Market volatility | Black swans| Lessons on happiness
Some years come in with a whimper - but, not this one. 2016 has started with quite the roar, with one of the worst starts to a year the markets have experienced in a long time. Mid-week, however, showed some optimism with
North American markets firming
due to a small rally in oil prices following better than expected news about Chinese trade. But we remain prepared for anything that may come our way.
China and oil have been the two biggest issues on most investors' minds. The last 18 months have been incredibly volatile for China's stock markets due to over inflation from investor hubris and a government irresponsibly encouraging citizens to invest in the market.
But to put things into perspective, although the
Shanghai Composite Index
has fallen dramatically over the last few months, it's roughly where it was one year ago - around 3,100. Also, it remains up about 50% from July 2014. The country is clearly going through some growing pains and volatility should be expected. China will likely continue to grow its economy faster than the developed world, but not as fast as most previously expected.
Part of the plunge in energy prices is due to the anticipated lower demand for commodities from China. But, of course, there is far more to it than that! There's a
lot of oil in supply
and its production has not slowed down, which is what usually happens when the price of a commodity falls this far. Despite the many doom and gloom warnings, it's just too hard to make any real predictions given the thousands of butterfly effects that can and will affect the energy sector and periphery sectors.
What I can confidently write, however, is the
world will need oil
- and a lot of it, for a long time. Given that very few, if any, producers are making money at these prices; something will inevitably happen (supply restrictions, bankruptcies, research restriction) on the supply side to positively impact prices. Although I'm surprised to see oil fall so far, after almost two decades managing portfolios I've grown to expect the unexpected and thrive on the challenge of figuring out how to benefit from these occurrences.
A few weeks ago our plan was to rebalance our portfolios in late winter/early spring, however, should this market volatility continue, we may move our time table up. With this rebalance we'll also consider adjusting our asset allocations to take advantage of securities that are particularly cheap, historically or by valuation.
For personal finances
You can now increase the amount you have in your TFSA by $5,500, bringing your lifetime contribution level up to $46,500. If you aren't sure how much you can contribute, check out the
As it's a leap year, the deadline to make RRSP contributions that will help lower your 2015 taxes is February 29, not the usual March 1. As always, it's a good idea to take care of this earlier rather than later to ensure everything is taken care of without rush.
Keep in mind that
tax rates will change
for Canadians in 2016. For those needing to make RRSP contributions, the new tax rates will not affect your contributions up to the February 29 deadline! For our clients, as always we'll make sure we help you navigate through the gamut of taxation options to optimize your results.
On the bookshelf
Last month, I mentioned I was re-reading Daniel Khanman's Thinking, Fast and Slow. I also started re-reading
The Black Swan by Nassim Taleb
. As both authors are brilliant, friends, and share a number of ideas, I wanted to get the most out of each by reading them concurrently. While Khanman is a gentleman through and through, reading Taleb often feels like watching an old Muhammad Ali fight where he's berating a beaten opponent he clearly dislikes. His pejorative tone is laced with sarcasm and disdain for the people and ideas he deems foolish and harmful to society.
With that in mind, The Black Swan is a must-read for anyone serious about managing and protecting money. The book takes its name from the once erroneous belief that all swans were white. After discovering Australia, we learned that just because we had never seen a black swan before, didn't mean they couldn't exist. He highlights our natural desire for precision even in areas where it's irrational to expect any, like economics and the stock market. This type of "physics envy" has caused the bankruptcy of many companies that built complicated models based on the impotent belief that everything we've seen is all there is. In other words, it's crazy to think you can predict the future when your calculations are based on the false assumption that the future can only reflect what has happened in the past.
If you can stomach Taleb's writing style, you won't regret reading this or any of his other books!
Something to think about
You've probably noticed our newsletter has become more robust over the last few months. We want to make sure it provides a blend of pertinent global financial information and timely personal planning suggestions, while also including some interesting tidbits I've been learning, that relate to the ongoing success of our clients. We hope you've enjoyed these improvements, and welcome your recommending it to your friends and family.
Here's to a great 2016 and beyond!!