When creating a strategy for long-term financial success, there are many different factors that must always be considered. One of the most talked about factors - but often the least important over the long term - is the concept of market volatility. During times of economic expansion investment prices tend to rise over a period of several years followed by a brief period of time when investment prices retreat. So when examining investment market fluctuations, it is important to remember the normality of how economic cycles behave over long periods of time -- even when current events cause investors to second-guess their long term financial strategy.
Today in the world of economics and investment markets, there are new and different challenges. Canada and Australia, for example, are the only two major global economies that have not resorted to money printing, or Quantitative Easing (QE) and/or negative interest rates since the 2008 credit crisis. The U.S. is talking about negative interest rates and time will tell if the Federal Reserve is able to withstand the pressure to implement negative rates.
Investment markets sometimes experience unusual circumstances. The U.S. and Canadian market returns showed strong results in 2019 even though profit growth declined from the previous year. During 2019, the investment markets performed well despite some global economic challenges brought on by trade international trade conflicts.
The U.S. Government also recently experienced a new situation whereby their general debt levels are now growing faster than the U.S. economy (at about 5%) and are estimated to do so until at least 2030, by the Congressional Budget Office (CBO). At the same time, US GDP growth in 2019 was slower than in previous years which in turn will likely affect the cost of servicing government debt in the future.
The key thing supporting the U.S. economy in 2019, according to market observers and economists such as David Rosenberg, was the strong spending by consumers, who accounted for almost all of the U.S. GDP growth.
What does this all mean for investors today? While most financial strategies in Canada are formulated based on projecting the current economic picture into the future, sometimes it is wise to consider alternative planning scenarios.
At some point in the future (perhaps 5 – 10 years), it is predicted that some Western governments will face limitations on their ability to issue debt to maintain the current economic system and this may in turn lead to some type of reforms to our credit-based economic system.
One approach for a financial strategy is to assume that everything for the next 20 years will likely be similar to the previous 20 years. But, you can also build in some contingencies to your planning for some “what-if” scenarios.
Your unique financial strategy for the next 10 years ahead will depend on various factors such as: your age, personal debt levels, asset accumulation, income, and how close you are to retirement. Generally, the closer one is to retirement, the more cautious one should be in terms of using any type of leverage in a personal financial plan.
The best financial strategy is always dependent very much on each person's unique circumstances.
1Congressional Budget Office - The Long-Term Budget Outlook Under Alternative Scenarios for Fiscal Policy. August 2018
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