Your turn

TURN modified

When I first lost my mind and went to Parliament twenty-six years ago, people bitched about the government. Spending, they said, is out of control.

That year (1988) the feds spent $132 billion running the country, and the national debt was $322 billion. This year Ottawa’s shelling out $279 billion and the national debt is $649 billion. Spending has doubled, but so has the debt. This is not good.

In 1988 there was rampant inflation and mortgages were 12%. People and government struggled. Today there’s almost no inflation and rates are under 3%. We struggle still. Personal debt is historic. The current government has been spending more than it takes in for the last six years. And these are conservatives. This is not good.

Well, according to Joe Owe, our almost-new finance minister, the country will run a small surplus next year (even though almost all the provinces are in deficit). Strangely, 2015 is also an election year. And now Joe is asking Canadians this question: how should we spend the surplus?

In fact, the feds have released a video aimed at high school students posing exactly this query. Here it is:

So, have you ever wondered where all of the money goes when it reaches Ottawa? You should. We are a highly-taxed people, certainly compared to the Yanks. About $26 billion a year is burned up paying interest on the accumulated debt, and the rest is consumed by civil servants, transfers and program spending.

Here is a complete list of that spending for the current fiscal year, by department. You will see, for example, that $18.6 billion is spent on the military, $2 billion on CMHC, $3.8 billion collecting taxes, $2.3 billion on prisons, $1 billion on the CBC, $51.6 billion on employment and social development (mostly transfers to the provinces), $87.6 billion by Joe’s department (including the debt interest), $5.3 billion on foreign affairs, $8 billion on aboriginals, $2.6 billion on the Mounties and $49 million on Enterprise Cape Breton.

That’s just a sampling. Go poke around for yourself.

The point is, this is your money. The MSM never actually tells you where it goes. Nor does your MP. Instead, each time a budget is released reporters focus on the goodies dispensed or any new personal taxes to be imposed – because that’s the spin they’re given.

Few people end up knowing the national debt has doubled or that the current government recently ran the worst deficit in national history, spending $55 billion more in one year than was collected. Yes, it’s Keynesian economics at work (spend more in the bad years), but let’s go back to Joe’s question: what do we do now? If the economy is limping ahead, taxes are rising and we may have a small surplus, what’s to be done with it? Spend it, or cut tax with it, or use it to reduce debt?

This is what he’s asking the students to do, without providing them a summary of current spending. Joes says he will seriously consider their feedback. Go figure.

And now I’m asking you. The surplus next year will be $1.9 billion, or 0.68% of the budget. It would have been a lot more, but the government just announced an income-splitting program for middle-class couples and $60 more monthly for child care. There is no provision for debt repayment.

Did I mention there’s an election next year?

Well, I know Joe. And if the students get to say something, we probably should, too. Give me your thoughts. I’ll pass them on.

By the way, back in 1988 I produced a worksheet for citizens listing all the federal spending, providing them a chance to design their own budget. Over a hundred MPs adopted it, and mailed it to their constituents. Finance minister Mike Wilson ended up with about a million of them, and never looked at me the same way again.

He decided we needed the GST. Oops.

Trust

SONY DSC

Kelly says she’d like to talk with her friends about this stuff, “but they’ve all been suckered into Vancouver area condos and ‘high interest savings accounts’, so that’s obviously no help.”

It’s a common complaint. Where do you go to get some indie thought about investing? After all, the bank’s in the business of selling you stuff. So are the mutual fund sharks. And the credit union. Don’t even think about an insurance or real estate guy. And your parents just want you to be little copies of them, with a mortgage. No wonder so many young people end up being schizophrenics, bouncing between dead-end savings accounts and high-risk, leveraged condo units. Both are really bad choices.

“I kind of feel like an idiot wasting all these years, but I’m an 80’s kid that has actually squirreled away money by renting and not trying to live like a rock star,” says Kelly. “I have a decent job (~60k/yr), no debt and 50k in the bank excluding RRSPs, but I’ve been completely ignorant to investments. I’ve read your posts a few times but I can’t shake this lost in the woods feeling of ETF’s, and I’d rather do it right than get in over my head. What would you suggest for someone like me, that isn’t comfortable going full speed ahead with ETF?”

Kelly says she’s mostly worried about doing this herself. “I know that in starting out I’ll need help, and it will cost a percentage for managing a portfolio, but how do you go about finding someone that is competent in this?”

Well, first let’s discuss timing. Not a day goes by without newbies asking me if this is a good time to invest. Because we all now live on Internet time, when a full day is considered long-term and your Twitter feed never stops, people bounce around from headline to headline. This blog is a perfect example. It’s full of weirdos who ardently believe what just happened (Obama’s speech, ISIS, Ebola, bank layoffs, MH-17, mid-term elections, Fukushima) will alter the entire future. They’re wrong. They bury money, fear risk, buy gold, market-time – and lose.

Kelly’s young. The time horizon is long. And the world will continue to grow while she moves through her life. The doomers almost always end up being incorrect, as the last six years have so richly proven. It happened again this past week.

When growth slows more than people like, they kick it. Since 2008 the large central banks have been quietly coordinating monetary policy, to stave off deflation, support expansion and jobs. On Friday China chewed up interest rates, for example, chopping deposit and lending rates. In Europe the central bank boss, Mario Draghi, was crystal about what he’s got in mind: “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires.”

And what does that mean? Cheap money, yes. Plus, central banks buying up assets to create demand and, ultimately, inflation. It’s what the US Fed did for the past four years, before ending its stimulus program in October. The results in America: unemployment went from 10.2% to 5.8%, corporate profits flowered, real estate prices recovered by half and the stock market increased 160%. I have no doubt Europe will be another Cinderella and China will plump, while the US advances its recovery. In other words, all the people waiting on the sidelines since 2008 – waiting for another 2008 – are fools. It ain’t coming.

But there are always risks. Monetary engineering brings volatility, as does the growing mountain of global debt. People overreact. They buy stuff that goes up and run screaming when it falls. This is why you need balance and diversity in any portfolio. The balance is between growth assets (based on stock markets) and safe stuff (called ‘fixed income’). The diversification comes from various assets (like real estate investment trusts, preferred shares, bonds and equity ETFs) and also geography (Canada, the US, international, emerging markets).

Normally, for example, stocks and bonds move in the opposite direction. When the Dow swoons, money flows into the safety of bonds, pushing their prices up while stock values decline. If you own both, you have a built-in hedge, and need not sweat over timing. Finally, all portfolios should be liquid, giving you the flexibility to avoid serious risk if necessary, or jump on a serious opportunity. Five-year GICs are not liquid. Soon neither will be condos.

With fifty grand, Kelly should not be paying an advisor, not giving the bank fat mutual fund fees. She should not be trying to time investments that will stay in place for years, if not decades. And the first place she should invest is inside her TFSA, where all gains will remain free of tax.

The process is simple. Open an online brokerage account. Establish a TFSA and a non-registered (or ‘cash’) account. Transfer your funds. Do what I recommended in a post several weeks ago:

“So divide the TFSA money into five piles, putting equal amounts into ETFs (exchange-traded funds) that mirror (a) the S&P 500, (b) the TSX 60, (c) a basket of preferred shares, (d) real estate investment trusts and (e) a Canadian bond index. You can use iShares products, or Vanguard, BMO exchange-traded funds or others. But these five will give you safe (preferreds and bonds) as well as growth (equities and commercial real estate).”

For example, using iShares, you’d buy XIU (Canadian stocks), XSP (US stocks), XPF (preferreds), XRE (real estate trusts) and XSB (short bonds). As your funds grow, you can add lesser weightings in XEM (emerging markets) or XCS (small-cap Canadian companies). When you get to $150,000 or so, it makes sense to pay someone 1% to manage this growing nestegg, rebalancing it, giving you tax avoidance advice and gaining further diversification.

Of course, this is but an example. There are lots of other exchange-traded funds around, and they’re getting cheaper (even though costs are already a small fraction of what a mutual fund charges). There are also advisors who’ll take on a smaller portfolio, but the fees can be brutal. Besides, you don’t need one.

If you get the right asset allocation and – above all – stop reading damn financial blogs, you’ll soar.