Enough letters from losers and whiners. Letâ€™s hear from some of the industrious little beavers among us:
â€œGarth: My wife are I are in our mid-thirties and have been fortunate over the last 10 years. Â We purchased our home in 1998 and have now paid off the mortgage. Â We secured a significant LOC (300k @ 3%) just over a year ago that we haven’t touched. Â While paying for our house, we managed our cash flow carefully and now have a combined $250k in RRSPs and $70k in Cash/Cashables spread across 3 financial institutions and a basement fire safe. Â We’ve also got a total of $600K in life insurance. Â My wife’s job is secure; I work for a small business that is having some cash flow problems but my own business skills, experience, and contacts will leave me in good standing even if the company fails (maybe even better than if I keep my job).â€
Rick continues: â€œI don’t want to sound smug or arrogant; we’ve had our share of good and bad luck over the years. Â Our careful management of both has placed us in a fairly strong position, we want to take advantage of our position and make some good money.Â Here’s basically what we’ve considered so far:
1) Â Use the LOC to purchase an income-paying investment (Dividend Index Fund?). Â Even at yields of 25% of last year’s yield we’ll be able to cover the LOC interest easily. Â We can afford to wait for prices to rise.
2) Â Use our cash/LOC to purchase a rental property, maybe in a year or so.
3) Â Thank our lucky stars and just keep the cash (earning about 2.5% for now). Â This is a conservative option, given our age is this too safe? What is your advice?â€
No mortgage. A quarter mil in RRSPs. Seventy grand in cash. And 300 big ones burning a hole in a line of credit. We should all be so lucky, Rick. But of course luck has nothing to do with it. This is what Canadian beavers do (distantly related to squirrels, I hear).
Should you be conservative, sit on your cash, take no risks and eschew any new debt, even if itâ€™s tax-deductible? Or, is a recession/depression with deflating prices and endless news-that-sucks the perfect environment to buy things that will only rise in value later?
Well, letâ€™s review where weâ€™re at: On one hand Thursday was a microcosm of our times. Dell profit crashed 48%, GM lost $10 billion in three months, new housing starts in the US dropped the most ever, American banks lost money for the first time in 18 years, Washington unveiled a $1.7 trillion budget deficit, Wal-Mart bailed out of Ontario stores, JP Morgan laid off 12,000 people and Canadian media companies were popped off in a Surrey drive-by.
But at the same time, results from Bay Street showed Canadian banks are almost unscathed from the global crapstorm, the stock market soared more than 200 points as a result, pointy-headed economists at BMO said the worst of the awful will soon be behind us, and oil jumped 6% on expectation demand is going to soon pick up.
On balance, Rick (pay attention, and stop chucking that birch), the negatives still overpower the positives, but isnâ€™t this exactly what we could expect at this point in the financial drama?
In fact, itâ€™s what Iâ€™ve been writing about here for the past year â€“ decline and loss, wealth destruction, housing Armageddon, political upheaval, rampant job loss, corporate collapse and the end of the days of unbridled credit. All that was obviously coming, and none should be surprised at its arrival.
But I have broken ranks with many of the crazed rodents on this blog who say it is prelude to the Big One, a neo-Depression of biblical proportions. As Iâ€™ve said consistently, thereâ€™s wisdom in having a cash reserve, but none in hoarding gold coins. Itâ€™s smart to hedge against downturns and reversals, but lunacy to think they will constitute the new normal. Itâ€™s completely sensible to prepare for the long-term threats we know are coming â€“ climate change and the age crisis â€“ but folly to crawl into a bunker with your gun and your dawg.
Every crisis like this will bring opportunity. And while none of us know when the bottom will be, how deep, how far, how unfathomable, how dark and how desolate, there will be one. And when most people see that it has passed, recovery will be evident in days. Not years. Days.
Of course, the world will be different, Rick, with no more easy credit, no kids in $60K trucks or cashless young couples buying houses. But you can expect two things: The mother of a stock market rally and a swing back to $100 oil. Houses and jobs will take a long, long time to crawl back, but at the end of this tunnel we will have a lot of wealthy investors and a world full of indebted governments.
So, what to do? Hey, youâ€™re a beav, not a squirrel.
Letâ€™s dam this torrent while others search for their nuts.