Why Being Old Means I’m Not Upset by the Plunging Canadian Dollar, the Stock Market Meltdown or the Crude Oil Price Crisis

The waves of negative reporting on the state of Canada’s economy and even the world’s economy this week have been relentlessly pounding away at the walls of my financial sense of security. So far, however, they haven’t eroded my sense of calm: Because I’m old, I’m not particularly worried by the drop in the Canadian dollar, the stock markets pullbacks, or the ever-declining price for a barrel of crude.

Shouldn’t the Low Canadian Dollar Upset Me?

Actually, I kind of like it when the Canadian dollar declines against the US dollar. I often sell to the US and when I get paid in US dollars, I make a larger profit in Canadian terms for my work. I also have many relatives involved in producing goods that are exported to the US who also benefit from this. And other friends who work in the tourism industry who benefit when Americans decide to vacation “up here” to get an extra 25% or more for their dollar. (Don’t tell them that our rack rates for hotel rooms are often 50% higher than for a similar room in the US, so they won’t be saving much, ok?)

I am old enough to remember all the wailing and gnashing of teeth when the dollar rose to parity with the US dollar. It would spell doom and disaster for all of Canada’s “Branch Plant” operations. And unfortunately, in fact, it did in many cases.

The dollar is significantly down against the US dollar compared with a year ago but it’s been this low, and lower, within my children’s lifetimes. To me, with the hindsight of older age, I can see that it’s a cycle and that it will continue to change over the next 20 years too. I will try to buy things produced in Canada or in places where our exchange rate is reasonable. I will not travel to the US or to destinations that price based on the US dollar, but then I rarely did anyway. I will suffer through paying more for imported food, books and so on. But I am not particularly upset about it.

Am I Going to Sell All of My Stocks Since the TSX, the NYSE, the Dow Jones and Every Other Index Seems to be In Decline?

The markets have also been dropping steadily for what seems like forever. Some pundits are even screaming that everyone should retreat to cash now, before it’s “too late.”

Yawn.

There is nothing I can do personally about the stock market indices. I own some XIC and I will look at its market value and its book value and feel gloomy for a minute or two. But I won’t sell it. I didn’t invest in it to make a quick buck. I don’t need the cash from it now or anytime soon. Based on all of the news so far, I see no reason to think it will stop paying its small annual distribution of 2-3%. That’s the same or better than I can get for cash deposits. So I’ll just leave it alone.

When I bought my first index-mirroring mutual fund in the 1990s, it did very badly some years too. But over 20 years, it returned about 7%. Leaving it alone worked. I’ll try the strategy again here. And at least this time my fees are much lower!

Much of my other equity investment dollars is in individual shares in companies. I’ve looked through my holdings and don’t see any reason to make changes. They seem to be in reasonable financial shape. They still are making products, selling orders and generating revenue. They have not announced any dividend cuts. In most cases, their market values are also still above what I paid for them, even compensating for the time value of the money I invested. So no worries. I don’t want a bunch more cash. I’d like to get the dividend income if they can keep generating it. So I’ll hold and hope.

What Gives a Deeper Sense of Security During This Downturn?

My extremely conservative approach to investing is also helping me through this rough patch. We have a huge amount of our portfolio in fixed income, especially in GICs and high interest savings accounts. While this money generally is just breaking even with inflation, it is also still there ready to spend if needed. Its “principal” value has not declined.

If we want to, we could re-allocate some of this cash to equities. I won’t yet because I have no idea what is going on with the markets. So I’ll stick to our planned asset allocation. New money might be invested in equities, though, to keep our asset allocation on target as the market value of our existing equities drops. We’ll see.

How Low Can the Price of Crude Oil Go?

Well, I remember working when the price of crude oil fell to $7 a barrel for WTI. So that’s my personal benchmark. I’ll be surprised if it drops below $7 but I won’t be surprised otherwise. If the Saudis decide to really open their taps, they could drop it to that price quite easily.

When I worked in Calgary, we used to joke that instead of pins commemorating another 5 years of service, you should get a bar for each layoff and downsizing you survived. So you’d have a little medal saying “I survived” where you could add new bars below it: the Purge of ’XX; the Diagonal Slice of ’YY; the Right Sizing of ‘ZZ” etc.

Oil prices have NEVER been even remotely influenced by anything Canada does. I can’t see why they ever would be. So again, you have to shrug it off and keep walking forward. There’s really nothing else you can do. (Ok, maybe get a few extra gasoline storage tanks and fill up while the price is low.)

Alfred E. Neuman and I have the same approach to all these negative news stories. There’s still work to be done, housework to be done, birthdays to be celebrated, sidewalks to be shoveled and people who need hands-on support. I’ll save my worrying for those real issues.

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Why Buying an Index Fund ETF Must be for the Long Term Not for a “One Year Wonder”

Back in 2014, I had some RRSP cash to invest in the equities side of my portfolio but I didn’t have any particular companies in mind. Instead, I gradually bought $24 295 worth of XIC an, ETF that tries to reflect the entire S&P TSX Composite index. Looking back on how it performed in 2015, I decided yet again that Index Fund ETFs are most suited to someone investing for the long-term, such as a distant retirement, rather than for the short term or just one year.

Whether Markets Rise or Fall, Dividends Still Get Paid by Most Companies

Many of the companies on the TSX S&P Composite Index list pay dividends. These include Canada’s big banks, telecoms like Bell and Telus, and old established utilities like Fortis and Canadian Utilities. An ETF that mirrors holding those companies, like XIC, usually will pay distributions to unit holders based on the dividends and other income it receives.

What Was My (Quick and Dirty) Yield on Investment for XIC in 2015?

In 2015, my actual distribution payments totaled $674.64.

While it’s not a particularly accurate way to calculate my return on investment, if I just divide my distributions by the amount I spent on XIC units in 2014, I get a percentage of 2.78%.

This is a bit different than today’s (January 6, 2016) quote for XIC on RBC Direct Investing, which says I will get 3.24%.

Why is my number lower? Because I spent more to get the same distribution.

What Happened to the Unit Value of XIC During 2015?

You see, the TSX had a difficult year in 2015. Its overall value dropped, at least on paper. I bought my units of XIC in 2014 at a rough average cost of $23.14 each.

Today, at this moment, on January 6 2016 they are worth 20.20 each.

Sigh. They’ve dropped in value by $2.94 each. And that’s not even factoring in any inflation and what not for the year between when I bought them and today.

If I Needed That Money In One Year, What Alternative Investment Might Have Been Better?

It doesn’t matter much to me that on paper my XIC units are worth less today than when I bought them. That’s because I don’t need the cash today so I don’t need to sell them and make that paper loss a real loss.

But what if I had been investing for the short term? What if I did need the cash today?

Well, I likely would have invested the same $24 295 in 2014 in some one-year GICs. I did buy quite a few GICs that year so I can find an average rate for 1-year certificates. On average, I invested at a rate of 1.91% for 1-year GICs in 2014.

So if I had put my money in GICs, on January 1 2016, I would have had all of my principal returned to me ($24 295) and I would have received $464 in interest.

You can see that the GIC interest is $210.61 less than the XIC distributions.

But the XIC loss of principal if I had sold the units today would be $3 087.

Ouch!

The lesson is obvious to me. Don’t invest in an index fund ETF for the very short term unless you are prepared to accept the possibility of a large, real drop in value. I wouldn’t risk $3 087 to gain $211 in interest/dividend distributions over a one-year period.

That said, my XIC investment is supposed to be needed in 20 or more years. So I’ll let it putter along, paying the 0.10% expense ratio and hopefully over that length of time, the capital value of the units will have increased at least enough to cover inflation and even better enough to generate a capital gain and profit.

Just Out of Curiosity, How Much Did Bell Do Better than a GIC and than XIC Over 2015?

I noticed when I looked at this particular account, that in 2014, I also bought about $25 000 of BCE stock. It was paying dividends to yield about 4.92% at my purchase price. The actual dividend per share has increased since then, so it’s still yielding about 4.77% today, January 6 2016.

The shares were bought at $50.25 in mid-2014. They are trading for $54.50 right now, today, January 6 2016. So they have appreciated in value by $4.25 each.

Too bad there was no way to know that in advance, or to be sure that that trend would continue (which it probably won’t) or I would have been very happy to have invested the full $50 000 in BCE and left XIC on the shelf!

Ah well, that’s why we’re supposed to invest in a variety of assets with a variety of risks and volatilities. I’m satisfied with having some BCE, some XIC and some GICs as part of my overall blend. Between them, it was a reasonable 2015.

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