Pathetic. The previous post was about Millennials, and how they’re screwed. Worse than their parents, in fact. Mostly because they’re wusses.
Eric summed this up nicely when he wrote me after reading the blog:
‘Risk on’ definitely resonated with me. I’m 29, university educated, big bank employee, no debt, no desire (or capabilility) to even kick the tires on real. My girlfriend (low income, big student loan) and I live in my sister’s basement.
RRSP – $15K conservatively invested in a low fee mutual fund and $5K just sitting in cash. TFSA – $32K that was sitting in a “high interest” saving account. I know. Delusional. I moved it to my brokerage account (TFSA), but sadly still sitting in cash. Cash – $28K “high interest” saving account. Still delusional.
Net worth: About $80K
So, given the current pricy market and your comment: “Nothing goes up forever”, what should I do? My gut tells me that the TFSA should be the ‘Risk on’ growth vehicle. I am trying to be a do-it-yourself investor, but can’t make a decision. The excuses are numerous: my money is precious, the bull market is getting old now, a correction will come soon and so on.
See what living in your sister’s basement with an indebted woman does? Your manhood shrivels from lack of light, while constant dankness permeates your faculties. You awake one day amid the bugs, spores and rodents only to discover you’re impotent – incapable of making a decision or crawling out of the clingy womb of cash. Your net worth grows more stagnant than your hormones. Soon, it’s over. You take your tablet into the bathroom and Google ‘ING’.
Once again, it all comes down to financial illiteracy. Most people have no idea what inhabits the wide landscape between a savings account and high-flying stock markets. They accentuate risk, get their investment facts from the bank or doomer websites and usually end up buying real estate because mom endorses it. (Ironically, the US experience was that young homeowners were trounced in the housing correction far worse than their parents, thanks to their extreme leverage. In any correction here, expect the same.)
Millennials (and their parents) should understand the future will belong to those who are liquid. Nobody really needs to own a house. But everyone needs income. And burying your wealth in a ‘high-yield’ account or GIC paying less than inflation is a crime against nature. Does this mean opening an account at Waterhouse and diving into Tesla stock? Hardly.
There are but three things to remember when it comes to comfortable, low-volatility, non-cowboy investing that will still make women swoon. I’ve elaborated on these points previously, but you might not have been born then.
Balance. Having all your money in GICs or a savings account is unbalanced. So is owning only stocks (or a condo). The best way to build liquid net worth is to have multiple asset classes which don’t all react to events in the same way. That means they are not ‘correlated’ or even ‘negatively correlated.’
For example, when stock markets fall investors look for safety and often buy secure assets like bonds. So bond prices rise as equities dip. That’s negative correlation. By owning both safe stuff (called ‘fixed income’) and growth assets in the same portfolio, you mitigate against declines and create your own hedging effect. For example, in 2008 when the Dow crashed 55%, a portfolio with 40% fixed income in it declined only 20% and then rebounded in one year (it took the Dow seven years to recover).
Diversification. Incredibly, 70% of Canadians who own stocks only have Canadian ones. Others own just three or four individual equities. Or they buy a single mutual fund and put it in their TFSA and RRSP and non-registered account. Fail. It’s a volatile world. You need both balance and diversification.
Fixed income might include government bonds (3%), corporate bonds (5%), high-yield bonds (3%) and inflation-indexed bonds (6%), along with preferred shares (18%). If your portfolio’s large enough, buy the assets. If not, buy relevant ETFs. BTW, cash is okay, too. But max it at 5%.
Growth assets could include real estate investment trusts (5%), Canadian equities (large cap 8%, small cap 4%), US equities (10% large, 8% mid and small) plus international stocks (10% large cap, 8% emerging and small cap). Obviously, unless you have seven figures to invest, you need to use ETFs (not expensive mutual funds) to achieve this diversification through index investing.
Rebalancing. Most people buy what goes up and sell what goes down. Bad idea. Do the opposite, and do it regularly – like three or four times a year. This is called ‘rebalancing.’ For example, if you want to have 8% exposure to Canadian stocks and the TSX bloats, pushing it to 12%, then sell off 4% and use the money to buy something that’s dropped, like the small cap ETF or preferreds.
You may think you’re Zeus, but you probably have no idea where any of this stuff is headed, so best to own it all – but in sane proportions. Remember, the fixed income side of the portfolio will pay you continuously to own it in the form of interest and dividends, while the growth side yields mostly capital gains. Obviously, since interest is taxed the most, the assets producing it should be sheltered inside an RRSP. Best to earn dividends and cap gains in a non-registered account. And put the hot stuff (emerging markets, small caps) in the TFSA.
There’s more to learn. Like which of the thousands of ETFs, bonds or preferreds to buy. But there’s a start. If Eric was smart enough to get a degree and seduce a bank, he should be able to figure this out.
But will he have the guts? Stay tuned.