Some days ago a whiny little princess came here saying she wanted to buy a $700,000 house in mid-town Toronto because that would be cheaper than renting an apartment for $2,500 a month. Of course she was wrong. Even over five years, with annual appreciation in house prices (not that likely), renting’s cheaper.
Some things, like real estate these days, or children, or a new Audi, can’t be justified financially. People do stuff because they want to. That’s cool. Just stop trying to rationalize it.
Of course my post last week raised the usual howls. Jake Abramowicz, who makes his living getting people mortgages in Toronto, was one of the aggrieved and almost tweeted himself into a terminal frenzy as well as blogging about my shortcomings. One of his statements is interesting:
I love how Garth thinks that people have the capacity to earn 7% year over year in a “balanced” portfolio. Wrong. More like 4-5%.
Hmm. Let’s compare for Broker Boy. He needs help.
In the last 12 months the average Toronto house has increased in value (according to the suspect numbers of the local real estate board) from $502,155 to $532,102. That’s 5.6%. At the same time, though, sales have dropped by double-digit levels – never a good sign.
Nationally, house prices plateaued a year ago and have fallen since. The average is now $368,895, down half a point. Soon almost all markets will be softer, given that sales are declining month after month.
Over this period, gold has lost 3.1% of its value, and so far in 2013 (despite Cyprus and all the faux hysteria surrounding bank theft) is a loser by 4.6%.
Stock markets? In the last 12 months the Dow added 10.94%. The more meaningful S&P 500 is up 11.4%. The Toronto market, a laggard now for several years, has increased 2.5%. In Germany the DAX is ahead 13% and Britain’s FTSE higher by 9.2%. The Nikkei in Japan has gained 23.2%.
This all reflects the reality in front of us. The world economy has stabilized, while the US grows stronger monthly. Corporate profits remain robust and ahead of expectations. More profoundly, sales are up substantially for two-thirds of all large cap US companies – which means they’re making money selling more, not just cutting overhead.
To summarize, financial assets are gaining in value as we continue to put distance between ourselves and the mess of 2008-9. Real assets, like gold and real estate, are underperforming amid falling sales and waning interest. As for a balanced portfolio, like one that is 60% based on growth assets and 40% on fixed income, the numbers speak for themselves.
If you simply bought the global equity index and the Canadian bond index in those proportions, then last year you made 9.25%. If you had a smart advisor who mixed in some preferreds and REITs and reasonable timing, then a double-digit return was yours.
Why do so many people believe a nice, diversified, balanced portfolio of financial assets means earning 4-5%, or half of current returns? Simple. They don’t have one. Or it’s in their interests to lie. Usually both.
Most Canadians, as you know, have most of their money in real estate or cash equivalents, like GICs and savings accounts. The average total household savings in Canada is now $122,300. The average debt (not including a mortgage) is $27,485. If houses simply maintain their value (the best-case scenario nationally) and GIC rates stay sub-3% for a few years, then we have a momma of a problem.
Avoiding risk is not a strategy when the greatest risk is running out of money. And ‘investing’ doesn’t mean buying a bunch of stocks and hoping for the best. This is why God created ETFs, global equities and the bond market. Balance (between growth assets and safe stuff) and diversification (by country, market cap and sector) keep volatility in check. Add in liquidity and rebalancing, and you now have a plan.
Most people will ignore me, which is fine. They’ll do what worked for their parents in the Eighties, when we had inflation, growth and buzz. But all that changed almost a decade ago, and it will stay that way for another one. As lots of surprised Boomers are now discovering, just buying a house ain’t good enough.
Invest or regret.