Bill’s Blog | November 3, 2022
Proper diversification is no small matter that many overlook, mainly from a lack of financial knowledge and risk management. However, having all your eggs in one or two baskets in a growing unstable financial world is not a good idea. Many who do not take diversification seriously will learn a painful lesson in the years to come. As we have witnessed in 2022, the stock and bond markets have crashed into a bear market with a 25% decline or greater. Some sectors in the stock and crypto markets have crashed by 60 to over 90%.
On top of that, Canadians are getting a wake-up call that the housing market does not always go up. Many are also learning for the first time how rising interest rates dramatically affect a highly leveraged and overinflated real estate market in much of Canada. Most Canadians have wealth in both of these falling asset classes. I often see business owners falling into the trap of just two or three asset classes (often mainly their business or businesses, real estate and the stock market). As the risk of recession increases, this can dramatically impact your networth. So, what is one to do?
So, in today’s Blog, I want to share with you the incredible benefits of proper diversification. Also, share some valuable idea’s with you on having multiple asset classes and different strategies. Of course, no one can guarantee you will not have some losses in some asset classes; however, if three assets decline and three go up in value, you mitigate significant losses. You are practising sound risk management by spreading the risk into many assets. Diversification into suitable asset classes provides hedging of your wealth. Therefore, a worthy goal of every investor should be NOT to take BIG hits to your wealth and capital.
I will start with some basic rules to avoid huge losses.
- Work towards never having more than 10% to 25% in any investment or asset class. You may think this is impossible since 90% of my wealth is in my house/real estate or business activity. But, remember, protecting wealth is all about spreading the risk to many baskets and having too much wealth concentrated into one or two assets is extremely risky. Work towards diversification and multiple assets classes.
- Every asset class has a time and a season to be in it and when to exit. As a result, managing wealth is complex, requiring constant research, adjusting your portfolio, and understanding critical market cycles.
- The buy-and-hold mantra has worked in the past as long as the central banks juiced the markets and made credit easy; also if you did not need to sell assets. However, there have been seismic monetary and geopolitical shifts worldwide due to cycles, unsustainable debt, the breaking down in global trade, and crushing inflation.
- High inflation (4% plus) is here to stay for the foreseeable future and most likely for the rest of this decade or longer. During these periods, you can have certain assets go down in value and others go up, making investing a very challenging proposition. Most people need wise counsel to navigate during these turbulent times. You need to invest in assets that do well in an inflationary cycle. Think commodities, energy, precious metals, and some real estate like farms. Real estate assets should be cash-flowing and have little or no debt. Also, defensive stocks that provide essentials like food, energy and utilities/power transmission often have generous dividends. Even in a severe recession, people require these essentials.
- I recommend you consider being a more active investor and being willing to sell when the timing is right. If you do not have the skillset or time, ensure you have a proven active portfolio manager and knowledgeable financial advisor. Have a well-thought-out plan when you buy an asset (unloved and on sale) and when to sell one (in sizable profit or a timing issue). Panic selling is never a good idea.
- Finally, focus on educating yourself as we are in a very challenging season (think a decade or longer). Most fund managers and people have never experienced the current market conditions unless they are over 60 years old. Many still do not grasp the seriousness of the economic crisis and think we are returning to the good old days. In 2020 the world changed, and the trend will continue for the foreseeable future. Remember, this is not the end of the world, but it will be a challenging historical period. Our grandparents endured the great depression of the 1930s and WW2 (16 years), and we, too, will get through this!
So here are some ideas and strategies to diversify your wealth.
- Have a portion of your wealth in life insurance contracts. Why? Firstly, life insurance companies are well-capitalized and have a minimum of 120% assets to 100% liabilities in Canada. Second, they do not partake in high-risk investments like many banks or major financial institutions that partake in derivatives. Third, insurance contracts take some of your assets outside your estate (not subject to probate fees and long estate settlements) and make them private and often very tax efficient. Fourth, insurance companies can provide contractual income and death benefit guarantees. Also, one can create very tax-efficient income down the road with the right strategy. Finally, with the rising interest rates, you can now receive 4 to 4.5% interest and have liquidity (early surrender will create minor fees) compared to bank GICs which are often locked in and pay less interest. High-interest savings accounts are now 3.35% and 100% liquid (no penalties).
- Have a good portion of your wealth outside the stock markets. Why? Many people are unaware that balanced funds have had their worst performance in one hundred years. There has been a 92 trillion decline in market values in 2022 in stocks, bonds and cryptocurrency, and now real estate is on the ropes in many markets. Here are a few suggestions: High-quality private apartment REIT, farmland investments or possibly Super Flow Throughs in Precious Metals for those needing tax write off’s. I have referral arrangements to provide these solutions for my clients. These investments have excellent track records of 15-plus years and proven management.
- Cash or cash equivalent is an excellent way to diversify in troubled times. Insurance Guaranteed Investment Accounts (GIA) would qualify.
- Physical Gold and Silver provide an excellent diversifier. I provide private vault storage to ensure your asset is protected and insured. Gold and silver are safe-haven assets and protect your purchasing power, especially as this inflation story plays out. Over the coming years, I firmly believe precious metals will see significant gains.
- Work towards having a sizable portion of your wealth that produces yield, dividends and income. Again, use diversified strategies to achieve this and work towards multiple asset classes.
My goal in my Blogs is to challenge you to think about new ideas and strategies and then take action. So if you need help with diversification, please reach out to me.
Also, As A Reminder, Please Register For The Upcoming Webinar (On November 12 Saturday, 10 AM PST) As I will Interview Silver Expert Peter Krauth (Best Selling Author, Conference Speaker, Newsletter Writer And Analyst). Forty-Five Minutes With A Short Q&A To Follow. Learn About A New Investment Idea From One Of The Best In The Industry.
Please register and feel free to invite your friends to this Webinar:
Bill Westmacott, Owner