Entries from October 2014 ↓

Love your landlord

DAVE modified

So, a big mistake people reading this pathetic blog make is thinking they have to choose between real estate or a financial portfolio. They don’t. It’s just fine to have both (in which case my Rule of 90 applies).

But if you must choose one, take the money. That way you have more liquidity (62% of all house-sellers in Canada were unable to find a buyer in the last six months). You have diversification, instead of one asset on one street in one city. You have balance, with assets that pay interest or dividends, or the potential to yield capital gains. And you have less risk of loss, given all that real estate leverage. Plus you get to live for less.

That last point is a giant one. Every time I hear of another moist virgin succumbing to her mom and buying a condo with a heaping mortgage, I despair. Do the kids not know they could be a lot richer if they rented and just “paid somebody else’s mortgage”?

Lincoln is one smart little Millennial dude who gets it. He writes:

“It’s amazing how much difficulty I have convincing friends that landlords are very heavily subsidizing renters in many many parts of the country. They steadfastly maintain that buying a house is a good investment. “You’re always building equity!” They say. While I have tried to explain just who amortization schedules favour (hint: if you think it’s not the bank, you’re dead wrong), there is a serious head in the sand attitude here.

“My personal favourite is “Well, there may be a bit of a bubble, but it can’t possibly affect us much here [Kelowna] – real estate has been dropping slowly for a couple of years now!” Apparently it’s not just people in the major metro areas who believe that they are special snowflakes.

“I’m renting for about 2/3 of what I would otherwise pay for housing here. I’m going to have my student loans paid off about one year after I graduate. And until this housing gasbag deflates in a major way, I’m going to work on making out my TFSA. And when things break around the house I’m going to keep picking up my phone and saying “Hey, you’ve got a problem to fix over here.”

But let’s bring in the experts at the International Monetary Fund to prove the point I’ve made here repeatedly: it’s less costly to rent than to own, even with 3% mortgage rates. Property prices have swollen to the point where we’re way past the rest of the world in terms of crappy affordability, and have shot through historic norms for rent/price ratios.

See what I mean?


Now, we have another little problem. The economy. Unlike the US, which I explained this week is in fine shape (all things considered), Canada’s seriously lagging. The American economy is growing at the rate of 3.5% (down a little from the 4% earlier this year), while we’re barely doing a third of that.

In fact, on Friday Stats Canada delivered the latest bad news. Already the oil plunge is hurting GDP, coming as it does on top of a weak jobs market, a floundering manufacturing base and our hipster-inspired condo economy. So, like Jian Ghomeshi’s reputation and Facebook Likes, we’re shrinking by the day. The economy in August contracted at an annualized rate of 1.2%. Ouch.

And poor Alberta. Oil and gas extraction plunged 2.5%, the second drop in a row – and there appears to be more coming as crude barely hangs on to the $80 mark. (Commodities in general are being spanked as money flows elsewhere – gold was nailed for a $30-per-ounce loss Friday, and is now at $1,170. Drop since 2011: 38%.)

Manufacturing output also shrank, which sucks, because we’re turning into a nation of salesmen and kids with two arts degrees. Tough to see how that will generate a ton of prosperity, or exports earning hard currency.

There’s a reason our dollar’s dropped to 88 cents and the Bank of Canada is freaking over deflation. We’re struggling. And what does Ottawa do? The feds promise $26 billion in tax cuts for families, based on a budget surplus which doesn’t yet exist, and probably won’t next year.


Rent, save and invest, children. You shall inherit the dirt. Cheap.


JOY modified

If you ever wonder why contrarians always get the girl, read the comment section of this blog.

The moaning, drooling and quivering on display yesterday was awesome. Moments after I laid out a case for continued growth in the US economy – and solid reasons to be invested in financial stuff – it began. The dissing of America was classic. The belief markets are manipulated, government stats are rigged, governments run by morons and that central bankers can’t Google was endemic.

It’s staggering how many think the world’s going to end. Just as it’s improving. And that brings us to today’s lesson. It’s simple. Get invested. Stay that way. Stop reading blogs. It’ll kill ya.

Here’s what I mean:


The above is a 10-year chart of a balanced portfolio, with 40% safe stuff (such as bonds and preferreds) and 60% growth (Canadian, US and international ETFSs, plus REITs). This is not theoretical – it’s real. I know. The portfolio was routinely rebalanced to sell winners and buy losers and keep the weightings in line.

Note this: what was invested in 2004 has more than doubled now. The average return over that period is 7.3%. If you had a hundred grand then, you have two hundred now and enough for a new Kia.

This period of time included (a) the greatest stock market crash since the 1930s, (b) the 2011 debt ceiling crisis in the US, (c) the American real estate bubble and collapse, (d) the aftermath of the dot-com/tech plunge, (e) the Euro debt debacle and (f) everything else the doomers sweat over – debt accumulation, Ebola, Miley Cyrus, central banks, Vlad Putin, the Baltic Dry Index, ISIS, food stamps, Hamas, high-frequency trading and Goldman Sachs.

In other words, all the gnashing and flummoxing was for naught. The market timing failed. Those who freaked, selling in dips (because everything was going to zero) or buying the highs (because they were so smart) were creamed. In contrast, people who understood how to invest quietly multiplied their wealth – even through volatile times populated by fools who know everything.

Here’s another chart. Same portfolio. This time it’s about risk.

60-40 modified

The bottom scale is risk – the further to the right, the greater. The left scale is return. The various dots, with the exception of “60-40” refer to various components of a balanced portfolio – and you can see that emerging markets (EEM) or real estate investment trusts (XRE) are higher risk-higher return than, say, bonds (XBB). The “60-40” is the actual return/risk of the balanced portfolio – averaging 7% over a decade, with considerably less risk than the US stock market (SPY) or Toronto equities (XIU).

This is what a good portfolio should do – give reasonably predictable returns without giant swings, letting you sleep at night and ignore stock market emotion and the bleatings of the nihilist, gold-rubbing losers who pray for pestilence. (By the way, bullion crashed below $1,200 an ounce on Thursday. As expected.)

So here’s the thing: investors with a good, well-built and routinely-maintained portfolio full of boring stuff were able to ignore markets for the last decade, double their money, and get on with their lives. Will this be repeated in the next 10 years? Beats me. But if we have the same events – a boom, several busts, multiple crises, wars, debt, a generational crash and confusion – there’s a decent chance.

In case you missed it, the US economy has just capped the strongest six-month period of growth in more than a decade – the best since 2003. Jobless claims there are now at the lowest level since way back in 2000. Almost 250,000 people were hired last month and the unemployment rate is down to where it was in 2008. Gas prices are set to hit a six-year low, and consumer confidence is increasing. Meanwhile the Fed has stopped its stimulus spending, and the stock market immediately gained 200 points.

So, you can moan and dribble over things you cannot control. Or you can cede life is to be confidently embraced. You only get one.