Entries Tagged 'Book Updates' ↓

Trust

SONY DSC

Kelly says she’d like to talk with her friends about this stuff, “but they’ve all been suckered into Vancouver area condos and ‘high interest savings accounts’, so that’s obviously no help.”

It’s a common complaint. Where do you go to get some indie thought about investing? After all, the bank’s in the business of selling you stuff. So are the mutual fund sharks. And the credit union. Don’t even think about an insurance or real estate guy. And your parents just want you to be little copies of them, with a mortgage. No wonder so many young people end up being schizophrenics, bouncing between dead-end savings accounts and high-risk, leveraged condo units. Both are really bad choices.

“I kind of feel like an idiot wasting all these years, but I’m an 80’s kid that has actually squirreled away money by renting and not trying to live like a rock star,” says Kelly. “I have a decent job (~60k/yr), no debt and 50k in the bank excluding RRSPs, but I’ve been completely ignorant to investments. I’ve read your posts a few times but I can’t shake this lost in the woods feeling of ETF’s, and I’d rather do it right than get in over my head. What would you suggest for someone like me, that isn’t comfortable going full speed ahead with ETF?”

Kelly says she’s mostly worried about doing this herself. “I know that in starting out I’ll need help, and it will cost a percentage for managing a portfolio, but how do you go about finding someone that is competent in this?”

Well, first let’s discuss timing. Not a day goes by without newbies asking me if this is a good time to invest. Because we all now live on Internet time, when a full day is considered long-term and your Twitter feed never stops, people bounce around from headline to headline. This blog is a perfect example. It’s full of weirdos who ardently believe what just happened (Obama’s speech, ISIS, Ebola, bank layoffs, MH-17, mid-term elections, Fukushima) will alter the entire future. They’re wrong. They bury money, fear risk, buy gold, market-time – and lose.

Kelly’s young. The time horizon is long. And the world will continue to grow while she moves through her life. The doomers almost always end up being incorrect, as the last six years have so richly proven. It happened again this past week.

When growth slows more than people like, they kick it. Since 2008 the large central banks have been quietly coordinating monetary policy, to stave off deflation, support expansion and jobs. On Friday China chewed up interest rates, for example, chopping deposit and lending rates. In Europe the central bank boss, Mario Draghi, was crystal about what he’s got in mind: “We will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires.”

And what does that mean? Cheap money, yes. Plus, central banks buying up assets to create demand and, ultimately, inflation. It’s what the US Fed did for the past four years, before ending its stimulus program in October. The results in America: unemployment went from 10.2% to 5.8%, corporate profits flowered, real estate prices recovered by half and the stock market increased 160%. I have no doubt Europe will be another Cinderella and China will plump, while the US advances its recovery. In other words, all the people waiting on the sidelines since 2008 – waiting for another 2008 – are fools. It ain’t coming.

But there are always risks. Monetary engineering brings volatility, as does the growing mountain of global debt. People overreact. They buy stuff that goes up and run screaming when it falls. This is why you need balance and diversity in any portfolio. The balance is between growth assets (based on stock markets) and safe stuff (called ‘fixed income’). The diversification comes from various assets (like real estate investment trusts, preferred shares, bonds and equity ETFs) and also geography (Canada, the US, international, emerging markets).

Normally, for example, stocks and bonds move in the opposite direction. When the Dow swoons, money flows into the safety of bonds, pushing their prices up while stock values decline. If you own both, you have a built-in hedge, and need not sweat over timing. Finally, all portfolios should be liquid, giving you the flexibility to avoid serious risk if necessary, or jump on a serious opportunity. Five-year GICs are not liquid. Soon neither will be condos.

With fifty grand, Kelly should not be paying an advisor, not giving the bank fat mutual fund fees. She should not be trying to time investments that will stay in place for years, if not decades. And the first place she should invest is inside her TFSA, where all gains will remain free of tax.

The process is simple. Open an online brokerage account. Establish a TFSA and a non-registered (or ‘cash’) account. Transfer your funds. Do what I recommended in a post several weeks ago:

“So divide the TFSA money into five piles, putting equal amounts into ETFs (exchange-traded funds) that mirror (a) the S&P 500, (b) the TSX 60, (c) a basket of preferred shares, (d) real estate investment trusts and (e) a Canadian bond index. You can use iShares products, or Vanguard, BMO exchange-traded funds or others. But these five will give you safe (preferreds and bonds) as well as growth (equities and commercial real estate).”

For example, using iShares, you’d buy XIU (Canadian stocks), XSP (US stocks), XPF (preferreds), XRE (real estate trusts) and XSB (short bonds). As your funds grow, you can add lesser weightings in XEM (emerging markets) or XCS (small-cap Canadian companies). When you get to $150,000 or so, it makes sense to pay someone 1% to manage this growing nestegg, rebalancing it, giving you tax avoidance advice and gaining further diversification.

Of course, this is but an example. There are lots of other exchange-traded funds around, and they’re getting cheaper (even though costs are already a small fraction of what a mutual fund charges). There are also advisors who’ll take on a smaller portfolio, but the fees can be brutal. Besides, you don’t need one.

If you get the right asset allocation and – above all – stop reading damn financial blogs, you’ll soar.

The temptress

BILLS modified

Andrew took his babe to the bank. Like most 24-year-olds, she doesn’t know how to invest. TFSA in cash. High-fee mutual funds. And way too much in GICs. “We went,” he says, “to set up an on-line trading account to give the girly access to low cost index funds and ETFs.”

Perfect. That’s progress. But then TNL@TB turned into a temptress. And war emerged.

“As we were finishing up, I excused myself to take a phone call.  When I came back, no more than ten minutes later, a ‘mortgage specialist’ had joined us.  My GF had disclosed that we currently rent (she left out the part about our all-in housing cost totaling 10% of our gross income).  In the span of ten minutes, the TNL@TB tag team had convinced my GF that buying was not only affordable but was the only logical decision for us to make now that we lived together (throwing money away, building equity, low rates, etc.).  I practically had to fireman carry her out of there but escaped without $400,000 of debt in tow.  Longest ride home of my life.

“I do not believe that Canadian mortgage lenders practice the kind of predatory techniques that we saw in the US leading up to their housing crash.  However, I now realize that the banks have two scripts for TNL@TB.  I was of no interest to them but the reps we dealt with could spot a financial noob from a mile away and seemed to know that they don’t have to convince me of anything. They only need to convince an eager spouse and hormonal housing lust will do the rest.  I am astounded that after two full years of pushing my high liquidity, long-term focused, debt-free,lifestyle on the GF, it took less time than it takes to make a cup of tea to upset the apple cart.  This will be an uphill battle.

“Please keep the blog posts coming.  Our blog dog legion is growing but I will need all the ammo I can get to fight off the all-out assault from TNL@TB.”

Canadian banks have long called mortgages, ‘relationship’ products. Once they’ve you signed up for a home loan, chances swell they’ll get your savings, TFSA and retirement account, plus sell you insurance and flog a mess of mutual funds. Besides, bankers make a spread on every mortgage – and with the amount people borrow these days, they’ll be collecting for decades. Of course, because all mortgages open after five years in Canada, TNL@TB also knows even if interest rates spike in the future, constant renewals mean the bank’s always protected.

And here’s the corker: bankers can fork over a huge amount, at a stupid cheap rate, even if you’re financially hopeless and have saved nothing, because there’s no risk. Thanks to the feds, and CMHC, all high-ratio, high-risk mortgages are backed by the taxpayers. If the kid defaults, the bank still gets paid.

Think about it. Minimal down payments. Borrow from your RRSP. Or Mom. Cheap rates. No risk premium. Federal, provincial and local tax incentives for virgins. And bankers with nothing to lose. No wonder real estate’s become the opiate of the indebted masses, bloating in price. No wonder the people in the bank branch are rabid, aggressive and seductive.

So now we have horny Millennials, average new mortgage borrowing of $10 billion a month, historic heaps of household debt and detached houses costing $1 million apiece in two major cities. Should anyone be surprised what the money-lenders and governments wanted has come to pass?

And yet, CMHC is. Incredible. This week the agency published its annual report, saying it’s now worried houses in Canada cost more than in the States. “This Canadian ‘premium’ could be a cause for concern, because it may indicate that house prices in Canada are overvalued.”

You think?

The feds will be analyzing this, to understand if the giant extra amount it costs Canadians to secure accommodation (Chicago median price for all homes: $188,200; Toronto average price, all properties: $599,658) is temporary, structural or “reflective of relative overvaluation in Canada.” Yes, I know. Like Beyoncé or cold fusion, this is difficult to believe. After all, by taking away the risk that would make bankers think twice about giving $400,000 to a 24-year-old who believes a TFSA is a savings account, CHMC itself is largely to blame. They need to analyze it?

Well, the good news is the agency may be worried, but says there’s no bubble.

So relax. They got this.