Days ago we sliced & diced the young musical Starbucks babe who decided to gamble it all on a condo in dubious Mission.

Is it cultural, tribal or just FOMO pressure that makes kids hot to get mortgaged? Do they believe it’s an easy path to getting money without working? Maybe an overpowering urge for stability and nesting? Or is it just social – succumbing to peer pressures – that would make a young person trade freedom, flexibility and infinite choices for condo fees, property tax and a mortgage payment?

Dunno. But if you could buy a home for two or three times your income, it might not matter. Today it can be ten or twelve (at least) times annual earnings. In Vancouver, says the National Bank, it now takes 29 years to save enough for a down payment – which is the definition of futility. So why do people keep trying? Why not just (a) move or (b) decide there are more productive things to do with your money, and your days?

An enduring tenet of this pathetic blog is this: the goal of life is not a house. Instead, it is the worthy spending of your time.

So here’s a counterpoint to the Mission-bound Ms. Sbux. Please welcome Scott…

“Just a short note to let you know I’m liking that blog.  I’ve been following your advice for years and your blog does a great job,” he says in the obligatory suck-up.

My own tale of woe.  I started out as an English major at UofT.  I wisely came to my senses, and moved to Manitoba where I switched majors, improved my employment prospects after graduation, and took full advantage of a relative lower cost of living, whilst enjoying the same standard I had in T.O.

My tale gets worse.  I actually graduated with 0 debt.  I’m one of those weirdos who held a job despite managing a full course load. I eventually found satisfactory employment completely unrelated to anything I studied in school.  I was lucky, because although we’re all in a profession where we’re pulling in a good wage, I was mentored by a few of the guys in money management.  They set the foundation.

So did I buy a house in cheap, cold Winnipeg?

No.  I rented.  For years.  My sad tale continues.  I bought groceries and made food like a normal person, I never did “Timmy’s runs” and don’t even think about talking to me about $tarbucks. I endured ridicule.  “How come you don’t buy a house?”  “Tim’s (coffee, what else) is like, the best ever.”  I was single then, performing shift work, so I needed a low-maintenance place to rest up and have little worries.  Toilet blows up?  Property Mgt deals with it.  I’ve paid for that in my rent.  I can make own coffee (still do) for pennies a cup.

I’ve heard it more times than I care to remember, “You’ll never get ahead by bringing coffee from home.”  It all adds up.  It does.  Or, “You’re a young guy.  Buy a house and sell it down the road, you’ll make lots of money.”

I learned early.  A house doesn’t make money.  It COSTS money.  So amid all the mockery and snickering along the way I quietly worked, invested and basically didn’t make a life and/or money stupid move.  Like investing in a speculative venture or ponzi/pyramid scheme.  I guess the kids call that Bitcoin these days.

My sad story ends with me being semi-retired.  I can pick and choose my hours and have enough FU money (I guess the ‘moisters’ refer to this as … ‘Freedom Unlimited’.) to call it a day if I choose.

Ok I guess that wasn’t so short after all.

A few observations:

Too many people try and spend their way to wealth.  You refer to the Audis and so forth.  They might be faking-it-till-they-make-it.  But, they’re all fake, and they’ll never make it.  Next time you see a massive house, or an Audi, or a high cost purchase, ask yourself, “Is it bought and paid for, free and clear?”  Sometimes it is, most often – nope.

For the ‘moisters’ out there – I believe getting married is the most important financial decision you’ll ever make.  More than your education, profession and even what you’ll invest in.  My wife, bless her heart, is even more of a bad ass than I am.  She possesses an MA in Philosophy and also worked a job completely unrelated to her post grad work.  She’s completely on the same page with how we invest and manage our finances.

We still consider $100 a lot of money.  As time went on we eventually caved in and bought a house and not a mortgage.  We only have one vehicle, and we can afford to buy new. 0 financing.  If we don’t get the deal we want, we’ll walk.

We also learned from our parents.  I know, it’s odd in our world today, but my folks actually knew each other and stayed married.  Same with my wife.  Buy only what you can afford.  Save.  Invest.  One step at a time.  Don’t skip steps or take shortcuts.  Don’t listen to morons.  Don’t do stupid shit and go to jail.  And etc.

You must either be bored if you’ve read this far.  One more thing – I believe a lot of this house-horny nonsense is a result of those ridiculous TV shows (buy it, flip it, renovate it, design it, buy it? and etc etc etc.  Selling them on something they can’t afford.  But hey, it’s “on trend.” Ok, thanks Garth.  I know you have more important things to do.  If you want to gleefully dissect this and pass along a response that’d be solid.  Cheers.

Scott’s moral: go your own way.

If the goal is freedom from worry and work at an age you can enjoy it, real estate my not be the right path. Especially now when costs are extreme and historic. Nobody needs to own, nor be in debt, to have a home. That’s where you live with the ones you care about. It’s where the dog sleeps.

Emotional and financial goals are often opposed. People make decisions by rote and instinct, not always with intellect and forethought. What worked for the parents may not for the child. What others covet may be your downfall. Pick the destination, then go your own way. Proudly.

Why 60/40

RYAN  By Guest Blogger Ryan Lewenza

All it took was a bit of volatility and a 10% market correction to wake investors up from their low volatility induced stupor. Well a “bit of volatility” is maybe downplaying what we’ve witnessed in recent weeks with the VIX or “fear index” rocketing higher from a near historical low of 9 in early January to a peak of 37 in early February. And with the spike in volatility and market correction, out come the doom and gloomers once again peddling their fear based prognostications of an imminent bear market and further market carnage. Not surprisingly we’re fielding some queries from clients on whether our recommended asset mix of 60% in equities and 40% in fixed income is still appropriate in light of this increased volatility. The short answer is yes, and in this week’s post we examine some of the inputs and analysis that goes into our preferred 60/40 asset mix.

Let’s start with a review of bear markets to see how the 60/40 portfolio performed versus the TSX and other portfolio models. Using the S&P/TSX Total Return Index and the FTSE TMX Canada Universe Bond Index we analyzed portfolio returns in the four last major bear markets of 2007, 2000, 1990 and 1980.

On average the 60/40 portfolio declined 20% peak-to-trough in the last four bear markets, roughly half of the 38% average decline in the TSX. A 50/50 and 40/60 portfolio declined 15% and 10%, respectively.

So of course even with a balanced or conservative portfolio they will decline during bear markets, but as you can see the declines are far less severe than an all equity investor.
Now you may be wondering why not just move from a 60/40 to a 40/60 portfolio ahead of the bear market to reduce the potential downside. While we may tweak the 60/40 asset mix if we believe a bear market is coming, we generally will stick with the 60/40 asset mix since we recognize how difficult is to perfectly time the markets as it requires you to get both the sell and buy just right. For this reason we recommend investors stick with their long-term or strategic asset mix over time.

Performance during Bear Markets

Source: Bloomberg, Turner Investments

Below we show the last two bear markets of 2007 and 2000 to better illustrate how these different portfolios hold up much better than the overall TSX.

Performance for the 2007 and 2000 Bear Markets

Source: Bloomberg, Turner Investments

The second thing I looked at was how long it took to get back to even following a bear market. In the table below I show that on average it took the TSX 24 months to get back to even following the bottom of the bear market, versus 10.5 months for our preferred 60/40 portfolio. For the 50/50 and 40/60 portfolios they were back at even quicker at 9 and 6 months, respectively, since they declined far less during the bear market.

This is another factor supporting our preference for a 60/40 balanced portfolio

Number of Months to Get Back to Even

Source: Bloomberg, Turner Investments

Finally, I looked at historical returns with the analysis in the table below. Since 1980, the TSX has returned on average 10.2% annually, just above the 60/40 at 9.8%. However, this was during a time of record high interest rates, which then consistently declined helping to deliver nice capital gains for bonds. Well, those days are long gone and we see much lower rates of returns from bonds over the next decade.

I believe returns will be more consistent with what we’ve witnessed since 2000, with the 60/40 portfolio delivering an average annual return of 6.9%. The 50/50 and 40/60 portfolios returned 6.7% and 6.6%, respectively over this period.

Given our expectations for lower bond yields over the next decade we see the 50/50 and 40/60 portfolios delivering lower returns going forward of potentially 6.4% and 5.8%, respectively.

Historical and Future Portfolio Returns

Source: Bloomberg, Turner Investments

Wow, that’s a lot of data and analysis to take in. Here are the key takeaways:

  • The 60/40 portfolio declines far less than the TSX in bear markets which better helps investors control their emotions and stay committed to their long-term financial plan
  • The 60/40 model gets back to even far faster than the TSX but not as quick as the 50/50 and 40/60 models
  • The 60/40 portfolio has and should continue to deliver long-term returns of 6.9%, which is better than the 50/50 and 40/60 models but should return less than the TSX over the long-run

Put it all together, readers and clients, stick with the 60/40 asset mix for now and over the long-run!

Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.