Bad choices

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Andres says he’s a hipster at odds with his messed-up generation. “If I was anyone else in Vancouver I would probably be buying a postage stamp condo and patting myself on the back for having a proper down payment,” he says. But he’s different. Praise be.

“I’m currently up to $107,000 in RRSPs thanks to an old government pension plan buyout and $12k in my TFSA,” he tells me. “The problem is that currently $70k of my RRSP is not invested, nor is $12k of my TFSA. I’m sort of paralyzed right now, where I have no idea where to park these funds and I’m losing money to inflation while adding about $5k a month into this stagnant pool. What do I do?”

Sarah ives in Edmonton, is single, 29, and has a government gig. “Just paid off my student loan earlier this year.  Car was stolen a few months back (Edmonton, remember?) and I decided I don’t really need one, so no plans to replace.  Rent and all utilities (incl. phone) is less than $1000/month.  I owned a house once; it was awful… not going to make that mistake again!”

Now she’s got twenty grand to invest and, like Andres, can’t pull the trigger. Should I try to time the market, she asks, or just do it?

“Your answer will likely be “don’t try to time the market, just go all in”… to which I will reply “but… but… with the economy in a bit of a shit storm, shouldn’t I try to buy what’s low now, and then just add/rebalance as the other funds drop in price?

“My divorced parents both own $700,000 houses making $70K outside Vancouver.  They do the low interest savings account and mutual fund thing.  I mentioned ETFs a few weeks ago, and they both had mild strokes.  My friends (in Van) are poor and don’t have money, so they don’t know anything about investing.  So… thank you for being the voice of reason for financial orphans like myself!”

See how people keep asking me questions they know the answers to? It’s weird. I feel like the pope.

Of course these two should invest. They should have done it days ago, weeks ago or months ago. They’re young with vast time horizons. Temporary market fluctuations become irrelevant over the sweep of decades, so long as you cling to the three guiding principles: balance, diversity and liquidity. A 60/40 portfolio of ETFs – a basic four or five for Sarah and double that for Andres – will probably do as well in the next decade as it did in the last (which included the GFC and endless moaning).

Market timing usually doesn’t work because people have lives. They fail to rebalance. They have no actual idea where a top or a bottom is. And they’re massively influenced by the idiot bleatings of the mainstream media, friends with phobias but no money, and their petrified parents. In time, most fail. So don’t do it. Mr. Market will eat you.

This week gives a fine example. On Monday everyone was pissy and morose with markets falling, oil unloved and sentiment negative. By Wednesday there were massive gains – for a few reasons. The US central bank gave a signal that economy is strong enough for rate increases this year as retail sales, industrial production and housing starts all surged. Oil stabilized at fifty-five bucks, and suddenly energy stocks – beaten up badly – looked too low not to love. Money is still cheap, inflation is nowhere, America is growing and gas is on sale. All of that outweighed the meltdown in Russia, and the growing list of layoffs in Alberta. So markets exploded.

Nobody tells you this is about to happen. So what most market-timers do is avoid perceived trouble (Sarah says the economy sucks, so she hesitates), then jump in when things pop and they feel more confident. In short, they buy rising assets and avoid or sell falling ones. They suffer from recency bias – believing what just happened will happen in the future. It’s classic. And fatal.

This is why investors fled screaming from stocks and equity mutual funds in the winter of 2009, just before markets rebounded. They thought losses would beget more losses. Like many of the doomer dipsticks who read this blog (because it’s free and warm) they believed everything was going to zero. History shows us they should have bought, not sold. Like now.

Things we know: the world still runs on oil. When it falls by half, well, duh. Second, US growth is solid and entrenched, so you should have more exposure there. Third, Europe, China and Japan will all benefit from the energy collapse and are some of the biggest economies on the globe. Why wouldn’t you want them when the needle’s at cheap? Fourth, volatility is here to stay, so the more balanced and diversified your holdings, the lower the risk. Fifth, when you can shelter thirty-six thousand (as of next month) from all taxes, present or future, inside your TFSA, and invest in stuff that’s proven it will grow an average of 7% a year even when the lights go out, why wouldn’t you?

By the way, how did we get such wimpy kids?

The obvious

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Now I’m worried.

I write six million tedious words on this blog warning housing is overvalued and Canadians are horny debt snoflers. Nobody cares. Then the Bank of Canada, no less, suddenly agrees with me. People, it says, are paying between 10% and 30% too much for real estate, and household debt is the biggest single threat to the economy.

Meanwhile this pathetic blog carries the torch for realism, arguing that house-lusty locals, not rich dudes jetting in from Guangdong, are mostly responsible for properties average folks can no longer afford. Our debt levels prove it. Your condo-craving twentysomething daughter proves it. Real estate has morphed from a cult to a disease, for which we are responsible. The Asian guy in the big house down the street did not make you do it.

And now Canada Mortgage and Housing, no less, says it agrees. And can prove it.

CMHC just issued a report based on interviews and site visits with owners, managers and supers of 20,000 buildings across Canada (which is probably more research than all the puffed-up bigots who hang around this site’s unsavoury washroom conducted) and the stats are in. Nationally, about 2% of investment condos are owned by foreigners.

In Toronto, it’s 2.4%. In Vancouver, 2.3%. In Victoria, 1.1% and Montreal, 1.5%. Concentrations are higher in downtown cores, with the tops being in 416 (4.3%) and the Burrard Peninsula (5.8%).

Seriously. Two per cent. This is even lower than data I have presented for the total of foreign buyers in all of Vancouver and Victoria over the past months. It puts all of those racist, anti-newcomer comments from people wanting to blame someone else for their own issues, in context. Canadian real estate prices are insane because we’re a nation of idiots. Get over it. You did this. Most people you know have a one-asset investment strategy which usually involves extreme leverage. I just hope events of the last few days are making them think twice about their choices.

What’s next, CREA sending me a Christmas card? Letting me use the word ‘realtor’ again without being sued?

Well, it’s time homeowners sobered up. Fast. Look at Russia to see just how quick a modern, advanced economy can circle the drain. The currency lost 19% of its value before lunch on Tuesday. Russian bond yields spiked to 16%. The central bank raised interest rates from 10.5% to 17%, but that did squat. The stock market shed 12% of its value. Russians are sucking their savings out of banks before they wobble and currency controls are leveled. The Moscow real estate market has frozen. And gold took a hit on the assumption the country will have to dump its reserves to survive, now that oil revenues have collapsed.

Nobody’s suggesting anything remotely similar will transpire here. But I wouldn’t expect normal, either. Even the MSM is starting to sound like me, without the attitude or the tawny animal magnetism. The Globe carried a column on why people should actually listen to the Bank of Canada’s warning on fat house prices. And CBC editor Don Pittis wrote, “A sharp decline in house prices could happen once rising U.S. interest rates begin to push mortgage rates higher. The longer we let house prices continue to escalate, the more dangerous it becomes.” His thesis: hey, if oil can lose half its value in six months, why can’t real estate?

That won’t happen. At least not in 416 or 604, or in smaller markets where people curiously think of real estate as shelter, instead of a futures contract. In those places, houses will stop going up, flatline, and then begin a descent later in 2015 as it becomes clear oil hurt the economy and rate will be rising. The toll could be far worse in Calgary, Fort Mac, Edmonton and the bigger cities in the flat provinces next door.

Today (Wednesday) the Fed makes known its current thinking on the US economy after a two-day meeting. It may signal a change in interest rate intentions, but might also wait until after the holidays. Nonetheless, it’s coming. The American central bank will start to normalize the cost of money in 2015. At the same time OPEC says it will likely take no action to stabilize oil until its next regular meeting, in June.

The year to come, with the world feeding on cheap energy, will bring more dichotomy. A big tailwind for the US, a boost for deflationary Europe, recessionary Japan and stumbling China, but a whack on the head for the producers – like Canada and Russia.

By the week before next Christmas, you’ll wish you had less house and a bigger portfolio.