The greatest risk

killing1

And so, the last bank post. For now.

Banks are like cockroaches. Especially here. We’ve made the decision to allow them to vertically integrate through the entire economy – deposits, insurance, brokerages, car loans, retirement, real estate finance, commercial and institutional banking. There is no way any of them will not survive. Like roaches coming out after a nuke, our banks will endure through any economic reversal. They are now backed by the central bank, the federal government and, ergo, the power to tax.

This is why those people shorting BMO on Tuesday were such gamblers. By buying puts on the options market, they were betting the price of the bank’s stock would tank. The put holder pays a premium for the right to sell a stock in the future (like tomorrow) at a price lower than today. If the price of the stock falls, the value of the put rises – and money is made without a single share of bank stock changing hands. Instead, the puts (like calls) derive value from the underlying stock – which is why they are called ‘derivatives.’

Still with me?

The point here is (a) you’ll do better investing in the bank than depositing money there, (b) hot stock tips are usually toxic, but (c) over the next five years equity markets will far outpace housing. There are a slew of reasons for this, but little doubt this will happen. Too bad most of us have put our wealth in the wrong places.

Like Lynn’s about to:

Hi Garth, I’m an avid reader of your Greater Fool blog. As I fight the emotional urge to buy back into the real estate market, it is so refreshing to hear your common sense take on the real estate situation in our country, let alone in this silly little town I live in. ;-)

I live in Kelowna, owned a house and sold the summer of 2008, currently rent, have a good job, am single no dependants, have paid off all of my debt and have a nice chunk of cash left over. So I feel I’m on the right track in waiting this bubble out.

My dilemma is what or where do I put my cash. Currently it is sitting in a so called “high interest savings account” which has dropped considerable over the last year and now only earns .75%. I’ve met with a couple of investment advisors but my lack of knowledge in this area is causing me to hesitate when it comes to investing. I’m leaning towards a portfolio that consists of 83.5% in Canadian bonds and 6.8% Canadian stocks with the remainder in Cash, US stocks, International stocks, and Foreign bonds. Based on your knowledge and experience does this sound like a reliable strategy? Your thoughts or ideas on how I can feel more comfortable in handing over my nest egg?

I currently have a lira account consisting of $30,000, RRSP’s $10,000, TFSA $5000, my present employment also includes a pension and I am 38 years old.

Well, Lynn, I am not an investment advisor, just a guy with an opinion. But you asked.

First, the bonds. If you plan on buying bonds which you’ll hold to maturity, and are happy with the coupon rate, go ahead. But hard to see how you could even stay ahead of inflation over the next five years. If you’re after the bonds for their yield to maturity, then you need an advisor or broker to seek issues you can purchase at a discount. If you’re buying bonds for capital gains, you probably don’t understand that bond prices fall as interest rates rise – and rates have only one direction in which to travel. Bad idea there.

Besides, what kind of bonds? Canadas – long or short? Corporates, and of what quality? Strips, or zero-coupon bonds purchased at a discount to face value?

And why 83.5%? In fact, why would a 38-year-old woman, with a life expectancy of six more decades put four-fifths of her cash into an asset which will give capital losses and a negative real after-tax yield? I’d say you should reverse this, and have 80% of your liquid wealth in growth assets like stocks and funds, including ETFs, and 20% in fixed income.

You made the right decision bailing out of the K real estate market. Don’t blow it now by trying to avoid risk.

The greatest risk any almost-40 woman faces is outliving her money.

However, unlike men, bonds mature.

75 comments ↓

#1 Munch on 08.26.09 at 12:28 am

We disagree again, Mr Turner!

Banks can and do fail – Canada is not different to anywhere else, including Murrika – t pretend otherwise is to tempt fate.

You are a braver man than m

Munch

#2 $fromA$ia "Garths Nugget Boy" on 08.26.09 at 12:53 am

I am beinning to think that no Canadian Bank can fail as long as the BOC is sitting there with the printing press ready to give life extending cash injections. I think Canadians better wake up and smell the coffee here, our childrens ,childrens livelyhood is at atake here so the fat turd can keep his job.

#3 Barb .. a reader in Calgary on 08.26.09 at 1:27 am

“The point here is .. you’ll do better investing in the bank than depositing money there, .. hot stock tips are usually toxic, but .. over the next five years equity markets will far outpace housing.”

Mr. Garth,

I loved the drama trap you set up Sunday night for the silly people, regarding BMO rumours.

And of course it played out beautifully over the past 2 days.

And tonight the little show is over, the dramatic lesson learned (hopefully) …. and your Summary tonight is divine.

I think the ninnies will now finally see what you mean when you say ‘invest in preferred bank stocks, find a good advisor, and as well, do your own research.’

I put your quote in bold italic.. it should be emblazoned on every readers brain by now.

Good show Garth and great advice. You have a unique voice — intelligent, willing and honest. I’m just one Canadian, but I just want to thank you again for doing the ‘good’ work you do.

#4 Jan on 08.26.09 at 3:14 am

Garth – if you’re going to run for the Liberals I think you should nip this faux investment advice in the bud. You must realize the Conservatives are watching your every word on here. Why give them anything.

The poor things also need help. — Garth

#5 rp on 08.26.09 at 3:19 am

Don’t you think the stock market is a little overvalued ?!

#6 Rob in Madrid on 08.26.09 at 3:22 am

Lynn I would check out Canadian Money Saver, unlike many many larger blogs and magazines this one is written by Canadians and for Canadians.

http://www.canadianmoneysaver.ca

PS I’m not connected to the magazine in anyway.

#7 Anon - GTA on 08.26.09 at 5:46 am

Garth,

On one hand you’ve talked about a double dip and a stock market correction before fall this year.
On other hand, you are recommending go 80% growth assets for 40ish women..
When should Lynn and others make this move?

Not n expert – Just a guy with a question…

Because the investing time horizon for her is decades long, and the sooner she gains an exposure the better. If stocks dip in the next year, so what? It will be a dollar ost-averaging opportunity. — Garth

#8 Who Is Your Daddy? on 08.26.09 at 6:48 am

How to make money:

Buy 100 shares of your favorite company.
Sell 1 call (a month out) at a strike price 10% higher than the stock price.
Buy 1 put at the stock price (a year out), with a strike price equal to the stock price.

Every month, when you don’t get exercised on your call, sell another call (a month out) 10% above the stock price. Repeat every month.

A sure winning method, and you stand to make on your money 20% in a down market and 35% in an up market.

#9 Halifaxfamily on 08.26.09 at 7:43 am

Banks can fail, but your cash is still safe up to the 100K limit.

If you are a shareholder (preferred or common), you can get wiped out even if the BOC comes to the rescue. Bank is still there, but shareholders are diluted to near zero. So, BOC backup doesn’t mean that investing in bank stock is 100% safe.

#10 miketheengineer on 08.26.09 at 7:54 am

#7

Dollar Cost Averaging.

One well off friend of mine started investing by buying stock in one of the big banks. He was working part time, and everytime he acculated about 3k, he would drop it into the bank stock. His mom paid for everything he did, school, car etc. He did this the entire time we were in school. Always watching that stock and the market. Playing about, learning trends. Since mom paid for everything, his income was free for the stock market.

But he was always buying. He built up a huge nest egg. Dollar cost averaging does work.

Myself on the other hand, went to Mexico a few times.
I saved very little .

#11 double mike on 08.26.09 at 8:00 am

I don’t believe in stock market.

1. Baby boomers retiring in droves all over North America and converting most of the liquid wealth of the generation in form of their RRSPs and 401(k)s into annuities and fixed income.

2. Execs converting corporations they run into private cash cows without any resistance whatsoever. Protection of old boys networks won’t waver anytime soon so this neofeudalism will continue unchecked.

With all due respect to Garth, these facts don’t bid well for stock market investments in the foreseeable future.
Take Japan as a good example. Nikkei now is around 10000, about 1/4 of its peak in 1990.
http://ca.finance.yahoo.com/q/bc?s=^N225&t=my&l=on&z=m&q=l&c=

20 years of negative return is a little bit too much even for Lynn, I guess.

Your first point is fabricated. There is no evidence to support this, and any Boomers converting to annuities at current rates must like poverty a lot. — Garth

#12 Bob on 08.26.09 at 8:06 am

buy gold.

#13 moneyman on 08.26.09 at 8:31 am

This is about the CDIC deposit insurance.

More need to be said, I think. Specially for those in cash, at the moment.

Maximum of $100,000 applies to the total deposit one person has with one CDIC member firm per account type, i.e. RSP, regular, Joint & TSFA.

For example, in one bank, one could have 3 different investment accounts: RSP, regular, joint.

Now per account, one could have $100,000 in Scotia Mortgage GIC’s, $100,000 in Montreal Trust GIC’S & $100,000 in Bank of Nova Scotia GIC’s. Now that is $300,000 in RSP account, $300,000. in non-RSP account & $300,000 in a joint account for a total of $900,000 incl. interest.

The spouse could have exactly the same at the same bank except for the joint account, for a total of $600,000.

And the couple would be covered by CDIC for the total of their deposits: $1,500,000. incl. all interest payable.

#14 Jonathan on 08.26.09 at 8:43 am

I’m 28. I think everyone I know in the 24-35 year range has bought a house in the past 5 months. Who is left too buy – this bubble is going to run out of fuel?

I’ve come up with how to calculate home prices during a bubble:

Maximum approved annual mortgage payment x maximum amortization – less total interest payments.

If you give them debt, they will use it. Bubble’s are very competitive – if your not willing to use it, someone else will and beat you on price.

#15 Ernie on 08.26.09 at 9:06 am

Garth I can give this woman 7.5% over 4 years on $20000 as my wife is getting a bank loan to pay off her credit cards.

#16 Ernie on 08.26.09 at 9:07 am

I too live in Kelowna.

#17 double mike on 08.26.09 at 9:11 am

“Your first point is fabricated. There is no evidence to support this, and any Boomers converting to annuities at current rates must like poverty a lot.” — Garth

Not fabricated. It’s just a speculation. Of course nobody in his right mind moves into annuities today. Besides a bulk of boomers haven’t retired yet. But what about a year or three or five from now, when as you correctly argue the rates are way up? We are talking about long term perspective, aren’t we?

The prime will double within a year or two, but so will inflation. An annuity will still be a losing proposition for most. 55-year-old Boomers have 30 years to finance, and trying to avoid risk will breed risk. — Garth

#18 Peter Wiener on 08.26.09 at 9:19 am

#13 Jonathan

What percentage are first time buyers and what portion, if any, are ‘move up’ buyers? (sold first home and bought another) please?

#19 mikef on 08.26.09 at 9:22 am

Not only that #13 Jonathan demographically
speaking, there are so few of you compared to
20-30 years ago.

Here in Quebec the median age is 46.
In 1970 it was 26.

#20 Calgary_rip_off on 08.26.09 at 9:24 am

Jonathan: I havent bought a shack yet in Calgary. Me plus many others. Two reasons: Get more house renting for the same $$, and 2, my downpayment isnt big enough.

Garth, interesting comments on the investment strategy. Here’s another one: Forget about vacations, forget about retirement. Trying staying in one piece, injury free, and work ready. A new reality: All this crap about investing and retirement is just that: Crap. These people looking for security better keep looking because they wont find it. I assume that my life will be similar to what history has said until very recently: You work until you die. Period. I see it among the workers here at work. There are tons of almost 60 year olds at my work(my parents age) who I work along side of who plan to keep on working. Its nice that in Alberta they are allowed to, unlike the 65 year old mandatory B.C. retirement. The greatest privilege is being allowed to work and having someone who benefits from your work. There is no greater loss than being able to work and produce. I hear daily about people and their retirements and vacations. They obviously arent living in the now and are better off dead because they are so boring that all they have to talk about is their retirement and their vacations, rather than anything day to day in their lives that is exciting.

Im currently on vacation: I have a good paying job in the health field sector which benefits people directly and this allows me time after work to see my family and play guitar/keyboards like there is no tomorrow. Vacations and retirement isnt really living, I’ll leave that to people that are more dead than alive.

#21 Peter Wiener on 08.26.09 at 9:27 am

#2

Sure bodes ill doesn’t it? As you have correctly observed before, however, Canadians by and large are financially illiterate and like all fools everywhere, they are soon parted from their money.

IMHO, the party is over here and like you, I’m moving out of this place until some sanity returns to the BUSINESS climate – there are just too many hurdles that disrrespect capital here for me to risk it in this climate.

How’s about an update of conditions where you are? Any big changes to report or are things pretty good there still? Some international perspective would be appreciated. Thanks in advance.

#22 robert on 08.26.09 at 9:28 am

Yes. While a Canadian bank may not/never fail, that is not to say one can still lose a boat load buying shares at the wrong time (like now after some have doubled in less than six months). Vertical integration did not stop share prices from collapsing last fall and the charts for some of these paragons of fiscal probity still look absolutely broken long term. The biggest asset they hold is real estate. If this asset declines further (your thesis and mine) how can banks thrive?

Relying on the charity of government and (broke) taxpayers to maintain a facade of financial health does not inspire confidence in this investor. There is a secular change in consumer and investor behaviour brewing. Less borrowing and spending anyone? Decline of the cult of real estate?

Many of us boomers are about tapped out and the more intelligent of our progeny view borrowing to obtain unproductive assets at inflated prices as just plain stupid. Extend and pretend (see US) is not a viable strategy in a secular downturn. Change (and probably not the kind many are hoping for) is coming.

Check out the BMO annual report I linked to two days ago. You will see that banks are not in the real estate business, but the money business. An analysis of current assets should reassure. — Garth

#23 smw on 08.26.09 at 9:39 am

The spread between the BoC rate and the lending rate are helping the books of all banks. Not to mention the killing they’ve made from July to now just alone on the stock market, let alone the deals they were getting in February and October.

You don’t have to wonder when there is so much volatility just who’s rocking the boat back and forth, to their own advantage!

Seems to me most of Garth’s “advice” has been very conservative over the past 1 1/2 on this sight. This is no different. The bank of canada is threatening “quantitative easing” which means printing money, which means inflation, which means higher equity prices, or you let your money sit in a GIC at 1% – 2% and decline in value.

The real story is the now whether we are at the end of stock deflation(I say one more ride down this fall) and if housing prices will come back to the 2006-2007 levels. The medium level homes that the first time buyers can’t get into, don’t have buyers and prices are shrinking; inventory is rising. This will bring the spread between the low/medium and medium/high priced homes closer.

Its a win win for government which now has the value exploding in lower end homes. You won’t have to worry about shopping in the big box stores are going out to dinner, that property tax bill is going to be a beauty, which is another issue with all this cash directed to one industry(unless your an agent).

Which I believe was the whole premise of this orgy, people believe they are rich because they see inflation and government gets to keep their inflated budgets pumping because of new taxes(HST) and the increases in property taxes.

I checked my BMO investor line and my bank account last night, seems like they are still there… :)

There are lemmings on both sides of the fence… And a few of you in the last couple days just proved that.

#24 Mike (Authentic) on 08.26.09 at 9:40 am

Boomers leaving stocks and RE:

It’s actually been happening for the last couple of years at my wife’s O&G company she works for. In fact, it’s been quite the talk there and the majority of people are in agreement that people are pulling out of stocks and selling before we hit Oct 2008. I think most of them are holding now, hoping the market goes back up to sell and get their money out.

It’s like Garth said about Real Estate a few months ago; the boomers are selling, downsizing and reducing their financial exposure.

#25 The 'VULTURE' on 08.26.09 at 9:49 am

Not All Cracked Up To Be

I was looking at an investment property the other day and I noticed huge “lightning” bolt cracks in the basement foundation walls on opposing sides that were filled in with some kind of black putty with plugs spaced approximately 2 inches apart. My RE agent said it was likely “some special drainage” feature of the property (I never believed her of course!). She took some pictures of the cracks (to show an inspecter that she knew) and said she would get back to me.

I arrived home later on and spent some time Googling cracked foundations and found that the house has shifted and the foundation was indeed cracked and not a good investment property by any means without spending some serious money to fix the problem up.

My agent called me later and said, “don’t worry about the cracks…lets look at some other properties of interest. In the mean time keep your deposit money in the bank.” I said I am getting worried about leaving the money in the bank and would rather have it invested and making some real returns. She said to me “why don’t you then invest in the bank’s stock until such time that you are ready to put your offer cheque in and then sell the stock.” I glanced out at the car she was driving – Cadilac Escalade, and asked her was this a good move to buy bank stocks and then sell at the last moment and she said, “banks are a place where you get paid lots of money for doing really little and you get to sit in front of a computer all day long surfing the net”. I said, sort of like what you do all day long? We have not spokent to each other since.

#26 Munch on 08.26.09 at 9:50 am

Hey, I was first!!!

#27 moneyman on 08.26.09 at 10:22 am

Washington Mutual with US$307 billions of deposits was closed by the FDIC Sept. 2008. It was then quickly acquired by JP Morgan for US $1.9 b, who did not assume (all of?) its liabilities.

I did a quick google on it. It looks like the preferred shares were wiped out.

I know that since sept. 08, there has been a lot of government guarantees in the US & elsewhere. But, it is not transparent to the public what these guarantees are, re: bank preferred shares, money market funds and bank bonds…..

GOC/ON real return bonds: good in theory. But, in practice, you don’t get the inflation adjusted amount until maturity, but are taxed immediately on it. Maturity dates, however, are (were then?) 2013 (Qc), 2021, 2026, 2031, 2036, 2037. But, in an RSP, if one is young, may be.

Remember, the “spread” for selling eats the returns for the small guy. So be prepared to keep them. My discount broker had also told me “buy real return bonds when interest rates are rising; they become attractive then”. I guess because the coupons of 3, 4 & 4.25% have become unattractive.

But for those nearing retirement, the maturity dates of real return bonds are too long. That is the reality.

Justice demands something more from GOC than the guaranteed income supplement for the small guy. Some of us, have saved ourselves a pension, if we could just have a fair shake.

Australia, currently, pays 4.75% interest on deposits. Google it!

#28 Munch on 08.26.09 at 10:32 am

Okay, so we didn’t get the bank meltdown

Proves nothing really – it didn’t happen, so what?

My point still stands – it CAN happen!

Can I go back to sleep now please?

Munch

#29 Davinci on 08.26.09 at 10:43 am

The reality of math

One thing that helps me sleep well at nights under a mattress of gold and silver is the math. Currently our monetary system has a means for extinguishing the money supply but in the 40 years pure fiat history, we have done so only once and not for very long. So with that our money supply constantly grows. If we are given the choice of pain or borrow from the printer, we chose borrow every time.

Currently the system is has reach the exponential curve wall, consider the power of compounding. We all know that if you pay someone one penny today and double it every day in 31 days you would be at billion. So lets look at a smaller case, if you had 1 ounce of gold 6000 years ago and only collected 2% interest you would own all particles in the universe and it would half to be gold. [Good thing we are not on a gold standard right ;)]

The math behind owning all the particles in the universe is simple. The rule of 72 shows that if you divide the percentage by 72 you get the number of years it takes to double on compounding. So you start with one ounce at 2% it will double in 36 years. So you subtract 36 from 6000 and get 5964. Then divide that by 36 and you get 165.66666 times. So you take that 2 to the power of 165 and you get some long number but with rounding up the second digit you get 5 with 49 zeros that I will not bother to write out. lol

Now consider that our current money supply is 15 trillion dollars and everyone wanting interest on the money. You get the picture.

This is why I buy gold and silver and nothing else.

I love math it gives me only one right answer.
:)

#30 Peter Wiener on 08.26.09 at 10:50 am

# 24

lol – literally!
I like your style and comments to that Realturd.
You just made my early day – I cannot abide RE agents by and large.

Btw – should you speak with her again, ask her to show you her Securities licences that allow her to reccomend investments or give investment advice.

#31 Rai on 08.26.09 at 11:02 am

So Garth:
As per the current scenario if Prime doubles say around 4 %.Variable mortgage will be around 4.5 to 6 percent.
But if the correction is only 15-20%.Wouldnt it amount the same amount of money ie out of pocket cost.
Infact with a lower interest rate we tend to pay more towards the principal.

#32 Fairviewer on 08.26.09 at 11:06 am

Just had an interesting chat with the tax man.

I am self employed, and am currently paying my 2008 taxes back in installments, as is my right, to Revenue Canada. 2 more payments to go, I have the cash set aside.

Received a letter from the taxman saying that they would like me to start paying NEXT years taxes beginning Sept 15th, of this year! When I inquired, they said they noticed that I was self employed, pay significant tax (+ $5000/year), and would like me to PAY MY TAXES AHEAD OF TIME!

Think they will pay me interest? Think they are desperate to collect some $$$?

I’ve never heard of this bunch of bs before…wtf.

#33 The 'VULTURE' on 08.26.09 at 11:07 am

Hi Peter Wiener: #29

Thanks for your kind comments. Made my day too!

I am scared to ask her (RE agent) for her securties licences. I am scared to ask her anything at all. Last time I asked her a question she asked me if I wanted to go to bed with her while her ex was in the other room snoring away! Glad the offer (on a property of interest) fell through….her bed would have fallen through the floor with all of her life baggage.

Creepy, man really creepy………………………..

#34 rory on 08.26.09 at 11:12 am

#25 Munch on 08.26.09 at 9:50 am

“Hey, I was first!!!”

Now try to be the last …that would be really cool and a first?????

#35 Makeorbreak on 08.26.09 at 11:15 am

http://www2.macleans.ca/2009/08/25/unhealthy-excuses/

#36 Iguana on 08.26.09 at 11:33 am

Because the investing time horizon for her is decades long, and the sooner she gains an exposure the better. If stocks dip in the next year, so what? It will be a dollar ost-averaging opportunity. — Garth

Garth, if things work out anything like the 1929 depression, with the stock market going nowhere till the fifties, the chick stands to sit on a non hatching egg for about a decade. I wouldn’t like to see the shape of that egg, you suggest she lays, by then. Bonds are out for the moment so I would say cash (treasuries), for the main, is still the rooster that crows before the dawn.

#37 Live Within Your Means on 08.26.09 at 11:43 am

#19 Calgary_rip_off on 08.26.09 at 9:24 am

The greatest privilege is being allowed to work and having someone who benefits from your work. There is no greater loss than being able to work and produce. I hear daily about people and their retirements and vacations. They obviously arent living in the now and are better off dead because they are so boring that all they have to talk about is their retirement and their vacations, rather than anything day to day in their lives that is exciting.

Im currently on vacation: I have a good paying job in the health field sector which benefits people directly and this allows me time after work to see my family and play guitar/keyboards like there is no tomorrow. Vacations and retirement isnt really living, I’ll leave that to people that are more dead than alive.

CRI – Tell that to all those retirees who volunteer. Just because they aren’t earning a salary, you seem to be saying they aren’t productive. Actually volunteerism contributes anywhere from 5-7% of GDP. Do some research. I happen to be a retiree and glad that I was able to get out when I did. I read the other day that the majority of workers are unhappy with their jobs and only stay due to their huge debts.

I retired years ago and wouldn’t change my life. I was able to because we ‘Lived Within ‘Our’ Means, paid off our mtg ASAP and have no debts. We buy our ‘used’ Japanese cars with cash. We don’t need a McMansion. We love experiencing the culture, people, food and architecture on this continent, Europe and the Caribbean. Don’t tell me that we are boring & unproductive. At least we vote, mostly keep up with current affairs and have an opinion. You just sound envious of the boomers. Sure there were some boomer banksters & Madoff types, but the average middle class boomers where just trying to make a living, raise their children as best they could and get ahead, as every generation had before them. Do I feel bad for the younger generation? Of course I do. But, don’t blame the average retirees, blame instead this so called ‘free, not fair, market, instead. BTW, I come from a family of 6 children, most of whom worked their asses off, as my family had little. Blaming the boomers is tiring. I doubt you have, or will have, a more interesting life than ‘retirees’.

#38 smw on 08.26.09 at 11:51 am

This is for you Munch…

“We’re in a recession and more people are getting unemployed, so they’re probably not being too aggressive with their retail lending,” said Douglas Davis, who helps oversee C$400 million as chief executive officer of Davis-Rea Ltd. in Toronto.

Prime Minister Stephen Harper and Bank of Canada Governor Mark Carney have said that the country’s job market will continue to worsen this year, even as Canada’s first recession since 1992 is expected to ease.

Canada’s jobless rate is at an 11-year high of 8.6 percent. Bankruptcies rose 52 percent in June from the same month a year ago to 11,338, as more consumers gave up paying their bills, the country’s bankruptcy superintendent said Aug. 11.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ3Jl5_CknSc

If the banks weren’t given permission by the BoC and government to steal, they’d be in the red…

#39 Soylent Green is People on 08.26.09 at 11:54 am

Bwaha ha ha ha

#40 Dimitri (not from Paris) on 08.26.09 at 12:18 pm

#13 Jonathan

Nice formula… agreed that there’s no point in competing with people who are willing to leverage themselves to the max.

Am in the same age group. I and a couple of my friends with cooler heads have stayed out of the market to this point, but lots of other people I know have jumped in in the past year or two.

Several friends I’ve talked to recently had underestimated the total cost of “ownership” and are now sweating bullets as a result.

When they tell me about maxing out their lines of credit and worrying about what would happen if they were to lose their jobs, I try to smile and nod empathetically… and not to gloat about the sweet rental my girlfriend and I have, which we can easily afford on either one of our salaries, and our fabulous landlord who takes care of all the repairs as soon as the need arises.

Renting has its privileges ™.

#19 Calgary_rip_off

Well put. For better or for worse, being employable and able to enjoy the work we do is the only kind of security our generation is likely to have.

But then, as Helen Keller said, “Security does not exist in nature, nor do the children of men as a whole experience it.”

It looks like this is something we (unlike our Baby Boomer parents) will have to learn at a relatively early age. Maybe that’s a good thing.

#41 jess on 08.26.09 at 12:28 pm

sORRY GARTH, THAT IMAGE DIDN’T MAKE ME LAUGH the abuse of seniors and our young people gets me so angry i had to scream those capitals out.

WHAT TOOK SO LONG PEOPLE?
http://www.msnbc.msn.com/id/24095230/ – tricks of the trade
http://www.msnbc.msn.com/id/24096414/ns/dateline_nbc/

rationalization is the saviour of self respect!

outcome
July 22, 2009
NASAA Statement on Court Decision in Equity-Indexed Annuities Case
“The court’s decision represents a victory for investors in that it supports the core legal position of the SEC and NASAA that equity-indexed annuities are securities and should be regulated as such under the federal securities laws.

“We are confident that the SEC will move expeditiously to resolve the procedural issues highlighted by the Court. The sooner the rule becomes effective, the sooner the SEC can begin addressing the fraud and abuse that is taking place in the sale of EIAs, using the regulatory tools available under the federal securities laws.”

http://www.nasaa.org/nasaa_newsroom/8670.cfm seminars beware of a salesman fancy titles and products

=========
http://www.bloomberg.com/apps/news?pid=20601109&sid=am8X0llUPR_Q
‘Pump-and-Dump’

“It’s sort of a pump-and-dump scheme in a bear market,” said David Hendler, an analyst at fixed-income research firm CreditSights Inc. in New York. “CIT had a limited funding channel in the sophisticated wholesale market. They went to where they could offload risk without too many questions.”

Finra is “aware of the product and the problems,” said Herb Perone, a spokesman for the group, which is responsible for protecting investors.

CIT sold InterNotes from 2002 until March 2008, when the company still had investment-grade ratings, CIT spokesman Curt Ritter said in an e-mail.

#42 Live Within Your Means on 08.26.09 at 12:32 pm

#23 Mike (Authentic) on 08.26.09 at 9:40 am

Boomers leaving stocks and RE:

It’s actually been happening for the last couple of years at my wife’s O&G company she works for. In fact, it’s been quite the talk there and the majority of people are in agreement that people are pulling out of stocks and selling before we hit Oct 2008. I think most of them are holding now, hoping the market goes back up to sell and get their money out.

It’s like Garth said about Real Estate a few months ago; the boomers are selling, downsizing and reducing their financial exposure.

…………
Not sure where you live. Most of the owners on my end of the street are boomers and nobody is selling. But, I happen to live in an area where people don’t think of their homes as ‘just an investment’. On the newer end – $350 – $500K houses, half of the people probably consider their homes as an investment. Years ago, everyone was invited to the street party. Now, only 2 or 3 families from the newer part are invited. The rest have demonstrated, in various ways, that they really don’t want to get to know their neighbours. It appears they’re just climbing the RE ladder. How sad.

#43 Calgary_rip_off on 08.26.09 at 12:38 pm

Here’s another great source for mortgage rates

http://www.bank-banque-canada.ca/pdf/annual_page57_page58.pdf

#44 Crash on 08.26.09 at 12:44 pm

We have to remember the “black swan” effect on the economy, and prepare for any unforseen eventuality.

#45 Repatriated Expat on 08.26.09 at 12:51 pm

It was easy to miss this story around all the panic at the time, but I like to look at Citi Bank as a case example of what can happen.

Citi preferred shares were healthy for most of 2007, generally above 50$ per share with steady dividend payouts. As cracks formed in the business model, share prices started dropping precipitously to below $10/share.

In Feb 2009, Citi bank converted all their preferreds to common stock at $3.25 per share, saving the company billions (81 billion I think) from having to payout the dividends.

Think about this for a sec, as this happened to a well-off retired quasi-relative of mine. This guy bought a whack of Citi bank over the years as the cornerstone of his retirement plan. Theory: appreciation of capital and living off the dividends. A common strategy for a lot of people. But this unilateral move by the bank virtually wiped him out while at the same time he was trying to cover his leveraged positions from his higher risk investments. Good-by to dividend payments, and stock price in the toilet.

I don’t know how he is doing now because it is not “polite” to talk about money. But if that could happen in the US, that can happen here.

Citi is at $4.63 today.

References too many to list just google ‘Citibank dividend suspension’

It depends on the nature of the stock issue, since straight preferreds cannot be converted without shareholder approval. — Garth

#46 Boomer42 on 08.26.09 at 12:53 pm

Garth

Double Mike first point is valid. You have to cash out of your RRSP or 401 by age 69 or 71. This is because the gov wants thier tax. After cashing out I do not think boomers will invest in stocks at thier advanced age. 9 million canadians and 70 million amercians will be shutting down these accounts over over the next fifteen years.

No, you do not need to cash out RRSPs. They can roll over 100% intact into a RRIF, with the same asset composition. The only requirement is the removal of annual income. — Garth

#47 Shalimar on 08.26.09 at 1:11 pm

Garth,
I have always been sceptical of dollar cost averaging.
Let us know what you think of this Mish piece:
http://tinyurl.com/klx56z
On a macro scale, the global banking stystem is a dead man walking: the main event is the coming currency crisis and its going to make discussion of RRSPs and real estate seem a little trivial.

#48 Farley Mohawk on 08.26.09 at 1:13 pm

There doesn’t seem much doubt that interest rates will be rising. As Garth points out, this means that bond prices will be falling.

Given that preferred shares behave more like bonds than equities, I don’t understand the enthusiasm for them that has been expressed so often on this site.

Preferreds can also be expected to drop in price if rising interest rates make their dividend payouts less attractive. They offer little opportunity for capital gains, typically trading within a narrow range (although they will tank with the common stock if there’s any fear of bankruptcy.) Preferreds theoretically have a higher standing than common stock in a bankruptcy, but practically speaking, seem almost as likely to become worthless.

Finally, the sheer volume of preferred shares the banks and other large companies were flogging throughout their recapitalization frenzy earlier this year makes me wonder what made this such an attractive financing option for them, compared to issuing common stock or selling bonds. And why do I have the feeling that what makes it attractive to them as an issuer, makes it worse for me as an investor?

Dividends receive preferential tax treatment while bond interest is taxed as regular income. Dividends are also normally purchased for income, not for capital gain, and if you stick with large corporations and banks, I see little risk of a dividend reduction since this is murder on common stock values. — Garth

#49 Mike (Authentic) on 08.26.09 at 1:29 pm

#41 Live Within Your Means “Not sure where you live but…”

Sorry, I should have stated that I was referring to Calgary, Alberta and the O&G boomers are mostly management and exec level selling $1m+ paid for homes.

Mike

#50 supersocco on 08.26.09 at 1:53 pm

Rule of thumb: Your age = % of Bonds you should have.
20 years old? 20%
60 years old? 60%

No, it depends on your wealth – especially in this unprecedented period of low rates. — Garth

#51 Boomer42 on 08.26.09 at 1:53 pm

Thanks. Do you escape the tax man by doing the RRIF?

There is no tax payable on conversion of an RRSP into an RRIF. The only tax is on the annual income you are forced to take from the RRIF, which is added to your taxable income. However it is possible to offset this tax with an equal amount of interest on an investment loan which is deducted from your taxes and used to fund a non-registered portfolio. Thus, taxation can be escaped. — Garth

#52 Peter Wiener on 08.26.09 at 2:04 pm

# 32 The Vulture

Maybe she was a Realtwhore that just believed in offering “full service”. Sorry, couldn’t resist. (Apologies to those ethical Realtors that everyone seems to feel exist, but that I’ve never met yet).

Seriously though, it has always bothered me that their ILLEGAL opinions, even on RE as investment (check the laws) often given while they disparage other
investments is overlooked. Earl Jones is a prime example of the illegality of not being registered to give investment advice OF ANY KIND.

Sounds like you are too smart for her ‘tactics’ (or maybe she was just not that attractive) – just kidding Vultch! What an experience, eh?

Btw, what part of the country are you looking in and how is the serach going- pretty frustrating I’m betting.

#53 dd on 08.26.09 at 2:04 pm

#41 Live Within Your Means
…I think most of them are holding now, hoping the market goes back up to sell and get their money out….

Easy to say and difficult to do during this rally.

#54 dd on 08.26.09 at 2:11 pm

“Check out the BMO annual report I linked to two days ago. You will see that banks are not in the real estate business, but the money business. An analysis of current assets should reassure. — Garth”

Funny: This indepth debate should have been taking place in November or March when bank shares were at multi-year lows. However back then we were waiting for a depression to unfold.

#55 Gonzo on 08.26.09 at 2:23 pm

Garth,
I think you may have a point on stocks as good places long term, but I would have serious difficulty putting 80% of my cash into stocks right now. There are many very smart economists (prechter,roubini,others) who still are predicting another major downwave in stocks, to challenge/demolish the March lows. This could happen in the near future. Even if you judge the probability of this happening at 20% or so, I still think it justifies holding tight for now.

That logic was in place last autumn, and it has proved to be faulty. Any correction in equity markets will likely have a duration of months, not years. It should now be clear to everyone that 2008 was not 1929. — Garth

#56 PTDBD on 08.26.09 at 2:25 pm

– The biggest minus for Preferreds is their lower liquidity. During a panic exit they become trap doors with huge spreads.

– Regarding Uncle Sam Beanyanke’s renewed contract for his high wire act. When the Circus ring manager asked for his qualifications he responded that he specialized in studying the history of the greatest falls in high wire. He specialized in the Great Depression, don’t you know.

– Taking away the punch bowl, turning the paperprestidigitizer off just isn’t going to happen. Now they’re talking of implementing a Cash for Appliances program.

– Canada’s wallet is empty and won’t recover for at least 3 years. $7 Bbbbbbbilion deficit in Alberta this year.

– C’mon Canada Conservatives! Borrow, borrow, borrow. Give us our tax rebates cheques, and cash for clunkers, and cash for appliances. We might as well party too. Jeeze, we’re like shut-in hermits huddling in our basement while the houses next to us are just a rocking with a never ending party. Let the money spiggots flow. Live for today, for the world’s tomorrow has already been borrowed and sold by the USA.

#57 Henry on 08.26.09 at 2:29 pm

Regarding to investing preferred shares of Canadian corporations, are there any problems with Claymore Claymore S&P/TSX CDN Preferred Share ETF (CPD)?

Pros that I see are:
1) Low MER (.45%)
2) High Diversification (58 different preferred shares)
3) Low bid and ask spread (.36% for yesterday)
4) Low transaction cost (only need to buy one security)
5) High Liquidity (50k minimum volume on daily basis)

Cons:
1) Lack of management and timing
2) MER can reduce returns in the very long run

#58 jess on 08.26.09 at 3:26 pm

“Dollar cost averaging does work opposed to lump sum? hum….I am confused

http://www.efmoody.com/planning/dollarcost.html

#59 Coho on 08.26.09 at 3:27 pm

Any correction in equity markets will likely have a duration of months, not years. It should now be clear to everyone that 2008 was not 1929. — Garth

Nothing that umpteen trillion dollars, interest on which alone will undermine the future quality of life for our children, couldn’t delay for a few months….or maybe a few years.

#60 Men With Hats on 08.26.09 at 3:54 pm

Mighty Mouse (Eddy Stelmach) says that Alberta’s economic recovery will lag two years behind the nations .
Guess ol’ Eddy is getting a lesson in why it is stupid to keep royalties artificially low .

#61 Men With Hats on 08.26.09 at 4:06 pm

http://worldenergyresearch.com/HowItWorks.aspx

Need an opinion .

#62 Men With Hats on 08.26.09 at 4:17 pm

Gold is no hedge against inflation :

http://thepoliticsofdebt.com/?p=224

#63 Live Within Your Means on 08.26.09 at 4:33 pm

#50 Boomer42 on 08.26.09 at 1:53 pm
Thanks. Do you escape the tax man by doing the RRIF?

There is no tax payable on conversion of an RRSP into an RRIF. The only tax is on the annual income you are forced to take from the RRIF, which is added to your taxable income. However it is possible to offset this tax with an equal amount of interest on an investment loan which is deducted from your taxes and used to fund a non-registered portfolio. Thus, taxation can be escaped. — Garth

Garth – As to your first point that is my understanding. Our Manulife, etc. salesguy, has been converting mine or our RRSP accounts to to a RRIF for several years.

As to your 2nd point, we may have screwed up. We took out a 30K loan about 8 (?) years ago for investment purposes. We had the assets to back it up. We had already invested about $60K lump sum with him plus + monthly investments. Doesn’t sound like much to some, I know. But we owned our home, 2 cars & no debts. When the market took a nose dive a few years ago, we stopped investing and upped our repayments on the investment loan. We’ve only got 5 months left to pay it off. We just didn’t feel comfortable with what was happening in the market. Wondering now if we made the right move. I’ve an indexed pension & hubby will receive a pension in 9 years tho not indexed. He’ll no doubt consult after that. Even tho we’ve taken a hit on our investments we haven’t bailed out. Just took a much more conservative approach. I don’t think either of us will live nearly as long as our parents. And, we’ll inherit on my hubby’s side. It’s a certainty. Yes, we’ve drawn up our wills.

#64 blobby on 08.26.09 at 4:46 pm

I *love* the subtle spin put on this article:

http://www.yourhome.ca/homes/realestate/article/686449

Quote:
“You have to wonder (if) in two or three years mortgage rates go back to normal levels whether they will still be able to afford the properties,” says Guatieri.

One has to wonder who put the “if” in.

#65 Live Within Your Means on 08.26.09 at 5:13 pm

#41 Live Within Your Means
…I think most of them are holding now, hoping the market goes back up to sell and get their money out….

Easy to say and difficult to do during this rally.

No DD – We’ve lived on this street for 18+ years and most of my neighbours on our end of the street have lived here longer than we have. They brought up their children on this street & now are grandparents – in their early & late 60’s. On our street there are people from the US, Scotland, Pakistan, France, (a Polish couple who are now in a Senior’s home) & Canadians who have lived in different provinces. None of the neighbours think about moving at this time. As I said, they don’t think of their homes as an investment, but as a home. Many people on this blog just consider a house as an investment. I feel sad for them. I wonder how they can contribute to their community when they have no ‘real’ investment in it.

#66 Peter Wiener on 08.26.09 at 5:58 pm

# 64 Live Within Your Means

“Many people on this blog consider a house as an investment.”

Sorry mate, have to disagree.

You might have paid a reasonable multiple of your income when you purchased your house (bet it wasn’t 7 times like it is today) and the world wasn’t going thru the economic collapse it is now, with structural unemployment and the debt loads that exist today.

Ergo, one has to view and consider the financial commitment to a home with a far more gimlet eye so as not to potentially ruin one’s finances going forward.
You didn’t have those concerns when you bought and the nominal values were much lower and you didn’t have to commit financial suicide to put a roof over your heads. Some people today do, so forgive them for being a little money minded!

“I feel sad for them.”

Nice tone of condescension there!

I feel sad too because the powers that be have, through overregulation of deveolpment, huge development charges, restrictive zoning, etc. and through sanctioning ridiculous lending standards, lessened downpayments and higher lending ratios than in your puchase days have driven costs and prices through the roof.

Are you really sad that these actions have inflated the price of your house way beyond anything reasonable? Didn’t think so!

Bottom line, you had more economic certainty, paid less for your home as a function of your income, used less leverage (bigger downstroke) and had less taxes to pay and fewer calls on your cash flow than most prospective buyers on this blog face today. And a far more certain economic outlook and possibly job security.

How do they find the time in places like Vancouver to “contribute to their community” when two wage earners are busting their butts to cover an eggregious mortgage payment which now goes on almost twice as long as the mortgage you paid I’m guessing.

As the saying goes …walk a mile in someone else’s moccassins before you judge them…

Smart guys those Native Indians! They really knew about community and they sure as hell didn’t have a two car garage!

rant off

#67 X on 08.26.09 at 6:42 pm

#31 Fairweather – I can’t remember if they base this on the amount that you earned, or the amount of taxes, but once you either earn or are taxed a certain amount you have to pre pay your taxes.

Not sure how long it has been set up like that. But as long as I can remember paying taxes, it has been like that.

#68 baffled on 08.26.09 at 6:51 pm

To Smw:

In answer to: “If the banks weren’t given permission by the BoC and government to steal, they’d be in the red…”, I say, then why shouldn’t they be in the red?

Why should my mother-in-law be instead? We can’t pay for her nursing home with her savings anymore; no interest.

#69 moneymen on 08.26.09 at 6:56 pm

To #56, re S&P TSX Cdn pfd shares ETF’s:

If someone knows more about them, I would like to ask them to tell me:
1. What has been the dividend payout?
2. Do you still get Cdn dividend taxation advantage?

It sounds interesting as a means to lower risk.

#70 markintheprairies on 08.26.09 at 7:06 pm

To Live within your means:

I am very glad for you; an indexed pension, a 2nd pension not indexed, a large inheritance assured. And virtue, what a wonderful life.

And, of course, nobody’s income is being transferred to you via the indexed pension; that would have spoiled its taste.

http://fairpensionsforall.blogspot.com/

#71 AndyE on 08.26.09 at 7:26 pm

At a p/e of 45 (CIBC) how can you suggest it is a good idea to invest in banks?

Stay in cash – deflation, not inflation will dominate the short term.

Deflation is the reduction of money in the system including credit. As this bubble deflates currency creation will not outpace this.

#72 Henry on 08.26.09 at 7:26 pm

moneymen: According to http://claymoreinvestments.ca/etf/fund/cpd/distributions , its distribution consists of eligible dividends and return of capital.

According to taxtips.ca , return of capital is not taxable, but reduces the adjusted cost base of shares. There is no interest income from CPD.

I think CPD is a good starting point to learn about preferred shares. Its MER is much lower than broker mutual funds that have MER of 1.5% to 2.5%.

#73 taxpayer like you on 08.26.09 at 7:57 pm

Peter/dd/Live..means

Good blog today……

A few weeks back, dd brought up an excellent question – Are we all not speculating in real estate regardless of the time at which you buy or the reason?

To give that point some validity, you just have to ask yourself would you buy it today if you thought it would be cheaper tomorrow? Of course not! Even if you buy at the
percieved lowpoint of the market and intend to house your family, you are still assuming you are better off long-term than renting, especially with what can be a highly leveraged purchase.

I admit building my family home was very much an emotional decision, but I did ask myself the question whether I could handle a 20% drop in its value (short to mid-term anyways). My DP was about 35% and the 5 year rate I got was 5.5% amortization 15 years. Payment was slightly higher than rent for a house half the size. No problemo. Life is good, and now its paid for.
Lucky? Certainly to some extent. But also prepared.

#74 nonplused on 08.26.09 at 11:12 pm

Men mature! I complain about aches and pains as much as anybody these days!

#75 dosouth on 08.27.09 at 3:03 pm

Well here we go again…. you tell me Garth?

http://www.financialpost.com/story.html?id=1936066