Entries from September 2011 ↓

Hoovered

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.

How not to invest (2)

Chuck fears risk. He read my post on the weekend, and worried some more. “Many people park their money in high interest savings accounts because they have been burned in the markets before,” he said. “While a high interest saving account may yield a negative return after inflation, it has still outperformed my balanced portfolio which is down almost 5% YTD.”

Such a human thing to say.

Chuck’s up at night these days because his investments, almost half in fixed income and half in growth ETFs, are off by 5%. This compares to, say, equity mutual funds which reflect the TSX (down 19%), the Dow (off 16%) or emerging markets (lower by 22%). Even gold has cratered 15%. As markets decline amid a global slowdown, looming US recession and European debt debauchery, Chuck sees growing risk. He wishes he could hide.

Of course, he’s got it wrong. Like the fools still buying houses in Vancouver and Mississauga Chuck’s convinced there is less risk in rising markets and greater risk in falling ones. When asset values rise, he’s confident. When they fall, he’s into the scotch. Like I said, very human.

This is why most people suck at investing, and completely misunderstand the nature of risk. If they thought about it, instead of emoting over it, they’d see every time markets fall (houses, stocks, bonds, gold), risk comes off the table. Every time they rise, it increases. After all, if you’re paying $1.3 million for a fixer-upper on the west side of Vancouver, or buying an ounce of gold at $1,900, or an ETF when stocks are at a 52-week high, you’re paying too much. Your odds of losing money are about 100%.

Sadly, our brain tells us otherwise. We fear losses more than we covet gains. So we’re happy to make nothing in a bank account when markets fall, and fire financial advisors who serve up 2% when they rise.

This is why most of the people you know are headed for the ditch.

Think back three years. The winter of 2008-9 brought a wave of worry. Stock markets fell. Companies bled jobs. The real estate market froze and prices melted. The media teemed with dire stories. Everybody wished they’d seen it coming, vowed to cut back on their debt, then bailed out of their stocks and equity mutual funds. The apex of selling came in the early days of March, 2009.

There are parallels today. It’s not 2008 (no big corporate bloodletting, no credit freeze, no bank failures) but it’ll sure fell the same (markets wobble, housing suffers, economy shrinks).

The biggest difference from then: most people have less liquidity, more debt, fewer savings and no diversification. The three-year-long real estate binge, fuelled by emergency interest rates, created a false wealth effect which made folks forget what it felt like to stand on the edge of an abyss. Soon that feeling will reappear. This time, with most of their net worth in a single asset and a mortgage the size of regret, there’s no financial fairy to save them. Rates can’t plunge. The government’s in debt. Wages going nowhere.

In other words, they had three years to learn some lessons, and absorbed none. Just as greed drove equity investors in 2007 to eschew balance and eat risk by jumping into a rising market, so homeowners have done the same. They bought higher, expecting higher. They borrowed big, expecting gains. They gambled and called it investing.

In fact anyone who concentrates their wealth in one place – houses, gold, silver, stocks, commodities – is going to live 2008 and 2009 all over again. Only this time the pain could last half a decade, or more.

Meanwhile, what about being happy with making 2% in the manly comfort of the orange guy’s shorts?

No issue, if you already have a million or two. That should see you most of the way through retirement.

But if your net worth’s less than seven figures, with a few decades to go before buying your first package of Depends and installing a walk-in bathtub, you’re courting the greatest risk of all. Running out of money. Saving enough to finance thirty years after work will be virtually impossible, unless interest rates quadruple. And that ain’t going to happen.

So, back to Chucky. He moans over a 5% ‘loss,’ which is no loss at all if he doesn’t sell. His balanced portfolio has saved him from three-quarters of the market meltdown. It instantly positions him to gain when recovery takes hold (and it always does). He owns assets that produce income. He’s liquid and diversified. And over time, as history shows, he’ll prosper.

Unless, of course, he reads this pathetic blog’s comments.

Oh, the humanity.

Global BC: where the pumping never stops

… and where a new condo building and a mall are worth 4:46 of your life. Amazing.

  Garth’s latest podcast is here.