What I’m thinking

Never Retire Profile of the Week

Clint Eastwood

Who hasn’t been entertained by Clint Eastwood – either as a star, a director, or both? From the TV series Rawhide to the spaghetti westerns, Dirty Harry movies, Academy-Award winning films Unforgiven and Million Dollar Baby, and more recent work like American Sniper and The Mule, the 89-year-old Eastwood never stops. In you’re curious about what he’s up to today, look for his 2019 film Richard Jewell, a biographical drama about the security guard who found a bomb during the 1996 Summer Olympics, alerted authorities, and was then wrongly accused of having placed it himself. Whether you’re an admirer of his work or not, Eastwood exemplifies the Never Retire philosophy: he keeps doing what he loves without regard to age.

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Two weeks ago, I held a conference call and explained the following:

1. The banks are secure.
2. Our asset allocations are suitable for clients’ risk and age profile.
3. Our Canadian tactical model is in cash, increasing our clients’ cash level to higher than normal levels.
4. Short-term cash flow requirements are safely invested in ladder GICs.
5. All cash dividends are reinvested in the issuing company, hence lowering cost basis.
6. The Federal Government is providing large stimulus packages to support the unemployed and some industries.
7. The virus seems to have been contained in China, Taiwan and South Korea.
8. I have lived through—and learned from—other crises, such as the tech crash of 1999, the post- 9/11 crash of 2001, and the financial crisis of 2008.
9. We have divided our team into two sub teams. Two of us work from home and two of us are at the office. This enables us to keep the office open.
10. When the comeback begins, we will be led by our tactical model, which moves cash back into the market when the market changes direction.

As I write this blog on April 6th , 2020, the highlights mentioned during the conference call are still applicable and have not been altered by new developments occurring afterward.

However, the team and I have been very busy fielding calls from clients and re-evaluating the asset allocations for those who withdraw funds from their RRIF or from a non-registered account. In particular, we are ensuring that clients withdrawing funds have a minimum reserve of three years’ worth of cash flow requirements in guaranteed investments (like GICs), AND we’re discussing with clients whether their guaranteed portion should be expanded to four or five years. If you have not responded to our email/call yet, please do so as soon as possible.

The objective of our assessment is to ensure clients have a cash reserve of three to five years of lifestyle expenses and the ability to refrain from selling stocks before they have an opportunity to recover.

What should we do next?

Recently, I have spent almost every waking hour (and many of those hours occurred when I should have been sleeping) thinking about the pandemic’s health and economic ramifications (both short and long term). Unfortunately, I can make a strong argument for a positive and a negative ending to our current crisis.

Here is my argument for both sides.

Reasons for being cautiously optimistic:

1. A vaccine or an antiviral drug could be developed sooner than most expect.
2. An existing vaccine could prove effective against the COVID-19 strain.
3. The virus may not be as severe in North America as expected.
4. Federal governments and central banks around the world are making efforts to protect the economy with subsidies until a vaccine is developed.
5. The warmer weather may kill off the virus.
6. We may have already experienced peak infection rates due to the quarantines and other social distancing practices.
7. A higher percentage of the world’s population may have been infected without symptoms, which could lead to a greater percentage of immune citizens able to return to work than projected.
8. Based on the fact that stocks have already declined 30-35%, history indicates the worst of the decline may have already occurred.

Reasons for being negative:

1. The virus could be more severe than expected with North America following the pattern experienced by Italy and Spain.
2. The virus reappears during the fall and a vaccine is yet to be released.
3. The Federal Government subsidy packages are slow and insufficient to adequately help citizens, industries and small businesses.
4. There are mandatory quarantines that shut down the economy for three to six months, causing massive layoffs.
5. Companies defer dividends in order to protect cash flow.
6. Key political and corporate leaders test positive for COVID-19 and are hospitalized or die.
7. Due to a lack of consumer demand, many companies do not reopen but file for bankruptcy, causing a higher number of unemployed.
8. It may be impossible to equitably provide loans or subsidies to industries (i.e. airlines, hospitality, etc.) without creating winners and losers.

Despite the consuming nature of analyzing the positives and negatives of our current situation, I feel myself in an almost no-win scenario.

If we recommend maintaining the asset allocation as stated in your individual Investment Policy Statement and a vaccine is found very soon (or any of the other possibilities listed above come to pass), the stocks in our models may experience a relief rally, we may recover all or most of our losses, and life would get back to “normal” sooner than expected.

However, if a vaccine is not found for months or years (along with other reasons listed above), our recommended stocks may continue to fall, and corporations may decide to protect their businesses by deferring/reducing dividend payments and other companies may fall into bankruptcy.

My biggest stumbling block is the issue of how and when we restart our closed (or semi-closed) economy.

Here’s my guess on how to restart the economy, but remember it’s a guess and it’s tainted by my personal biases.

I believe we need a test that identifies the infected and the immune group. Through extensive testing, we create a government/employer registry for citizens who are either immune or not infected. This group is permitted to return to work and slowly restart the economy (note: the not-infected group must be tested frequently to ensure they don’t infect the not-immune group). The infected group is isolated and, once recovered; they are added to the immune group and allowed back to work. The workforce gradually grows by the increasing number of citizens who have recovered from the virus, and slowly, larger portions of the economy begin to restart.

This process continues until scientists develop a vaccine or an antiviral drug that offsets the virus and it becomes available to everyone on earth.

Here’s my guess on how long this process may take.

Because mass testing is not available today (and it may be several more months before available), and because social distancing is not strictly followed by everyone, I believe it will take several months before we slowly begin to restart the economy. As well, if we restart too quickly or before we have a handle on the virus, we risk going back to quarantines. My guess is that governments try to restart the economy in July-August.

The longer the restart takes, the more severe the effects on the economy and on our recommended stocks.

Our recommendations

If you are in retirement and your investment portfolio provides some or all of your cash flow needs, we suggest a cash reserve equal to three to five years’ worth of annual expenditures.

If you are five or more years from retirement, especially if you are a millennial, the pandemic may be a once in a lifetime opportunity to buy underpriced stocks. I don’t suggest clients wait until the market hits “bottom” because no one can pick the exact bottom. Instead, buy today and continue buying even if the market falls further.

In short, have a solid cash position and don’t give up on the human spirit. We will find a way through this pandemic and life will gradually improve again. I’m an optimist and have confidence that scientists will find the solution to the pandemic, so I’m not telling you to run for the hills. I don’t want to bet against the unstoppable human spirit.

Did this article resonate with you? What did I miss? Send me a note and let’s start the conversation.

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Call me if you in want to map out how you can Never Retire. You can also subscribe to our Never Retire Newsletter, contact us to order a complimentary book, register for one of our events, and call us to meet with a Certified Financial Planner. We offer you a range of services from a financial plan to investment advice or helping you take advantage of our investment models. Call me at 416-355-6370 or email me at richard.dri@scotiawealth.com.

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