Why you shouldn't listen to TINA

Why you shouldn't listen to TINA

Posted on March 21 by Alan Dustin in Non-fiction
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Lately, I have been reading a number of articles by industry experts and journalists espousing the virtues of the sixty-equity, forty-bond allocation. Their reasoning is that There Is No Alternative (TINA) to earn a good return on your hard-earned capital. I know enough to know this advice is more in line with their interests than yours. In 2017, it will only have been ten years since the beginning of the last financial crisis. For someone who is retired, or soon to be, the 60-40 allocation may be very dangerous advice. Here’s why!

There are three key risks. They are: sequence of return, longevity, and interest rates.

  1. 1. Sequence of return risk is an elaborate way of expressing two moving parts. It happens when an individual is drawing an income from their investments and the value of those assets are in decline, such as in an environment like 2001–2002 or 2008–2009. The problem is that, when the market inevitably recovers, because you have less money in the pot, you are not able to recover your losses. The result is that you burn through your cash exponentially quicker which leads to the next risk, longevity. For a better understanding on how long your money will last, download the retirement calculator and become better informed.
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  3. 2. Longevity is a complete unknown. Nobody was born with an expiration date. But with the help of modern medicine and technology we can assume that we are living longer than at any other time in history. Since that we are living longer, we need more savings. If we don’t have enough, we may find ourselves later in life having to make some very difficult decisions. If this is you, this is why capital preservation is more important than a return on capital at this stage of your life! I will demonstrate in an upcoming blog which of two portfolios does better in a market cycle, one that misses the 10 best days or one that misses the 10 worst? What do you think the answer might be?
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  5. 3. The final risk is interest rates. Investors for the last thirty years have had the benefit of safeguarding volatility in their portfolios with fixed income stability. As rates have slowly fallen over this period, bond prices have provided modest returns. In other words, both equities and bonds generally have appreciated over time in the same direction. If interest rates were to reverse course (rise), as they have recently, bond prices would continue to drop if the trend were to persist. Add to that, another equity market correction and both asset classes move in the same direction, lower. So the stability of bonds, which an investor has counted on in the past, may in fact compound their losses.

I have written about these risks extensively in my book and have provided a number of practical solutions to these problems, which I won’t get into here. It should come as no surprise that in my opinion we are very close to a major correction. How do I know this? It is simply a mathematical fact. It is preordained! Many theories have been brought forth to explain why market cycles occur. They include: demographics, election cycles, energy price shocks, derivatives and credit (debt) cycles, to name a few. Whatever the reason, we know they happen. Even better, if you are prepared for the coming correction, you can be handsomely rewarded. It is called an asymmetrical return opportunity, or more commonly as buying low and selling high. My best advice for investors at this stage of the market cycle is to get off the treadmill. Investing in the long term over the last twenty years can be summed up in three words: rinse and repeat. Moreover, little to no returns over this period of time proves it.

Alan Dustin

Posted by Dundurn Guest on May 17, 2016

Alan Dustin

Alan Dustin is a seasoned financial adviser who has spent twenty-five years guiding Canadian investors to financial success. He has appeared as an expert commentator for CBC and CP24, and has published numerous articles for Investor’s Digest of Canada and Canadian MoneySaver. He lives in Toronto.