Entries Tagged 'Book Updates' ↓

Mortgage rates will be puffing again in a few days. As I said. This comes atop hikes announced last week and the one before. There are more to come. The days of the 2.89% Big Bank five-year fixed loan are kaput. You will never see them again.

On Wednesday the yield on five-year Canada bonds spiked, as did US Treasuries. Bond prices fell and bond mutual fund owners were stung. That was no surprise. When bond prices crested about a year ago, investors piled on. In both Canada and the US retail investors pushed bond fund sales to the top of the chart, doing what they always do – chasing yesterday’s winner.

Now bodies are piling up at the exits. Last week alone sheeple cashed in $13.46 billion worth of bond funds in the States. It was the biggest exodus since (you guessed it) the final weeks of 2008. Some things are so predictable.

Why’s this happening? What comes next?

The US renaissance I’ve been telling you about for the past year (house sales, car sales, new jobs, energy rebirth) is now hot enough that Washington can dial back the stimulus spending. So the central bank will probably taper down its bond-buying program within six months (the news came Wednesday). In other words, that gush of money which has created a big demand for bonds, upping their prices and crashing their yields, will soon dry up.

Lots of consequences. Interest rates will go bloat as bonds deflate. That’ll attract money into bonds from stocks, which will temporarily puddle. Mortgages, funded in the bond market, will swell further. When it’s clear US growth will continue without stimulus, equity markets will rebound. But the outcome will suck in Canada.

Unlike America – and as BeeMo’s top economist confirmed in a Toronto speech this week – we’re going to get rising interest rates, but without more jobs or higher wages. “For a number of years Canada was outpacing the U.S., and now we’re in a situation where there’s just a lot more pent-up demand in the U.S. than there is in Canada,” said Douglas Porter. “Our consumer has tapped out, there’s not a lot of room for domestic spending to grow, and we think that the tables have turned and that’s going to be the story for the next number of years.”

Porter told a hushed room that the Bank of Canada will be hiking its trendsetting rate by a half point next summer, perhaps a full year before Americans follow suit. But between now and then, it will be the bond market, recovering from four years of crazed over-stimulation, that ups mortgages and hoops housing.

And it will. Despite what you are now being told.

A Globe column just published argues that higher mortgage rates are to real estate what Axe is to babes. But it’s a fail. Without the inflation, jobs and salary gains a growing economy brings, higher loan costs only make housing more unaffordable. And in a country with a weird 70% home ownership rate and record mortgage debt, higher rates whack the biggest pool of buyers left – the cashless virgins.

And here’s Toronto mortgage broker Dave Larock blogging away with this premise: “Rising interest rates generally occur in a healthy economic environment where future price inflation is expected, making them a by-product of positive economic momentum. While it certainly is true that higher rates increase borrowing costs, this generally happens in periods with rising incomes, higher levels of employment and increasing consumer confidence. To take our contrarian thinking to its logical conclusion, we should all be rooting for higher interest rates. Seriously.”

Poor Dave. Should get out more. Seriously. While the Dow is up 16% this year, the TSX is ahead 0%. While real estate here is 1% higher, US prices increased 11% in12 months. While our Alberta oil gluts and prices fall, the US is again exporting the stuff. There’s virtually no growth in Canada, little inflation and wage gains are less than the cost of living. We already have house prices 150% of those to the south, where there’s ten times the population. And higher mortgages will be good? And did I mention 63,000 new condos coming to Toronto? Or the real estate rot already festering in BC and the Maritimes?

There’s no doubt what’s coming. It won’t be a crash. No TV reporters shoving mics in the faces of the middle-class homeless. No foreclosure sales on the courthouse steps. No streetscapes of boarded-up McMansions with fading For Sale signs and weeds full of used needles. No drama or viz. Just a steady, protracted, relentless slide backwards to reality.

A house isn’t a right. Kids don’t deserve homes nicer than their parents. You should need money to buy something. Wealth is earned, not borrowed. The goal of life is not stuff.

We lost our way, thinking otherwise.

Not long now.

Should you manage your own investments?

Yesterday, when confused, scared, Vanbaby Suzi asked for some guidance with her forty grand, I said yes. After all, if investor virgins stick with the few simple tenets I proposed, they’ll probably be okay. Just avoid the bank sharks, self-direct your TFSA, harness ETFs, understand balance and diversification, buy low and keeping reading a pathetic financial blog written by a bearded guy with epic abs. And a Harley.

But this approach ain’t for everyone. Some people have actual lives. They go to work, have babies, commute, play with the dog and lack the time to research securities, absorb tax laws, rebalance a portfolio or understand why bonds mature when men don’t. Or, they have more money than Suzi and don’t want to screw it up. Or no pension. Or a looming retirement.

So for them getting professional help is a viable option. But how do you find a trustworthy and competent person in a world where salesguys, bank tellers, insurance floggers and daytraders call themselves ‘financial advisors’? Carefully. The danger in Canada is not so much being ripped off by a scammer (we have way tougher regs than in the US), but hooking up with a guy more motivated by a trailer fee than your success.

So here are a few things to remember.

First, find out how an advisor is paid, which is a good clue to what to expect. A person selling mutual funds, for example, is paid by the companies whose products he peddles, and not by the client. So, guess who he works for? Plus, he doesn’t manage your money, giving that job over to fund managers you’ll never meet. Also remember that fund fees (usually embedded) aren’t tax-deductible.

A fee-for-service advisor is paid by the hour, or by the plan. He or she will interview you, come up with a strategy, collect your cheque and be gone. It’s great to have a roadmap, but then you need it implemented – and the buying, selling and rebalancing of securities at the wrong moments can seriously derail even a masterful scheme. But for some people who are skilled and have the time, this is a great option. Trading fees are extra.

In contrast, a fee-based advisor will create a plan and also implement it, plus monitor and manage the portfolio. This person charges you a fee based on the amount you invest. Because there are no commissions earned or collected, the potential for conflict-of-interest is vastly reduced since the relationship is more akin to that which you’d have with a lawyer or accountant.

How much does an advisor cost? The mutual fund guys are free, which is nice, but management fees often chew the hell out of your returns. Planners can collect a hundred or two for an hour, or by the plan (from $350 to $3,000 depending on the complexity). Fee-based advisors charge up to 2% annually of the money you invest, but I think anything over 1% is too much.

By the way, wear protective gear when you approach ‘advisors’ who sell insurance. They are the ultimate salesmen, enjoying the sweetest of commissions. They also traffic in guilt. No wonder we have too much of the stuff.

Find an advisor who knows the tax code, because it’s not how much money you make, but what you keep. Find one who asks you about not only your spouse and kids, but your aging parents, idiot BIL who owes you money, your real estate, company pension plan plus your goals and fears and how you first met your mate. Integrated, holistic, personal – that’s the best approach.

The right candidate should actively manage your accounts, not farm them off to a baby advisor or a third-party manager. He or she should lay out clearly how you will connect. Get live, online access to your accounts. Insist on a plan before you start (at no cost). Find out how often reviews will occur (every three months at first is reasonable, fewer when your trust builds). Does the advisor have regular conference calls with all clients? Will you have access to private phone numbers 24/7 if you need help? Are the accounts protected and insured? (CIPF gives a minimum of $1 million in coverage in case of insolvency.)

Mostly it’s about trust, loyalty and connection. Money matters because it gives freedom and choices. It allows you to make more of the one thing you can never replace – time. Other than that, wealth is just a pile of stuff. But you need it. Don’t let suspicion, mistrust, fear or hubris keep you back.

Not everyone needs help. The geniuses who come here obviously do not. But the rest of us wonder.