Roxanne would be a princess in a normal town. No debt. Quarter of a million in the bank. Thirtysomething. Hot. Making $250,000 a year along with her BF. She’d have it all.
But Roxy lives in a city where the average SFH costs a million and Global TV keeps warning people about the dangers of falling Asians. “We’ve given up trying to buy a piece of real estate in this crazy place,” she says. “But we need to find a home for all this money we’ve saved.”
It’s a popular problem for princesses these days. Inflation is 3% yet bank accounts pay half that. Stock markets plunge or soar daily. Gold just laid the biggest egg since 1983. Mutual funds have all the appeal of Duran Duran. And who the hell can understand the bond market?
In fact, what comes next seems to be perplexing a lot of people. Even the geniuses in Ottawa. The prime minister has summoned Brother Carney and his trusty elf, F, to his office for a Tuesday afternoon meeting (rare) on what to do.
The debate is stark. Will Harper keep preaching austerity, take a leaf from the Tea Party puritans, and cut government spending as we trundle into another recession? Or will the feds try to counter falling growth, rising unemployment and wavering confidence with more government stimulus? Will F tell Carney to drop interest rates as much as possible to make Global BC happy, and keep horny young couples lined up outside the Mattamy Homes in Milton? Will Ottawa encourage people to borrow even more to rescue the economy now, nicely screwing the future? Or will the PM just turn the tap off, and damn the consequences?
Word has it Harper and the F want less. Carney wants more. And some people are worrying the Tea Partiers will win.
Like economist Sherry Cooper. For a real estate pumper, she nailed this one: “The misplaced belief that the road to economic prosperity is paved by near-term fiscal tightening, as espoused by our own Prime Minister Stephen Harper and British Prime Minister David Cameron last week, shows we have learned nothing from Herbert Hoover’s response to the Great Depression,” she wrote BMO clients this week. “We are in danger of repeating the deflationary policies that caused the 1929 stock market crash and the Great Depression.”
And, your highness Roxy, there’s little doubt deflation is already stalking the land – at least the turf just across the border. New home sales in the States have crashed again – bad news for Canadians who sell lumber. The average new home price crumbed another 7.7% in the past year. Resale prices are 5.1% lower. And here’s an interesting number – 29% of all American real estate deals are now in cash. No financing. You know what that means? Right – no debt.
But I digress.
“We went to visit a ‘fee only’ financial advisor who basically suggested spreading our savings into I-shares ETFs,” Roxanne writes. “ETF’s are touted as being simplistic and save havens – It sounds strange but I would feel more confident about putting our money in housing, purely as I understand the economics (although not in this crazy town, so don’t worry we are not going to be getting into the Vancouver Real Estate market any time soon), but with the world’s financial markets in turmoil again, is now the time to get in? The logic in me says “yes” given that prices are low, but the “emotional side” is wavering! We are in our mid 30’s so have a long work life ahead of us (joy!) so should we get in and see what happens?? Are ETF’s the safe haven, simplistic investing tools that everyone seems to suggest?”
Good questions, princess. ETFs, or exchange traded funds are like mutual funds but without an overpaid manager. So they’re cheap to buy and effective to own. They’re typically made up of scores of companies (never buy the derivative or leveraged kind), pass through dividends and provide tons of diversification. So the idea is to get growth, with far less volatility than owning individual stocks. All good stuff.
Are they simplistic and a safe haven? Of course not. There are hundreds of ETFs to choose from these days, covering everything from bonds to preferreds, emerging markets, various sectors, large caps or micro companies. Some are boring and relatively risk-free, some extreme.
But ETFs are just a way of packaging financial assets, so buying ten of them is not exactly a strategy. More important is what you’re trying to accomplish, and the times in which we live. Strikes me that a high-flying couple in the mid-thirties would not be looking for a “safe haven” as much as long-term growth. After all, if you get an average of 7% over two decades, you’ll have $1 million before you’re 55. That could double by age 65 – even without investing any new money.
But isn’t investing risky? Hmm. Compared to what? I’d say putting a mill into a Vancouver bung right now constitutes unadulterated risk. There is no interest, no dividends, no net income and a 100% chance of loss.
In comparison, large amounts of risk have just come off the table on financial markets. A young couple should be stoked to take advantage of that, but at the same time ensuring you protect yourself by getting balance. That means corporate and government bonds, real return and high yield bonds plus preferreds, as well as REITs, PMs, and ETFs – covering key sectors, Canadian, US and international economies, including large, medium and microcaps.
This is not an easy thing to construct, even for royalty. It’s why advisors crawled out of the primordial muck. Sounds like you should shop around for a guy who does more than throw iShares brochures at ya.
So, Roxy, would I invest my money at a time like this?
In a heartbeat, m’lady.