Protect your portfolio from a crash landing

Derek Shevkenek - Oct 31, 2022

25 years ago I had a summer job as an ultralight aircraft flight instructor. Students were fulfilling their dream to fly, and it was my job to help them do that safely.

Though engine failures are rare, students were taught to have an emergency landing area in mind in case it suddenly quit. That habit could be the difference between a catastrophic crash into trees, or gliding in for an inconvenient but safe emergency landing.
Do that with your personal finances too. Enjoy earning, giving, saving and spending. And when doing financial projections and retirement plans, have a backup plan in case the economic and market engines that power your portfolio falters. As examples, investment returns may be lower than hoped, or inflation could end up being higher than usual.
Let’s look at inflation. If inflation ends up being higher, that means your money is losing value faster. Over the past 20 years, Canadian inflation based on the consumer price index (CPI) has averaged 1.9% per year (Bank of Canada).
However, the 1913 Webster definition of inflation was not based on consumer prices, it was focused on the “undue expansion of currency.” In other words, printing too much cash. I think we should keep our eye on this too.
The 20 year track record of cash inflation (bank note printing) averaged 5% per year (BOC). And last year in 2015, cash inflation oddly ramped up to 7.8%. That’s interesting, given the tendency for people to use cash less, instead favouring debit and credit card transactions.
Further, if recent talk of “helicopter drops” of money should actually materialize, this may further inflate cash. I’ll paraphrase US economist, Nouriel Roubini, from his recent MarketWatch article titled, “Central bankers may have to fire up the helicopters.” He says, “A helicopter drop of newly printed money would put money directly into the hands of households, boosting consumption. Desperate times call for desperate measures.”
“Desperate times?” Take that with a grain of salt, but you may want to consider buying a little gold as your “emergency landing area” – your portfolio insurance. A historically prudent action.
Inquiry welcome at Opinions are those of Derek Shevkenek and may not reflect those of BMO Nesbitt Burns Inc. The information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. BMO Nesbitt Burns Inc. is a Member - Canadian Investor Protection Fund. Member of the Investment Industry Regulatory Organization of Canada.