that one can answer “no” to them.
I often use the analogy of owning a rental property and the real estate market goes down. Would you rush to sell that house? We all know the answer is no. As long as there hasn’t been a structural weakness in the house, something that impacts the location or a termite infestation, for example, you just continue to collect the rent. You should have the same mentality when owning stocks. The big difference is the speed at which you can sell either of these assets, as a house can take several weeks before you can even put it on the market to sell. Stocks can be sold with a simple phone call or push of a button. Often people react too hastily because it’s so easy, and then make a rash decision.
This opinion piece of mine is simply to give you some things to think about before making decisions that are not well thought out, and when you may not have considered all possible outcomes. Investing should be guided by logic, not emotions.
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