Entries from November 2016 ↓

It works

no-dogs-modified

There’s an interesting pattern on this blog packed with deplorables. I write about bonds. They trash bonds. I explain preferreds. They tear ‘em up. I discuss REITs. The deps nuke them. I offer weightings for a balanced portfolio. They diss balance. I proffer diversification. They pick stocks. I explain rebalancing. They wanna day trade.

If I weren’t on a mission from God to save you all, I’d give up. But, alas. Can’t. It’s a Sisyphus thing.

Well, kids, today a few words on why, during 2016, the investing approach and philosophy presented here was the correct one. It’s been a corker of a year, after all. Commodities collapsed last winter and Canada slumped into recession. Then Alberta incinerated. After that came Brexit. Then an oil surge. Stock markets flirted with record highs for months. Terrorists tore up Paris, Nice, Orlando while Syria burned and ISIS raged. Trump defied all odds and became the first inexperienced, Tweeting, goofy billionaire president. And now we stand on the precipice of more change. Rates are about to pop. Trade’s in trouble. OPEC blinked. Donald is crazy.

The question is simple for many people: how do you possibly preserve wealth, yet make it grow, in an insanely volatile world like this?

Well, hate to say I was right. But I was right. If you went through 2016 with a properly balanced and globally-diversified portfolio, then you’ve protected your capital in bad months, grown it in the good ones, and ended up with a return somewhere around 6%. Keep on doing that for a decade or two, and life will be sweet.

There is one big lesson here the deplorables need to learn. Never exit an asset class. You have no idea what’s coming around the corner. Nor does any fancy financial advisor-cowboy who says he can “add alpha” by beating the market. He can’t. You can’t. Almost every fund manager on the globe can’t. But you can have a portfolio that lessens volatility and has a long-term track record of consistent gains.

So just because interest rates are rising and bond values falling as yields increase, is no reason not to own bonds. They keep volatility down, balance equity drops and provide some income. When Brexit hit, for example, stocks screeched lower and bonds streaked higher. People with a nice balanced 60/40 portfolio barely noticed the commotion. Just make sure you have the right combo of bonds (a little government, some corporate, some high yield and real return) and the correct durations (short).

Just because Canada was in the crapper back in February was no reason to dump maple and go all-America. Commodity prices recovered, and so has our economy. Look at the latest GDP numbers, a scorching 3.5% with a big surge in exports. So far this year the TSX is ahead 15.93% – one of the best performers in the world – so abandoning Canadian growth assets along with the deplorables here nine months ago would have been a losing strategy.  Make sure you have the right weightings for your growth assets (Canada 17%, US 21%, international 18%, alternative 4%).

Just because the US election was a massively weird thing pitting two of the worst candidates since politics was invented against each other and promising no good outcome, was no reason to dump equities and go to cash. Or, worse, run to gold. Kneejerkers who did that lost big. And while most of the world thought Clinton would rip Trump, and was shocked when the opposite happened, investors with a balanced portfolio needn’t have worried about the outcome. If markets tanked (like Brexit) then fixed income would soar. As it turned out, the opposite happened – which was even better. Meanwhile gold was creamed and cash did nada.

Just because oil cratered to $27 last February, then recovered and ended up in a mid-$40 swamp with supply overwhelming demand, was no reason to desert the energy sector. Look at what happened this week – the OPECers agreed to production cuts, resulting in a 9% surge in crude in a single day and romping oil companies in the same week the feds okayed two pipelines.

I could go on (and will eventually). But there are solid reasons why people who actually want to preserve their capital and still have solid growth, need to own all of these assets, and in the correct proportions. The goal is to have a portfolio with 40% fixed income (half a variety of bonds, half preferreds) and 60% in growth stuff (real estate trusts plus equity exposure to Canada the US and the world). That’s balance.

Then, unless you have at least seven figures to invest, eschew stocks and go for index ETFs. Picking a handful of individual companies is gambling, not investing. Buying mutual funds, meanwhile, is often a sign of mental defect (or you like paying fat commissions to your salesguy BIL). This is diversification.

Keep a little cash (5%) and never any GICs, since they’re tax-inefficient, low-yield and illiquid. And always worry about taxes. Interest, like rent or your salary, is decimated. Dividends are a lot sexier. Capital gains are a tax gift.

Mostly, though, stop reading this blog. Or at least the comments section. Ignore the news. Don’t listen to [email protected] Or the gold crazies. Or the zero guy. Set up a balanced portfolio. Get a golden retriever.

Just chill. You’re gonna need it.

Why I rent

puppy

Over half of all new condos in Toronto are bought by speculators. Some call themselves investors. Some are proud flippers. Others crave to be amateur landlords, even if they lose money every month. About three in a hundred are foreign dudes, according to CMHC.

As mentioned a time or two, I rent a condo in the core. Steps from the soul-sucking office tower I’m occasionally held hostage in. It’s a cool space, but I’m not buyin’ it. As an owner, I’d be down over $1,200 more a month than my rent. Ouch. I’ll let the landlord take the hit.

Meanwhile directly beside my building is a new condo tower nearing completion. It’s 55 stories. In the last month the parking lot next door sprouted a sign announcing 28 new floors of condos. The venerable Albany Club down the street is being rezoned for a 25-storey condo tower. The site next to it is under construction for a 30-storey condo tower. Oh yes, directly across King street a heritage building now wears a placard warning it’s soon to shoot higher by almost 40 stories. Yup, all condos.

When I’m downtown on business for a few days a week, I walk Bandit in the only sizeable park for blocks, surrounding Toronto’s oldest cathedral. At 7 am there are enough dogs running around to fertilize Argentina. And Millennials everywhere, spilling out of their 500-square-foot boxes perched far above, blinking in the daylight.

Local realtors are reaping a high rise windfall at the moment, as recent mortgage rule changes and limited supply put detached houses, semis, townhouses or even garages out of reach. Sadly, many people don’t understand that real estate equals dirt, while condo ownership is more about space and risk – and not being a renter. I think all this activity will end badly, since without steady, consistent, annual appreciation in condo values, buying one of these units is a financial death trap. Especially if you plan on being a landlord.

A fatal flaw investors of all kinds have involves recency bias – believing what’s happening now, or has just taken place recently, will go on forever. It might be stocks, Hatchimals or condominiums. All the same. Most things bought for emotional reasons (like wanting ‘security’ in where you live) end up in distress. Just ask condo owners in Calgary, for example.

It’s a good example of what externalities can bring about. Crappy oil prices caused economic activity to decline and that sucked off jobs. Over 21,000 positions have vaporized in the past year – about 2.5% of all the jobs – and this has been enough to kick the crap out of all the people who, three or four or five years ago, thought it would be a great idea to buy a Calgary condo (or two) and rent it out.

The stats are now grim. There are 2,500 empty apartments in Cowtown for a 7% vacancy rate. That’s up three times in three years and at the highest level in 25. From a peak in 2014, rents have fallen between 25% and 35% – and are still declining. Landlords are throwing in free months of rent, paying moving expenses or coming over to give tummy rubs, all to get their units occupied. Condo prices, meanwhile, are traveling lower right along with lease rates.

Not just Calgary, either. Things are worse in Edmonton, in most of the Maritimes and Saskatchewan. In that flat province, for example, the apartment vacancy rate has bloated from 6.8% at this time last year to 9.4% today. The average rent is now below a grand a month. In Estevan, almost 30% of all apartments are unrented and unloved. In Saskatoon the vacancy rate tops 10%.

This is what happens when supply exceeds demand. In Alberta, Saskatchewan, parts of Quebec and much of the Maritimes, weak commodity prices and a sucky economy have brought condo prices and rents down simultaneously. In Toronto the threat is a surge in condo units hitting the market just as the draconian new mortgage rules transform the market and when mortgage rates are normalizing. Of course, you can be like realtor Casey Ragan, who yesterday put out a media alert to let everyone know how well he’s doing.

“In 2016, units are selling almost faster than I can show them,” he says. “Sometimes condominiums and lofts in some of the most popular locations are shown the same day as they are listed, or they are sold before the following day.”

Good for you. And who’s buying?

The speckers. The flippers. The wannabe landlords. Firsters. People without calculators.

Housing analyst Ross Kay tells me $191 billion in real estate equity has been lost in BC in the past five months, as sales and prices diminish. Meanwhile the nation’s lowest vacancy rates are in Vancouver and the Lower Mainland.

Not for long. And now you know what may be coming. Renters rock.