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When markets are down, many investors move money from their investments into cash. Doing so can help them avoid short-term risks associated with volatility. But, what they may not be aware of is the “silent assassin” lurking in the midst – a.k.a. inflation. As prices go up over time, the overall value and purchasing power of their money is chiseled away. Stu Kedwell, Co-Head, North American Equities, RBC Global Asset Management, looks at strategies for investors to get off the sidelines and back into the market to get the most out of their money today. (Recorded June 30, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson, and we’re joined for Stu’s days by Stu Kedwell who’s the co head of North American Equities at RBC Global Asset Management. Stu, great to have you here again.

Thanks for having me Dave and happy Canada Day to everyone out there.

Absolutely. Happy Canada Day to everyone. Even if you’re listening from outside of Canada, happy Canada Day. As we like to say in Canada, the world needs more Canada!

You’ve got it.

Yeah. And we had an interesting discussion off line, through the week, just talking about how right now there is more money sitting in cash on the sidelines — and these are investment dollars, these are dollars that would normally be invested in something or part of a long-term strategy — but they’re sitting in cash earning zero to 1%. And you started talking about how what seems to be a conservative strategy is actually a strategy that’s making a pretty strong bet against some forces that are really tough to fight from an investment perspective. Why don’t you take it from there Stu with your thoughts?

Great. Yeah. It was a really interesting conversation because I think investors always associate risk with volatility. And we watch markets go up and down each day and we can’t quite stomach the days it goes down. So that affects our behaviour and even though I have a longer-term time horizon and I think it will all turn out down the road, this daily up and down is not something I enjoy. There’s kind of a silent assassin out there that is affecting the purchasing power of your money — and that’s inflation. When the central banks are being as aggressive as they are in pumping liquidity and pumping money into the system, the risk that resides underneath is that inflation could bubble up. And we’ve seen that as the central banks have begun their aggressive policy. Since March we’ve seen the price of gold go up. We’ve seen the price of copper do a little bit better. Things seem to cost a little bit more when we order our groceries. And when I have my money in something that’s not volatile, it can be comforting looking at my screen each day, but it is chiselling away the purchasing power of my money over a very long period of time. And we talked about this in a variety of different examples. The cost of riding the subway has compounded by 5 or 6 % a year for 30 years. There are all sorts of examples. I’m sure we could have a field day naming them, about how much things used to cost and how much things will cost in the future. And that’s the purchasing power of your money. And when you own assets that have productive capabilities, they have an ability to hedge that degradation in your purchasing power over long periods of time. I kind of think about inflation as the boiling frog. I’m in the pot. It’s getting gradually warmer. I don’t really feel it from second to second. And then, one day it’s not so good for me. That’s kind of like inflation. I can have lots of money and do something extremely safe with it. And maybe I’m earning 1 % interest rate or 1.5 % interest rate, but if inflation is 2 %, then my money, particularly after tax, is actually going down in value over a long period of time. Just to wrap it all together, we talk a lot about dollar cost averaging as a way to deal with volatility. So I form a plan. I have confidence in the future, although I don’t always have as much confidence in the very short term. So I come up with a plan. Dollar cost averaging is an excellent tool to satisfy that kind of near-term stress with long-term opportunity. I follow that plan. And I kind of really assist the purchasing power of my money over a very long period of time.

Yeah. And I think one of the other important points you made is not only are you battling this silent assassin — and that’s the rising costs that take place over time — but also when the central banks like the Bank of Canada or the Federal Reserve, the old line, don’t fight the Fed, when they are actively trying to inflate asset values, and the asset values they’re trying to inflate are things like stocks, and you’re sitting on the sideline in cash, which by lowering interest rates to virtually zero, they’re not paying you for, then you’re not only being hurt by inflation, but you’re missing the boat in terms of those inflating assets.

You know, when you have an economy that has more debt than it’s had in the past, there are two ways for central banks to encourage the adjustment of that issue. The first is people can pay back debt, but when the economy is slow that’s more difficult. So they lower interest rates and try and create more asset value to cover off the debts that might exist. It’s not an easy task, but it’s something they’re very focused on. And we’ve seen time and time again that they have quite an imagination when it comes to adding liquidity to the market and getting to their stated goals, which are low unemployment. They want persistent inflation and they target that 2 % range. So, again, if you’re earning less than 2 % the purchasing power of your money is going down.

Then let’s pull up to full circle to where we started with happy Canada Day. We all know part of the great trade off of living in the greatest country in the world is the silent assassin — the not so silent assassin — which is the taxman. If that money is residing in a taxable account, the taxman comes in and taxes on what you earn, not what you earn after inflation, which really drags on your purchasing power. So Stu, again, happy Canada Day. And thanks for your Stu’s days visit.

Great. Thanks, Dave. Take care everybody.


Recorded June 30, 2020

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