The rare

SAFE modified

Over the last decade most investors did well, if they ignored their hearts. When it comes to dealing with money, emotion’s your enemy. It makes you covet stuff that’s popular and expensive, and fear what’s unloved and in decline.

This is why people buy houses when they’ve never cost more. It’s why nobody finds the guts sell a stock or mutual fund when it’s rising. It’s why there was a torrent of selling one afternoon in March five years ago, when markets were hitting bottom.

Despite knowing better, everybody buys high and sells low. They want houses when they go up, believing they’ll rise more. Forever. They dump financial assets when they decline, fearing they’ll go to zero. Both are utterly irrational. And they happen daily. To most people. So never be surprised people fail financially.

As I said, over the last ten years folks with a balanced and diversified portfolio (60% growth assets, 40% safe stuff) have seen an average annual return of about 7.3%. That decade, 2001-14, included the worst market meltdown in eighty years, the terrorist attack of Nine Eleven, the American real estate crisis, an historic run-up in debt, a collapse in interest rates, the ascent of China, wild volatility in the price of commodities like oil and gold, and there-emergence of deflation. Yep. All we missed were the locusts.

Of course people who went through this period trying to time the markets, buying on the ups and selling on the downs, were slaughtered. I can’t tell you how many I have run into over the years who won’t touch anything but GICs now because they panicked and sold their funds in 2009. They blame fate. Fate knows better.

In 2008, when the stock market was trounced by 60%, a balanced portfolio lost just a third of that. It then regained all lost ground by the end of 2009, and made 15% in 2010. So while it took equity mutual fund investors seven years to get their money back, people with a balanced portfolio averaged a 5% annual return during the worst three years of the crisis.

That’s why it works. You get downside protection by owning a mixture of equity assets along with boring things that save your ass during dark days. The big benefit: get it built properly, then forget about it. Change the oil once a year. Focus on your love life, where emotion is way more useful.

Now, some people worry the world is still scary and think a 7% return over the long haul is unrealistic. Like Tim. He sends me this excellent note:

I’m not a dumb guy but there’s something that bugs me about financial stuff. Basically, 7% a year sounds too good to be true. The economy grows at a certain amount per year, right? Like, one, two percent—on that order. Not seven percent, anyway.

If that’s the case, how can any diversified set of investments yield the 7% you and everyone else talks about? I understand that individual stocks or bonds or what have you can easily yield that much, if you’re lucky enough to pick the right ones, but since you probably won’t, that’s academic. (Or, if you make smart decisions while two or three other people consistently make dumb ones and accidentally give you their share of the pie, year after year after year.) But the more diversified you get, the closer you approximate holding a share of the whole magilla. (Right?)

Look, obviously over the long term that 7% has happened, including hiccups and corrections and 2008’s. But I don’t understand how it CAN, in the long term, when the actual amount of total wealth is only growing by a much smaller amount. Unless it really, literally is a case where every smart person making 7% a year is subsidized by two or three other people who aren’t making anything, or are losing money.

Help me reconcile this so I don’t feel like I’m walking into a trap by investing in a diversified portfolio. I can handle getting screwed by other people but doing it to myself–having that diversified portfolio eventually turn into a pumpkin when I “knew” 7% was unsustainable–would be a bit much.

Tim’s right about economic growth. In boffo years, it might be 5% (what the US is averaging right now), but lately it’s been a lot less – Canada will see maybe 3% this year. He’s also right about most people being happy to earn nothing. They must be, because that’s where they have placed their liquid wealth – in savings accounts and GICs paying less than the inflation rate (now down to 2% thanks to cheap oil).

So the bulk of folks you know are lending cash to banks which then are then lending it back, often to the same people, in the form of mortgages, LOCs and car loans at a higher rate. Duh.

Meanwhile in 2014, while the Canadian economy stuttered and stumbled, the Toronto stock market gave a return of 10.55%. Howcum? In part because Canadian corporations increased their profits, in aggregate, about 11% in 2014. A big whack of that money was paid to shareholders in the form of dividends, and those same investors earned more in capital gains as the value of the companies improved. Diversified investors – with a bigger part of their portfolios in US assets – did even better. The S&P added more than 13% last year. Europe was up about 8%. American companies increased earnings by 12% in 2014.

Meanwhile, Tim, there are lots of places where cash can earn a decent return. Like preferred shares. The big banks are paying in excess of 5% now to hold their preferreds, which are relatively stable and pay you quarterly income which also allows you to collect the dividend tax credit. This is equivalent to getting about 6.5% on a GIC from the same bank. And when was the last time that happened?

So, nothing is for sure. But I do believe this: the next decade will be better than the last one. Economies will expand. Consumers will spend. Companies will make money. Markets will rise. There will be days of euphoria and moments of despair. Millions of people will confuse investing with gambling. They’ll try to manage their money with absolutely no clue, buy the wrong stuff, then panic if it goes down, selling for a loss. Then they’ll wonder what alchemy others employ to achieve 7%.

But it’s not magic. It’s logic. And it’s rare.

136 comments ↓

#1 Benchwarmer on 01.01.15 at 8:13 pm

Happy new year Garth, all the best in 2015!

#2 Big lew on 01.01.15 at 8:20 pm

First!!

#3 Uh Oh Canada on 01.01.15 at 8:20 pm

Tim, I was just like you when I first started investing. But the secret is to do your research and don’t be greedy. I made $700 on my 5k TFSA this year.

#4 Santino on 01.01.15 at 8:24 pm

2015. The year to buy townhouses in ancaster. Santino will rise!

#5 R Kaputnic on 01.01.15 at 8:27 pm

Garth, we thought you would take a well deserved long weekend.
Thank you for your persistence….one at a time, one at a time.
We have our family reading and have just about convinced a couple to heed your advice regarding renting v owning.

Thanks and have a happy new year.

#6 Smartalox on 01.01.15 at 8:41 pm

Timbo,

You’re right that a balanced portfolio yields at higher rates than simple economic growth. One reason for this is the re-balancing step also advocate by Garth: by selling off a portion of the stuff that goes up, and using the proceeds to buy more of what’s gone down (soon to go up again), you lock in your gains.

Three per cent growth in the economy is the net figure – the ups minus the downs. Rebalancing means you get more ups than Dows, hence returns that are higher than the economy’s performance as a whole.

#7 Smoking Man on 01.01.15 at 8:42 pm

Sorry Gartho, safe is no way to live.

If we jog, eat salad, wave an amazing gene pool. 110 years tops.

Short time dogs. Live large take risks. You never know when the reaper comes to collect the bill.

Drink, Smoke, party like no tomorrow, you go broke…

Shit load of bleeding heart liberals will feed you..

Life should be a crazy risk taking adventure. Cause when you die. It’s over.

Oh I should have left my family something.. Bull shit..

It’s not about preventing the fire, it’s about walking through it that makes this shit 100 years or so worth it.

#8 mitzerboy aka queencity kid on 01.01.15 at 8:49 pm

Howcum?

Whazzamatta? You don’t speak English? — Garth

#9 1drs on 01.01.15 at 8:54 pm

But it’s not magic. It’s logic. And it’s rare
But it is getting more common with each post you write. I have taken your advice and made my life so much more financially secure. Thank you Mr. Turner , your wise words have made one boomer a very happy investor.
I think I made closer to 8% this year, all in.

#10 nonplused on 01.01.15 at 8:55 pm

I didn’t think Garth would post today so I’m bringing this over from yesterday’s post, I did write it today. Here it is:

Well I’m bored, the family is playing Rock Band, so I thought I would do some speculation on oil prices even though this post is cold and no one’s probably going to read it.

I read just about every article that comes out about oil prices and even worked in a research company for a while. But no man is an island so obviously I am borrowing heavily from others.

There is a general belief that lower oil prices are good for the economy. This can be true but only in the circumstance where the actual cost of production fell. So when the great fields of Saudi Arabia and elsewhere in the Middle East were brought to market, it was very good for the economy because suddenly great supplies of energy were available at a very low cost of production. In other words the net energy available to the economy went up dramatically, we only need to burn say 1 barrel of oil to get 100 out of the ground we could use for other things.

Same thing could be said about when Texas came on line in the early 1900’s. Or Alberta in the 40’s. The oil practically shot out of the earth if you poked a hole in the right place.

So that is how cheaper oil is good for the economy, when the production costs are dropping.

Production costs are not dropping today, even with the so-called glut. On the margin, they are rising. Shale oil and tar sands need oil around $80 a barrel or higher to make sense. The reason is because it takes so many more inputs, those being steel, labor, cement, steam generated by gas, horsepower for fracking that uses a lot of diesel and also steel and high technology and more labor, sand and water in great quantities transported over great distances using even more diesel, super big (and expensive) rigs and more labour and steal and diesel there too, and on and on.

This is why it’s important to calculate the Net Energy Return On Energy Invested (NEROEI). All those miles of pipe they are sinking down into the shale represent a bunch of coal and oil being burned to make the steel and run the drilling rigs and fracking spreads. The concrete demands are huge, but you can’t make concrete without energy. The water and the sand all represent spent energy. Then there is all the labor.

So what we have happening is this, and I’m jumping ahead a bit, but perhaps I will backfill it later. The marginal cost of oil has become higher than it’s economic value to the economy. Therefore people are choosing to walk or just not go anywhere as much rather than pay for gas. They simply cannot afford to keep driving their kids to soccer or whatever when gas is $1.40 a litre. They could buy a more efficient car, but that’s a whole lot more energy invested in the car itself, being made out of steel.

So what has happened in my opinion is that the economy has discovered that the returns on shale oil are to low from a physical perspective to be worth all the effort. The global economy must therefore downsize until shale oil is not required. Alternatively maybe other cheaper sources of energy need to be deployed, if there are any.

A simple way to think about it is this: If I have to walk 4 miles to be able to drive a 5th mile, why wouldn’t I just walk the whole way and avoid the cost of owning a car? This is the conundrum the global economy is in as a collective.

One must always keep in mind that economics is physical. Natural resources + labor = capital + consumption. No paper playing can change this equation, only facilitate it. In the case of shale oil, the resources just don’t justify the energy inputs if the result is to be used as a fuel. Perhaps for plastic, like mining gold takes energy (or copper or aluminum or steel or concrete) but it’s the metal we are after not energy.

Every energy source goes through this phase. Once they ran the trains and paddle-wheelers that built this great land on wood. Now wood is so expensive you’d hardly ever think about burning a good tree, just junk wood. Heck they turn the sawdust created from cutting wood into particle board. But that takes plastics (more oil) so I don’t know how long we’ll be doing that. (And yes I know there are some survivalists who live in forested areas and prefer to cut wood for fuel and remain off grid. But if they’d get a job they would find they can pay for gas heat in less time. At least for now.)

So the long and the short of it is, we are passed “Hubert’s peak” for cheap oil (probably occurred in 2006). Demand must now drop as a result because the expensive oil we have been drilling just isn’t worth it. This price drop indicates a great recession is upon us until we implement alternate, cheaper sources of energy or retool the global economy to be much more energy efficient.

There is a phrase attributed to a Saudi Sheik that goes “the stone age didn’t end because we ran out of rocks”. I hope he’s right, but it won’t be because oil is unlimited. It will be because we find something else, perhaps renewables, perhaps thorium, perhaps we just go all in on uranium (hopefully not it’s nasty), perhaps fusion. I believe we have arrived at that crossroad. We must choose how we are going to power things without oil or the global economy will collapse.

Incidentally, this is why the Ukraine is now in the news. But it’s short sighted. Russia freely sells it’s energy so gaining control of those assets will only change who makes the profit, not the energy available. Same as how lower oil prices only changes who gets how many dollars, not the amount of oil available. And prices are now so low that oil production will begin to fall. That’s the same as having a bad crop for a farmer.

#11 dwilly on 01.01.15 at 8:58 pm

This didn’t really answer the question. Sure Corp profits are good, but that just begs the same question: how do you know it’ll continue.

Of course the answer is that it might, or might not. The simple, unsatisfying answer is that there are no better options. What else you gonna do with your money? Gic? Mattress? Shack and ammo? So 7% may or may not continue. But there’s no better place to put your money than a balanced, diversified portfolio as garth says.

#12 Renter's Revenge! on 01.01.15 at 9:16 pm

It’s because of share buybacks, dividends, inflation and corporate leverage. Add that on to GDP growth and you get your 7% per year.

#13 Washed Up Lawyer on 01.01.15 at 9:26 pm

#10 Nonplused.

Thank you. Well done.

I was curious so I Googled the Catholic population in the world to try to determine the effect of the Eco-Pontiff’s encyplopedia against anthropogenic climate change, human greed and rapacious resource extraction. This will have an effect. Now 1.2 billion people do not have to trouble themselves with reading IPCC peer reviewed papers. It is now an article of faith. It appears from the map that most of that population does not live in countries where people own a couple of cars.

Might be a game changer. Stranded assets in the Athabasca oil sands perhaps.

WUL

#14 sue on 01.01.15 at 9:26 pm

I was just noticing how rents have skyrocketed in the Hamilton/Ancaster/Dundas area. To get a crappy townhouse (old, dated, small) in Dundas, you have to pay 1600 plus utilities…1800 in Ancaster. One owner had a 1 bedroom bungalow (ONE) and was asking 2000/month just because it was modern. I never want to own again but this is just ridiculous.

#15 Dean on 01.01.15 at 9:26 pm

I’m still quite shocked at how few people believe this strategy works. It does. Not overnight, but it works.

In the course of 15 years I have been able to almost triple my initial investment. In the last 4 years the returns have been spectacular, how long that continues who knows?

I hear radio commercials spouting the awesomeness of 2% and 3% returns in savings accounts and wonder who does this?

It’s not gambling. It’s slow, methodical and logical investing…….and it works.

#16 Smoking Man on 01.01.15 at 9:27 pm

Just now, not 60 seconds ago I follow my own bull shit. Went to high limit slots. Second spin, 100 dollar bet..

Waiting for the attendant to bring me 14k

Im pissing away 4k and change so I don’t have to tell Canadian Boarder Services my life story. Bringing back 9,999.99

Any thing to declare,, nope

I love Atlantic city.

#17 The rare | Realties.ca on 01.01.15 at 9:29 pm

[…] Source: http://www.greaterfool.ca/2015/01/01/the-rare/ […]

#18 Smoking Man on 01.01.15 at 9:34 pm

What a Rediculos questions, “anything to declare? ”

As a matter of fact Sir..” I think you’re retarded, trading time for shit wages . oh yeah that pension you were promised. What happens one day shy of collecting you’re tee boned be truck.. You lose.

Does that wee gun make you feel good. Strong. Is that why you took this job.

Also, I’m declaring I’m certified insane, not normal. I hate people, including you, for no damn reason other than your stupid and weak. Shoot me bastard.

Shoot me now..

#19 Retired Boomer - WI on 01.01.15 at 9:37 pm

The results are in for 2014. My 60/40% diversified portfolio has delivered the hoped for number.

Yes, it is almost all in mutual funds (old dog here), one ETF

VTSAX 12.56%
VTIAX -4.17%
VFIDX 5.81%
VFSUX 1.76%
VBTLX 5.89%
VTABX 8.82%
VNQ 30.29%

So, the market went up overall moderately, the dividends were modest as well. 2015 Rinse & Repeat….

#20 Leo Tolstoy on 01.01.15 at 9:37 pm

Canadian banks that are tied to the oil sands are toast.

But none are. — Garth

#21 Smoking Man on 01.01.15 at 9:39 pm

No more posts after this one.. Seriously JD aggression on the way.. Let me take my chances with the 25 year old bouncer at the bar…

One good clip behind his ear, 56 year old wins..

That’s it no more after this one Gartho.

Well at leased till tomorrow… Why does JD make me want to punch people, and talk dirty to random woman..

University students, this could be a good thesis..

#22 Roman on 01.01.15 at 10:00 pm

And why bother with balancing at all?
Simple “buy and hold” SPX averages 7.9% for the last 10 years (including div but I haven’t verified number below)

http://quicktake.morningstar.com/index/IndexCharts.aspx?Symbol=SPX
Trailing Total Return S&P 500 Index
1 Mo 3 Mo 1 Y 3Yr avg 5Yr Avg 10Yr Avg
-0.25 4.93 13.69 20.41 15.45 7.67

Same
http://dqydj.net/sp-500-return-calculator

However last 2-3 years returns were much higher than 7.8% – almost 2x of that.
Who would want to bet on SPX 15% returns going forward? Betting on 7.8% returns means normalization and pain next few years.

#23 Rochelle on 01.01.15 at 10:06 pm

Garth, thank you for what you’ve been doing over the years. Keep up the good work and I wish you a happy and prosperous 2015. God bless you!!!

I’ve been reading your daily blog for a little over 4 months. A friend introduce me to this blog and I am so happy he did. Because of you, I now feel comfortable investing. I am still doing my research and I’m learning a lot. My challenge is that I have $5000 and I don’t know which ETF(s) to start off with within my TFSA.

Any ideas?

#24 My Life is a Pile of Shit on 01.01.15 at 10:08 pm

Those portfolios that returned 7% during a period that includes at least one bear market were constructed in retrospect; in other words, they are works of fiction designed to accommodate the past. With diversified portfolios, the price of outperforming the market in bad times is underperforming the market in good times. Most investors don’t have the discipline to stick to a strategy that underperforms. But even if a portfolio declines less than the market in bad times, most investors don’t have the fortitude to stay invested. (If you lose less than the market, you’re still a loser.) Therefore, although it is possible to construct such a portfolio, it would undergo so many changes that nobody can say they kept it the same for two years, let alone an entire bull/bear cycle.

Good investors have more staying power than you, in other words? — Garth

#25 Smoking Man on 01.01.15 at 10:12 pm

Last one.. I’ll keep it clean Gartho.

Let’s face it, you’re curious, you would love to have a beer with Smokey..

But you got a Dorothy. She read me shit, it’s not going to happen, totally understand .. I got me a Dorothy too. Unbeknown to her, I’m a deviant, depraved bastard. I cover it up well.

Men we all are, if you disagree you’re lying, or brain dead.

Men and woman are so different. Men at the pool in Vegas are undressing with eye balls anything under 125 lbs.

The woman, comparing purses, designer bathing suits. Look at that bitch.. They think..

If you know this dogs, that perception and your poor, clearly you have no confidence..

Just do it…. 2015 happy new year..

#26 Arfmooocat on 01.01.15 at 10:15 pm

$40 Oil, Tar sands finished, Alberta crash and burn, yeda yeda yeda…

Wake me up when real estate starts dropping in PRICE here.

#27 Obvious Truth on 01.01.15 at 10:17 pm

Twelve posts and still nobody gets it.

Congrats to those coming forward to let everyone know they have changed the way they think. Garth gets the credit for being able to say the same thing a hundred different ways.

And somebody had too much time to write about oil. Oil will continue to be less important in your lifetime. It’s a predictor of nothing. Higher prices are a net negative cause it takes my money. Period. Everything you read is BS. Even Putin said his economy needs to diversify. You can bet that 50 years from now your car won’t run on gas and your house won’t have a furnace.

Plus it’s terrible for the earth.

Markets my friend. Maybe it’s oil that has to compete now? Maybe it’s the next horse and buggy? Maybe something nobody knows. Check out iye vs tan.

Garth’s method doesn’t care about any of this. The portfolio need not make that call to profit.

#28 I love real estate on 01.01.15 at 10:21 pm

The firm has finished its annual year end consults with in-house and external forecasters. They agree with Garth there may be a small increase in interest rates, which should only push many more smart buyers into the market. Here is a distillation of their price forecasts for Toronto in the 14 districts we specialize in:

2015 +12%
2016 + 4%
2017 + 6%
2018 + 8%
2019 + 9%

It really is different here, folks. Even experts like Shiller cannot really figure out our real estate, and they refrain from calling it a bubble. While you grumble with resentment in your parental basement, that $700,000 semi you might like will be over $1,000,000 in a few years and completely out of your reach.

How will you feel then?

To a large extent, we see similar numbers playing out elsewhere in Canada, at least in the top major centres.

Go to 4:25 of this video with Robert Shiller, one of the favourites of some of you doomers. Watch the whole thing – he even admits, he does not see Canadian real estate as necessarily in a bubble. Look how steady and balanced Toronto’s price growth looks compared to Boston in his chart.

https://www.youtube.com/watch?v=fzhDGY8_VcU

Bubble? Hardly. Only a sad rationalization for people who will let themselves, their partners and children be left out of home ownership forever if they do not move soon.

May 2015 finally be a year of action for all of you sitting on the sidelines.

Resolve in 2015 to give up your hopeless and pathetic doomerism.

Do it for your family, or at least the family you hope to one day have.

#29 Rochelle on 01.01.15 at 10:24 pm

By the way,

John Hood (president & portfolio manager, J.C. Hood Investment Counsel) recommends three ETFs for 2015

Technology Select Sector SPDR ETF (XLK)

First Trust Health Care AlphaDEX Fund (FXH)

BMO U.S. High Dividend Covered Call ETF (ZWH)

What do you think about these for a first time investor?

Not much. — Garth

#30 BG on 01.01.15 at 10:25 pm

# 21 Smoking Man

Nobody cares about your off topic posts, the sordid details of your life or your flawed philosophy.

You are a nuisance on this blog.

#31 Sydneysider on 01.01.15 at 10:25 pm

#18 Smoking Man, another book you might enjoy when sober is “Ecce Homo” by Friedrich Nietzsche.

https://archive.org/details/TheCompleteWorksOfFriedrichNietzschevol.17-EcceHomo

#32 Smoking Man on 01.01.15 at 10:26 pm

Ok last one Gartho

Dude how can you take all these dogs thanking you to no ends. Your the best, you’re great. Do these people have no God damn SELF respect..

IT’s an extension of giving the teacher an apple.. Damn, the machine reached into there spine and ripped it out.

Gartho, I hate your guts….. :)

#33 Shawn Allen on 01.01.15 at 10:27 pm

At the Risk of Incurring the Wrath of Garth…

“”It’s why there was a torrent of selling one afternoon in March five years ago, when markets were hitting bottom.

Despite knowing better, everybody buys high and sells low.”

*******************************************
Often said, but clearly false.

For every single share sold on March 9, 2009 at the bottom, someone was buying. So, no, everyone does not buy high and sell low.

What happened on March 9, 2009 was that the price of stocks were driven to a low. Buyers and sellers however were in balance as always. Not a single share was sold that was not also bought that day.

My statement is correct since a trade, of course, always has two sides. Usually on one is a retail investor crystallizing a loss. On the other is a financial deity such as yourself. — Garth

#34 Kris on 01.01.15 at 10:31 pm

DELETED

#35 Waterloo Resident on 01.01.15 at 10:37 pm

Quote: (“Of course people who went through this period trying to time the markets, buying on the ups and selling on the downs.”)

Oh yeah, that seems to be just human nature.
Its what happens when we let our emotions in control of our decisions. Smart investors learn to take the emotions out of their decision making.

#36 Ahmed on 01.01.15 at 10:45 pm

Garth,

You didn’t really answer the question that Tim asked. Here is the correct answer:

The reason the stock market can yield a higher return than the growth rate of the economy is because the return includes dividends which are paid out. Only retained earnings contribute to growth. For example, a utility stock earning 8% which exceeds the grown rate of the economy might pay a 6% dividend leaving 2% as retained earnings. This would allow the utility to use that 2% to grow in line with the population growth rate.

#37 Republic_of_Western_Canada on 01.01.15 at 10:54 pm

#10 nonplused on 01.01.15 at 8:55 pm

You’re stabbing in the dark.

Although it is correct that the netback on energy invested to produce some hydrocarbons is slim, the bigger consideration is the FORM of that energy, the conventions familiar with producing it, and other uses of those hydrocarbons.

For example, with present technology, commercially viable aircraft can only fly using stores of concentrated chemical energy in the form of kerosene or gasoline, even if it becomes very expensive. Other stores, like rubber bands or compressed air or human bicycle power or nuclear heat/reaction mechanisms are either impossible or unfeasible in that application. The manufacture of various kinds of petrochemicals/plastics using alternate feedstocks to [cyclic] hydrocarbons or extracted ethane is likewise difficult or uneconomic.

Present regional infrastructure and convention even favours the manufacture of similar fuel end products using goofy roundabout paths. For example you can make a very nice clean diesel from natural gas using the Fischer-Tropsch chemical process invented in Germany in 1925. Instead of burning huge amounts of gas to boil water to wash bitumen off of sand with. In fact, Qatar (Ras Laffan) and South Africa make very large quantities of diesel using F-T.

But the sheer volumes of bitumen in northern AB & SK and the existing built-up infrastructure to extract that mean we will continue to burn natural gas just to steam underground rocks and clean sand with. That has relatively little to do with energy netbacks.

Another consideration conceptually related to specific forms of energy is economic arbitrage. Even though the amount of energy needed to extract and refine iron then manufacture and ship all the volumes and forms on steel needed in an oil sands mine is substantial, the costs of all of that take advantage of cheapness of material and labor found in other regions. It’s also produced for purposes other than just bitumen extraction, so the energy to run a steel mill & pipe factory is also paid for by other customers and projects. Further, much of it is paid for using cheap debt. In other words, the dollar cost of the energy needed for all the material and production of upgraded bitumen is watered down and diverted in a number of ways.

Just as huge amounts of human labor (most of it necessarily kept poor) was needed to run a society a hundred years ago, the production and consumption of hydrocarbons in present ways will continue until it becomes substantially easier or cheaper to do otherwise.

Demand for hydrocarbon-based energy won’t systemically drop much unfortunately. Not in the next couple of lifetimes. There’s just far too much global overpopulation which increasingly wants the power advantages that internal combustion engines provide. Demand will only increase, but like food there will be escalating conflicts over who gets to use it.

That allocation will mostly be determined by price and armed conflict; both of which will also increase. Sorry, kid.

#38 Big lew's Mom on 01.01.15 at 10:59 pm

#2 Big lew “First !!”

My dearest Lew,

It’s not every day that a boy who so frequently had “accidents” (And I’m so glad that you have almost conquered this.) achieves such a milestone later in their life. To think that my son was first, almost, in one of Mr. Turner’s blogs. Why, it’s the talk of Chesterville. That and the time you peed your pants when officer Lumley talked you about the egging at the Belanger’s house.
Well you can’t blame people for talking, you were 25 years old. Your Uncle Bob still gets a chuckle, till I shush him.

I am so proud of you. And don’t listen to those nincompoops about getting a job. You know that your daddy and I love you having you and your Supergirl Super Hero Bust downstairs. Until you get a girlfriend, I suppose she can be your pretend one.

Love ,

Mommy.

#39 Leo Tolstoy on 01.01.15 at 11:00 pm

Canadian banks that are tied to the oil sands are toast.

But none are. — Garth

Financial Post: Canadian banks could take up to 7% earnings hit from oil exposure

http://business.financialpost.com/2014/12/15/canadian-banks-could-take-up-to-7-earnings-hit-from-exposure-to-oil/?__lsa=fbca-89af

You have a wild definition of ‘toast’. — Garth

#40 Republic_of_Western_Canada on 01.01.15 at 11:03 pm

#11 dwilly on 01.01.15 at 8:58 pm

This didn’t really answer the question. Sure Corp profits are good, but that just begs the same question: how do you know it’ll continue.

Of course the answer is that it might, or might not. The simple, unsatisfying answer is that there are no better options. What else you gonna do with your money? Gic? Mattress? Shack and ammo? So 7% may or may not continue. But there’s no better place to put your money than a balanced, diversified portfolio as garth says.

That depends. If implosive deflation takes hold like many are starting to proclaim, a better risk/reward might end up being cash. Fiat money. Accumulated in currency of the hottest economy ‘du jour’. Nothing much is more diversified throughout an economy than cash.

#41 james on 01.01.15 at 11:19 pm

It’s actually not ‘logic’, as the sort of reasoning in investing and market timing is not deductive. It is inductive.

#42 Bottoms_Up on 01.01.15 at 11:29 pm

#6 Smartalox on 01.01.15 at 8:41 pm
———————————————–
Good answer, I think that answers Tim’s question.

#43 prairie person on 01.01.15 at 11:32 pm

Run, don’t walk to the bank, get a mortgage for this place. House prices in calgary only go up and even just a modest ten percent rise on a 20,000,000 house would give you a 2,000,000 profit. It is an easy flip. Tell the banker it is really just a short term loan, good collateral, in the hottest of the hot cities.
http://calgaryherald.com/business/real-estate/calgarys-most-expensive-mls-house-listing-20-million

#44 Bottoms_Up on 01.01.15 at 11:32 pm

#23 Rochelle on 01.01.15 at 10:06 pm
—————————————————
A month or two ago Garth wrote about 5 ETFs you could hold, and this included:

XIU (top 60 companies in canada)
S+P500
a bond etf
a preferred etf
a real estate etf

they are out there, just go looking.

#45 Smoking Man on 01.01.15 at 11:34 pm

DELETED

#46 Bottoms_Up on 01.01.15 at 11:35 pm

#16 Smoking Man on 01.01.15 at 9:27 pm
—————————————————-
As long as you claim the money over $10,000, there will be no problems. Legally you ARE allowed to bring in cash over that amount, and you are not taxed on it. You just have to claim it, that’s all.

#47 Erich Nolan Bertussi on 01.01.15 at 11:44 pm

….but gambling is a mental health issue…. …and no one in media saturation culture society is equipped with sound mental health… …at least not a statistically significant number of humans on this “modern” planet are mentally healthy… …couple that with manufactured desire you have an endless supply of unhealthy zombies gambling until the dopamine burns out… …does the dopamine every burn out…

This and many other rambling postulations, might mean something to some.

Truly where does hope lie in a monetary belief system?

ENB..//

#48 Bottoms_Up on 01.01.15 at 11:51 pm

#10 nonplused on 01.01.15 at 8:55 pm
————————————————
You seem to link a global drop in oil prices to what is happening with shale. Not sure if that is the case as shale is a small player in the overall global market.

Prices are low because lots of oil production has come on line. Supply has exceeded demand, and the suppliers are leaving the taps on.

I don’t think this oil pricing function is anything but a supply and demand issue. Once demand picks up, or supply comes down, prices will normalize.

#49 zee on 01.01.15 at 11:53 pm

Hi

you have mentioned this a few times of preferred paying in excess of 5% but never tell us the etf that is doing this. i have asked but you wont answer this question.

stop making things up or tell us which preferred etf pays excess of 5%.

I referenced bank preferreds. — Garth

#50 Shawn Allen on 01.01.15 at 11:54 pm

How Stocks Can Return more than the growth in the Economy

Ahmed explained:

The reason the stock market can yield a higher return than the growth rate of the economy is because the return includes dividends which are paid out. Only retained earnings contribute to growth.

*******************************************
Ahmed is absolutely correct.

Another point often missed that when GDP grows at 3% according to reports or forecasts , that is ALWAYS referring to 3% REAL growth. Add 2% inflation and you get 5% nominal economic growth in dollars.

Add 2% for dividends, and voila we are at the 7% return that Tim found to be unrealistic. In fact it is quite supportable on 2 or 3% real GDP with 2% inflation and 2 to 3% for dividends.

And as growth slows, dividends should rise.

#51 Washed Up Lawyer on 01.01.15 at 11:57 pm

#30 BG

You said:

“Nobody cares about your off topic posts, the sordid details of your life or your flawed philosophy.”

My new name is “Nobody”.

WUL

#52 45north on 01.02.15 at 12:01 am

nonplused : The marginal cost of oil has become higher than it’s economic value to the economy. Therefore people are choosing to walk or just not go anywhere as much rather than pay for gas.

this is a big deal! I checked the CAA for the annual cost of running a car – 20,000 km a year is $10,000.

http://caa.ca/car_costs/

so it’s not worth it if you drive 20,000 km a year to make $20,000. Unless you really really love your car.

In the 905 belt in the GTA, every house has two cars. So when people have to cut costs the obvious way is to get rid of the second car. So the house is less attractive, means it’s worth less.

Now Garth talks about a real estate bubble that affects all houses but there is another current which is the transfer of value from the suburbs to the inner core. Of cities. This could be seen in the US where the suburbs lost value to the inner core.

#53 Smoking Man on 01.02.15 at 12:02 am

#46 Bottoms_Up on 01.01.15 at 11:35 pm
#16 Smoking Man on 01.01.15 at 9:27 pm
—————————————————-
As long as you claim the money over $10,000, there will be no problems. Legally you ARE allowed to bring in cash over that amount, and you are not taxed on it. You just have to claim it, that’s all.

……..

Realy, I should just bend over.. Please sir a bit more desert, please don’t harm me. Your the best.. All the while fantisizing about stopping his face.

Note to self, don’t cross boarder on Jack.

#54 LeftyMarc on 01.02.15 at 12:10 am

Garth, what do you think of Climate Change Refugees moving to the Pacific Northwest, and how it will help Vancouver real estate?

http://globalnews.ca/video/1751096/experts-predict-climate-change-could-mean-bc-population-explosion

#55 Smoking Man on 01.02.15 at 12:18 am

Insanity is a beautiful place. You don’t God damn need to answer to anyone.

Floating, thinking in twisted dialectics.

Shit where did dialectics come from…

I love life… I’m going to die soon.. Without one regret.. I’m lucky…

#56 Pete on 01.02.15 at 12:21 am

Hi

you have mentioned this a few times of preferred paying in excess of 5% but never tell us the etf that is doing this. i have asked but you wont answer this question.

stop making things up or tell us which preferred etf pays excess of 5%.

I referenced bank preferreds. — Garth
————-
e.g. of a bank perpetual BMO.PR.K 5.04%

If you want an ETF, CPD.TO currently yields about 4.6%

#57 Snowboid on 01.02.15 at 12:31 am

#28 I love real estate on 01.01.15 at 10:21 pm…

This blog isn’t the best place to troll for Greater Fools!

#58 lionsroarin64 on 01.02.15 at 12:37 am

Will any banks here follow those in the motherland?

Seems 1.29% mortgages are now available in Blighty:
http://www.theguardian.com/money/2015/jan/02/mortgage-price-war-starts-banks-cheap-ixed-rate-deal

#59 Not 1st on 01.02.15 at 12:53 am

A stock doesn’t have a 7% return unless it had a 7% dividend. Capital growth meaningless and flutters away in the wind with every daily headline. But dividend cash is real and comes to my pocket every month. Like Kevin plenary says you gotta pay daddy first.

#60 Not 1st on 01.02.15 at 12:54 am

Sorry I meant Kevin oleary.

#61 Mark on 01.02.15 at 1:00 am

“The reason the stock market can yield a higher return than the growth rate of the economy is because the return includes dividends which are paid out. Only retained earnings contribute to growth.”

This isn’t true. For instance, a company can invest in plant and equipment which produces an output which naturally appreciates over time along with growth in the money supply. Said company can retain no earnings, and still experience the growth inherent to the growth in the value of the output. Retaining earnings is not necessary for growth. Although it certainly helps in terms of funding new growth opportunities when they present themselves. Or creating/maintaining balance sheet stability to weather downturns which are inevitable in any business (the income trusts seriously neglected this and most became insolvent because of such!)

In fact, when firms throughout the broad economy fail to re-invest, the long-term price of their product tends to rise, increasing profitability.

Another point often missed that when GDP grows at 3% according to reports or forecasts , that is ALWAYS referring to 3% REAL growth. Add 2% inflation and you get 5% nominal economic growth in dollars.

That’s correct. Now obviously large cap stocks probably won’t, in the aggregate, capture the entirety of economic growth in their long-term returns. Other factors include the effects of financing. Particularly long-term financing which, in a falling rate environment, decreases returns to equity. And in a rising rate environment, increases returns as debt depreciates as a liability on the balance sheet.

Add 2% for dividends, and voila we are at the 7% return that Tim found to be unrealistic. In fact it is quite supportable on 2 or 3% real GDP with 2% inflation and 2 to 3% for dividends.

The TSX P/E is around 15. So just inverting the P/E to E/P implies a return of 1/15 = 6.7%/annum. Add in a modest nominal rate of economic growth of 4% (2% real + 2% inflation), and you’re easily into a 10%/annum return.

As the housing bubble deflates, we may very well even see multiple expansion in stocks as the general population gets serious about investing for retirement. A large number of Canadian almost-retirees have eschewed stocks in favour of investing in housing. As the housing market continues its drop, the idea of ‘investing’ in housing should be put to rest once and for all, and demand return to the equity market in terms of investing for retirement. The Canadian stock market is severely cyclically out of favour, but it will eventually have its day in the sun once again.

And as growth slows, dividends should rise.

Exactly. Most large Canadian corporations are likely to gravitate to much higher payout ratios in the coming years. The Banks can pay out more as they probably won’t be growing their earnings in a consumer debt deflation. The O&G firms have few accretive investment opportunities at this point and can pay out most of their cashflow. Enbridge announced they’re going to a 100% payout ratio recently. The TSX60 (ie: XIU) consistuent companies currently pay out roughly 1/3rd of their earnings as dividends, so the dividend increases on XIU could be quite nice for many years to come. Which should drive the price of XIU and the indices upwards.

This is why I believe the TSX is headed much, much higher. Dollar for dollar invested, it pays 60-70% more than the S&P500, and is chock-full of firms with inverse correlation to long-term interest rates. And heaven forbid, when the cyclicals (gold, uranium, O&G, etc.) start coming back to life….

#62 Joe Anderson on 01.02.15 at 1:03 am

If I may, I’d like to flesh out the answer to Tim’s question just a bit. Basically, an index fund or balanced portfolio can churn out a return far greater than the whole economy grows because it is comprised of stocks and bonds from the highest quality, best run publicly traded companies whereas the whole economy includes a lot of failed, small ventures in any given year (up to 10% of newer private business fail in a given year in developed economies like the US) along with a lot of individuals who may not even grow their incomes faster than inflation. If you buy the index you are highly diversified but still getting the cream of the crop.

#63 Washed Up Lawyer on 01.02.15 at 1:04 am

Because I care. SM’s posts bring me back here and make me howl with laughter. I aslo get some insite onto life and what my son might face. Very high IQ and hated school every minute, every day with every fibre in his body. Brilliant, lovable and hard working kid. If I can instill some of SM’s courage and independence into him, he will be far better off than his dad with two obedience certificates.

Rock on SM.

Roast Beef to Nendo to 50-50. See you at the skate park.

WUL

#64 Mark on 01.02.15 at 1:07 am

“The Banks can pay out more as they probably won’t be growing their earnings in a consumer debt deflation. “

Sorry, please correct my previous post to say:

“The Banks can pay out more as they probably won’t be growing their balance sheets in a consumer debt deflation”.

The lack of balance sheet growth will likely not affect bank earnings, as risk premia charged to borrowers are likely to grow on account of diminished credit-worthiness. We already are seeing examples of this with many banks increasing their HELOC and ULOC rates across the board. As equity in housing continues to diminish, many borrowers will have few choices other than to accept much higher rates, even in the absence of BoC policy rate action.

#65 Mark on 01.02.15 at 1:21 am

“Financial Post: Canadian banks could take up to 7% earnings hit from oil exposure”

Sure. Earnings they can easily recoup simply by squeezing their adjustable rate borrowing customers. Customers who are increasingly trapped by virtue of the weakening job market. Additionally, as the economy deflates, the BoC is likely to engage in policy measures to reduce the cost of funding the banks. BoC policy rate cuts are practically a certainty given what has happening to demand.

So please don’t worry about the banks. They hold great assets. Usually secured debt, senior debt positions, CMHC insured subprime mortgages, etc.

#66 Karl hungus on 01.02.15 at 1:24 am

Im looking at all the charts and they all say tsx was flat for 2014. What am I missing?

#67 Ontario's Left Coast on 01.02.15 at 1:32 am

#25 Smoking Man
“…I’m a deviant, depraved bastard. I cover it up well.”

Do you?

#68 Lillooet, BC on 01.02.15 at 1:44 am

Banks can earn at least 7% per year because they charge 18% interest on credit cards and borrow from the Bank Of Canada at 2%. With overhead and bad loans, that easily works out to more than 10%.

Similarly, insurance companies can earn 7% per year because they sell insurance, then pay out a fraction of what they took in, many times denying claims and fighting people in court.

Oil companies can earn 7% a year because they extract oil at a cost of $40/barrel and sell it at $60 or $80.

So the average rate of inflation or economic growth may be 1 or 2%, but certain companies can do much, much better.

#69 Joseph R. on 01.02.15 at 2:13 am

#33 Shawn Allen on 01.01.15 at 10:27 pm

“What happened on March 9, 2009 was that the price of stocks were driven to a low. Buyers and sellers however were in balance as always. Not a single share was sold that was not also bought that day.”

You got it wrong. Stock prices fluctuate based on the amount of buyers and sellers: if there are more buyers (bid size) than sellers (ask size), the price goes up and vice-versa when the price goes down.

#70 Fortune500 on 01.02.15 at 2:23 am

Tim should realize that only a small proportion of the world has the spare change to actually invest at all. Those who can invest in large quantities are even rarer. In a global sense the owners of shares really are the ‘few’. Those still in the game after the 2008 meltdown are even rarer (again, in a global sense). His argument makes sense if it were true that everyone (even in Canada) was equally invested and acting as shareholders.

Anyways, Happy New Years Garth. Refreshing to wake up to some fresh-though provoking information during a time when the MSM is still sleeping off their New Years parties. Keep up the good work!

#71 kommykim on 01.02.15 at 2:42 am

RE: #49 zee on 01.01.15 at 11:53 pm

Hi

you have mentioned this a few times of preferred paying in excess of 5% but never tell us the etf that is doing this. i have asked but you wont answer this question.
stop making things up or tell us which preferred etf pays excess of 5%.
I referenced bank preferreds. — Garth

Here’s a good, but a bit dated, list of Canadian preferred shares:
http://www.cibcwg.com/c/document_library/get_file?uuid=823ffb68-e59e-45f0-817f-dcfc349fbdd6&groupId=92706

#72 Cordoroy cowboy on 01.02.15 at 3:16 am

I agree Smoking man is a nuisance on this blog. Can we get rid of him and bring back Mr. Lahey?

#73 Tony on 01.02.15 at 3:21 am

DELETED

#74 nonplused on 01.02.15 at 3:41 am

#13 Washed Up Lawyer

Thanks for the feedback but I am not sure I entirely understood it. I am only smart when I either have time to think about it or have thought about it before, and this is new. Perhaps I’ll take time to think and get back to you.

#37 Republic_of_Western_Canada

“sorry, kid”

Ha ha ha I wonder if the smiley faces work on Garth’s blog. Let’s try ;-)

I don’t wholly disagree with you, in fact I don’t think you are disagreeing with me. You are perhaps missing a few points.

You are correct oil has no suitable replacement in air travel at this point. I would be a fool to disagree. But I might suggest that air travel itself is replaceable. If not by other forms of transportation, perhaps Club Med is just not going to have any customers. The fuel has to be affordable, or the airplanes just won’t fly.

A couple of lifetimes from now there will be no hydrocarbons at present consumption rates.

I may be stabbing in the dark, but you are stabbing blind and I don’t appreciate the insults. Present your case without the insults and I might consider you an intellectual equal with a different opinion rather than a troll.

And PS don’t call your betters “kid”. As my dad eventually found out, you can only kick your kid’s ass so long before he kicks yours.

#48 Bottoms_Up

I don’t disagree, but a healthy economy always maximizes energy availability. Shale oil is admittedly on the margin. But without it production is going down not up. That means the marginal cost of oil is too high to be useful. Ergo, economic decline at least globally even if the US benefits for a while.

#75 nonplused on 01.02.15 at 4:07 am

Oh and for those of you who are wondering, no I didn’t actually beat my dad up, but I should have given the number of times he beat and whipped me and my brother. Instead what happened is I was asking him where something was while he was seeing of guests, I was about 15, and he considered the offense of the interruption so grievous that he beat the hell out of me once the door closed. I couldn’t move out at 15, but I did move out at 19 and never looked back. And he knew from that point on he wasn’t beating me again without a fight. (the 15 year old point. I’d beat the bastard to near to death if he ever raised a finger against me or my children again. And I am not a perfect parent but I do not ever hit my kids.)

#76 Millenial on 01.02.15 at 4:28 am

Tim,

The percent return is greater than the growth of the economy these days because of unprecedented debt levels. It’s an economy whose growth is fueled mostly by debt.

Without the credit bubble we’d be stagnating right now. Consider the age demographics of the US for example: http://www.pewresearch.org/next-america/age-pyramid/. Population pyramid is becoming a population rectangle, and the baby boomers are now solidly in that phase where they don’t spend a lot, which isn’t good for the economy. Demographics are everything.

So if there weren’t super-low interest rates and easy credit our growth (and return) would be pathetic. And throw on top of that student loan debt and generally increasing wealth inequality, which doesn’t help the economy at all.

Garth is exactly right about deflation, that’s what’s gonna hit us hard. Japan’s demographics are 20 years ahead of ours, and they’ve been experiencing what we’re gonna experience. It won’t be pretty.

Anyway, I wouldn’t count on 7% return moving forward.

#77 Fed-up on 01.02.15 at 4:47 am

#28 I love real estate

—————————————————————————-

You’re funny or simply deluded, whatever floats your boat I guess.

#78 pravchaw on 01.02.15 at 7:05 am

Ahmed & Shawn – you are both wrong. GDP and Stock Markets have only a loose (vs. tight) relationship. http://www.economist.com/blogs/buttonwood/2014/02/growth-and-markets.
Also google “equity” premiums – you get paid for taking “extra” risk in the market and you get penalized for “no risk” such as GIC’s and govt bonds. Garth is saying take more risk (and earn a premium) but not too much with a balanced portfolio.

#79 Chris Husen on 01.02.15 at 8:45 am

I know GIC rates are low right now. They are best 3.00% to 3.10% for 5 years.

My wife and I have 3 rental properties that we bought cheap relatively speaking meaning we bought them in the early late 1970’s and 1980’s for $75,000, $90,000 and $125,000.

We paid them off over 8, 12 and 14 years with no mortgage, line of credit line etc. them.

They are all worth now $425,000, $485,000 and $575,000 respectively.

They spin off net rents of $1,200, $1,400 and $1,800 a month.

We have a primary residence worth $500,000 and have no mortgage, debts, etc. meaning personal and on the rental property.

We agree that we went alot into real estate but after 1996, we started to put money away alot of money into RRSP’s, RESP’s, joint non-registered accounts and TFSA’s since 2009.

We have now accumulated $575,000 in RRSP’s, $70,000 in TFSA’s, $80,000 in RESP’s and $1,900,000 in non-registered accounts.

We were buying just straight longer term government bonds and zero coupon, residuals, zeros from 1996 to 2012 when rates were somewhat decent 4.25% to 8.25% but have stopped doing that since August-2011.

Most of them are in 5.5% to 6.25% range and we averaged out about 6.00%.

We are both doctors and were always conservative because of our large incomes but we saw after the big dip in the early 1990’s having all our money into real estate is not as safe as we thought, actually it is putting us more at financial assets, investments.

We have friends and family that have great incomes too, we are talking combined $400,000+ but have most of their money in real estate and are in debt in the tune of $800,000+ to buy these extra properties.

We are paying alot of taxes but we feel we are more fortunate in the sense that we have $375,000 a year being set aside from our 2 high incomes.

We just buy 5 year GIC’s and mid term bonds 11, 12, 13 years as it is hard with deposit insurance to do all GIC’s and get 3% plus rates.

We are still in our early 50’s and we will push down or overall real estate portion of our net worth from around 44% to 18%. This includes our primary residence.

If interest rates do not go back up to 2011 and prior levels in the next 18 to 24 months, we are looking at shifting some of our net worth, maybe 15% to 20% or so into dividend paying shares that are currently in the 3.90% to 4.00%+ range.

We have at least another 12, 13 years of piling up cash and this maybe our new best investment for our future.

#80 Chris Husen on 01.02.15 at 8:49 am

I made a mistake in what I was writing, having alot of our net worth into real estate ,it is actually putting us more at risk.

#81 Defrauded2 on 01.02.15 at 8:52 am

The American View of Canadian real estate

http://www.doctorhousingbubble.com/canadian-housing-bubble-canada-real-estate-oil-economy/

Reading Garth’s tea leaves?

#82 Mark on 01.02.15 at 9:03 am

“Banks can earn at least 7% per year because they charge 18% interest on credit cards and borrow from the Bank Of Canada at 2%.”

Banks don’t borrow from the Bank of Canada at 2%. They have to borrow every dime they lend out from depositors, the bond market, etc. Additionally, the competitive environment constrains the returns available to any industry. There is no guarantee that the financial industry will remain, in Canada, forever relatively devoid of meaningful competition. In fact, I would expect the banks and insurance companies, being long-term outperformers, to be future under-performers. Rising interest rates will profoundly damage insurers as well, so excess profitability in the industry will likely be mean-reverted in a rising rate environment.

#83 Mark on 01.02.15 at 9:06 am

“Im looking at all the charts and they all say tsx was flat for 2014. What am I missing?”

You’re likely looking at the TSX in USD$ terms (ie: the EWC ETF). In CAD$ terms (ie: XIU), it was up, on a total return basis, around 10-12%.

#84 Darryl on 01.02.15 at 9:07 am

Big lew’s Mom

LMAO
Love the post

#85 mitzerboy aka queencity kid on 01.02.15 at 9:09 am

Howcum?

Whazzamatta? You don’t speak English? — Garth

thanks garth my first respondz from u…
how becumming of you

#86 Mark on 01.02.15 at 9:12 am

“A stock doesn’t have a 7% return unless it had a 7% dividend. “

That’s not true. Retained earnings can grow the value of a stock, ie: book value per share, without cash actually being paid out to the owner. Retained earnings represent future resources available for a company to pay dividends.


Capital growth meaningless and flutters away in the wind with every daily headline. But dividend cash is real and comes to my pocket every month.

If a company has investment opportunities that are implied at rates of return greater than that of the market, why deny management the opportunity to use retained earnings to make those investments?

#87 Mark on 01.02.15 at 9:21 am

“We are still in our early 50’s and we will push down or overall real estate portion of our net worth from around 44% to 18%. This includes our primary residence.”

Lots of stuff in your post. I would merely say that you are dangerously correlated to long-term interest rates in most of your investment decisions, and even careers. Look for investments that bear inverse correlation to long-term interest rates, and get yourself more diversified, way more diversified outside of strictly the bond/fixed income/real estate “universe”.

Work with a fee-based planner. Get some diversified ETFs into your portfolio. Trim the under-performing real estate ($1800/month net on $575k is pathetic!), and you should do fine.

#88 Mark on 01.02.15 at 9:40 am

“Also google “equity” premiums – you get paid for taking “extra” risk in the market and you get penalized for “no risk” such as GIC’s and govt bonds. “

Not in Canada you don’t. The past 35 years has been characterized by no equity risk premium.

However, since there historically is an equity risk premium over the very long term, we can logically deduce that the equity risk premium is likely to be abnormally large for the next 35 years. After all, equities are riskier, and the love affair of Canadian investors with fixed income and RE will eventually unwind.

How large is the equity risk premium expected to be historically? Estimates range from between 3 and 6%. Hence, if the long-term equity risk premium is between 3 and 6%, and the past 35 years has seen no equity risk premium, an equity risk premium in the 6-12% is to be expected for the next 35 years.

In other words, “party time” for owners of Canadian equities, versus bonds which appear to now be spectacularly over-valued along with RE.

#89 Luc on 01.02.15 at 9:41 am

Are you one of the 1%? According to Stats Can, 261,000 reported revenues of $215.000 last year… http://www.ctvnews.ca/business/pay-for-top-ceos-rose-twice-as-fast-as-average-canadian-since-recession-study-1.2169482 In the article, they talk about pay raises…

#90 Detalumis on 01.02.15 at 9:48 am

#76. No Millenial, Boomers ain’t at the age where they don’t spend a lot. The bulk of them are in their mid 50s. People “don’t spend a lot” because they a) become ignored and invisible to marketers and b) are pushed out of society and told to disappear. I bought a whole entire wardrobe at 50 when I lost weight. It all came from online, from the U.S. and France because no bricks and mortar stores here think I should wear anything but bowling shirts, sweatshirts with hearts and puppies on the front and black stretch pants.

If you watch old movies up until the early 60s at the nightclub and country club scenes you will see that all age groups are represented, it wasn’t just 20 year olds out partying. So women bought fancy dresses and accessories well until old old age. Now you are expected to sit at home and watch TV in your slippers.

My neighbour is 78 and has an income of 108K. Not a single person ever tries to sell him a thing except funeral plots and duct cleaning but he has more disposable income than 95% of all millenials do. When older women get invited to somebody’s wedding as filler and gift gifters good luck finding clothes.

Just because Nana in 1960 was poor and dependent doesn’t mean that they will be that way forever. “Past behaviour does not predict future behaviour”. A 55 year old Canadian does not morph into an 85 year old Japanese.

#91 jess on 01.02.15 at 9:53 am

Spreading Sunshine in Private Equity
Andrew J. Bowden, Director, Office of Compliance Inspections and Examinations

Private Equity International (PEI), Private Fund Compliance Forum 2014
New York, NY

May 6, 2014

Why Is OCIE Focusing on Private Funds?

…” First, the Private Equity Growth Capital Council (“PEGCC”) itself has identified the number one myth about private equity as the myth that private equity only benefits wealthy investors.[6] “Mom and pop” are much more invested in these funds than people realize. PEGCC states it best: “Private equity investment provides financial security for millions of Americans from all walks of life. The biggest investors in private equity include public and private pension funds, endowments and foundations, which account for 64% of all investment in private equity in 2012.” To the extent private equity advisers are engaged in improper conduct, it adversely affects the retirement savings of teachers, firemen, police officers, and other workers across the U.S.

Next, the results of our exams indicate that because of the structure of the industry, the opaqueness of the private equity model, the broadness of limited partnership agreements, and the limited information rights of investors, we are perceiving violations despite the best efforts of investors to monitor their investments. They often have little to no chance of detecting the kinds of issues I discussed today on their own.
==============
“zombie” advisers, operating partners violations of law material weaknesses in controls over 50% of the time.
accelerated monitoring ,inflated valuations during periods of fundraising. “parking” read more

http://www.sec.gov/News/Speech/Detail/Speech/1370541735361#.VKaeM8lTvwo

#92 jess on 01.02.15 at 10:06 am

SEC Charges Investment Manager F-Squared and Former CEO With Making False Performance Claims

..”The SEC alleges that while marketing AlphaSector into the largest active ETF strategy in the market, F-Squared falsely advertised a successful seven-year track record for the investment strategy based on the actual performance of real investments for real clients. In reality, the algorithm was not even in existence during the seven years of purported performance success. The data used in F-Squared’s advertising was actually derived through backtesting, which is the application of a quantitative model to historical market data to generate a hypothetical performance during a prior period. F-Squared and Present specifically advertised the investment strategy as “not backtested.” Furthermore, the hypothetical data contained a substantial performance calculation error that inflated the results by approximately 350 percent.”

http://www.sec.gov/news/pressrelease/2014-289.html#.VKajXslTvwo

#93 crowdedelevatorfartz on 01.02.15 at 10:15 am

@#54 LeftyMarc
“Garth, what do you think of Climate Change Refugees moving to the Pacific Northwest, and how it will help Vancouver real estate? ”
+++++++++++++++++++++++++++++++++++

Yeah I saw that Real Estate drivel on Global “news” last night as well.
“California farmers are buying fields in Oregon you better hurry and buy your condo in downtown Van before their all gone!”
How pathetic is does the propaganda have to get before the fall? The last gasp of a floundering cartel?

Global “News” brought to you by Remax.

The big new should be the US economy raoring ahead and the inevitable interest rate rise. With Canada soon to follow. But viewers would yawn and channel surf.
Back to those condos! Buy buy buy before its too late.

#94 smoking man needs US tax help on 01.02.15 at 10:48 am

Hang on to those quarters SM, CBS is the least of your concern. The US is going to withhold something like 30% of your gross as taxable income. Head you lose, tails the US takes 30%.
Also, since SM has a distained for schooling we can forgive him for not understanding what a bad deal LV or AC is. Basic high school math shows with a 2% advantage to the house on any game, the expected outcome after 20 plays is .98 exp 20 = .667 of the original grub stake, even before the withholding bias above, which discounts the expected payoff again to.687 * .85 = .567 What do you expect of someone whose ego is wrapped around bragging about their smoking and drinking (and ignorance).
SM, I suggest you pick up some Coles Notes on high school math.

#95 Capt. Obvious on 01.02.15 at 10:50 am

7% for a balanced portfolio is a bit optimistic. There are a lot of inputs and various models. The real return on equities over the long term starting from today will roughly be the earnings yield plus or minus P/E expansion. The real return on bonds will be roughly the inflation protected bond return one could buy today. Add those asset classes with their weightings and add your assumption for inflation and you have roughly the nominal return expected.
From here managing 4% real return long term should be considered a good outcome. Call it 6% nominal.

#96 Tony on 01.02.15 at 11:12 am

DELETED

#97 Steve-0 on 01.02.15 at 11:25 am

Garth,

I never did buy my bond ETF (it all went to a prefered share ETF), but it is good to know I was on the right track with short term bonds.

Would you say that owning a house is like shorting bonds?

#98 What about CMHC? on 01.02.15 at 11:36 am

Happy 2015! Thanks Garth for this blog.

I am ready to stuff $5500 to each of our TFSAs on Monday to be invested in Vanguard ETFs.

#99 screwed on 01.02.15 at 11:47 am

Canadians (and Americans and probably many other people) are house horny.

So what?

People waste money or make bad investments all the time. At least the money they spend on the improvements to their dwellings leaves them with something tangible they can resell if need be. Worst case is taking a loss. Happens all the time. It’s still better than having wasted thousands on education or some sport fanatic with potentially nothing to show for in the end.

When guys were still crazy about cars rather than being crazy about the latest window treatments, it was the appearance of the the car that mattered to the guy.

Yes, sure some things have gone sideways. But a guy is still a guy and will be wired to fix something up or make something better to show what he’s accomplished. Otherwise, what’s the whole point?

If you’re a guy, you’re hard wired to upgrade or tune up what you’ve got in order to impress your family, your friends or the ladies (married or not, makes no difference).

As long as there are guys out there, we won’t stop improving how we look, how we live or what we drive.

Best to all in 2015.

#100 What about CMHC? on 01.02.15 at 11:53 am

#23 Rochelle “where to begin?”

go to CanadianCouchPotato.com look for ‘model portfolios’ or read this book: Millionaire Teacher by Andrew Hallam

#101 Kenchie on 01.02.15 at 11:56 am

“Ten numbers that will tell Canada’s economy story in 2015”

http://www.bloomberg.com/news/2015-01-02/ten-numbers-that-will-tell-canada-s-economy-story-in-2015.html

#102 Mark on 01.02.15 at 12:05 pm

“Canadians (and Americans and probably many other people) are house horny.
So what?

What’s the big deal? Well I’ll tell you — money that is squandered away on mal-investment in housing, is money that’s not available to build and maintain competitive industry. The obsession with RE and finance is one of the reason why the USA has lost much of its industrial base to China and elsewhere.

In the short term, the US has managed to prop up its economy with domestic consumption, and debt from abroad. But for how much longer can the strong dollar last, who knows. Its looking awfully toppy recently, and evidence is abound that the US economy is slowing dramatically (notwithstanding the current round of propaganda).

Q4 and Q1 US earnings are likely to look absolutely horrible, the result of the strong USD$ absolutely destroying the translated USD$ value of overseas profits, and the weakening domestic US economy. And on that basis, there’s little reason why the S&P500 will remain elevated.

#103 mnpr on 01.02.15 at 12:10 pm

Hi Tim… Not sure if Garth answered your question… Perhaps read Thomas picketty’s book “Capital in the 21st century”. He explains that the wealthiest 1% get that way because, as Garth mentions, the value of financial assets grow faster than the economy…. He goes on to explain that we should tax the ownership of these assets tomore equitably distribute wealth and therefore avoid possible societal upheavals. Not sure why assets grow faster than the economy (maybe picketty explained it,but to be honest it is a big book and I essentially skimmed it). But for some reason Garth’s recipe works and it is advisable to follow it.

#104 Mark on 01.02.15 at 12:11 pm

“Would you say that owning a house is like shorting bonds?”

No, taking out debt is effectively issuing/shorting bonds. Owning a house is more analogous to owning a long-term bond. After all, a house provides long-term cashflows (net actual or imputed rent), and eventually has a terminal value when you sell it, much like a bond will pay you back the principal at maturity.

Buying a house on short-term credit (ie: a Canadian 5-year mortgage or a variable rate mortgage) is effectively creating duration mismatch in ones portfolio, which can either be extremely profitable (ie: past 15 years of Canadian RE), or extremely loss-creating (ie: probably the next 15 years of Canadian RE). Rising equity, falling interest expense will likely give way to falling equity, rising interest expense. Of course, if you were able to match the financing to the duration of the house by taking out a long-term mortgage (ala the 30-year term mortgages available in the US), then your risk would be somewhat less and the duration mismatch risk would thus be vested with the bank.

#105 Mark on 01.02.15 at 12:32 pm

“The real return on equities over the long term starting from today will roughly be the earnings yield plus or minus P/E expansion. “

Should be higher than that, because of earnings growth that’s to be expected similar to real GDP growth. Plus of minus P/E expansion of course, but over the long term, P/E multiples are cyclical with the period being on the order of 60 years or so (ie: the investment lifecycle of most human beings, since most live to around 80 or so, and start their investing “life” in their 20s, albeit not with much money at first).

Changes in the relative cost of debt service also serve to increase or decrease earnings. For instance, firms with lots of long-term debt should experience rising earnings in a rising rate environment, due to depreciation in the relative cost of debt service. Firms financed on short-term debt in a rising rate environment, of course, have the cost of such debt as a drag against earnings.

Canadian (ie: TSX60-consistuent) firms overwhelmingly are of the type exhibiting negative correlation to long-term interest rates. Falling interest rates thus explain much of the TSX’s underperformance for the past 35 years relative to indices with constituents that bear positive correlation to long-term interest rates, such as the S&P500.

#106 Mark on 01.02.15 at 12:37 pm

” Not sure why assets grow faster than the economy (maybe picketty explained it,but to be honest it is a big book and I essentially skimmed it). “

Excess optimism for future growth, or likewise, excess pessimism, causes asset values to disconnect from the rates of growth in the real economy.

It seems to me that most of the so-called “1%” are people who are overwhelmingly concentrated in a few sectors that have experienced medium-term cyclical outperformance, rather than true long-term creators of wealth.

If history has its way, it is likely that 20-30 years from now, the ranks of the “1%” will be entirely different people (families) than we see today. As concentrated, non-balanced portfolios, typically the means by which the 1% got to be the 1%, as Garth points out almost every chance he gets, are extremely vulnerable to severe outcomes (whether positive or negative).

Even the famous Warren Buffet likely harbours the same fatal flaw in his portfolio. Over-reliance on the US economy. Over-exposure to the US financial sector. Over-exposure to “consumer” stocks. He may be a genius for allocating to those sectors and using leverage when he did, but without balance, excess wealth is temporary at best.

#107 Shawn Allen on 01.02.15 at 12:37 pm

Be Careful who you listen to

One of today’s main topics was Tim’s question how can stocks return an average 7% when the economy only grows at say 2%?

Ahmed gave an accurate and concise reply at 36 noting that companies on average grow as they retain earnings. The dividend is over and above that.

I added at 50 that the economic growth is bigger than people think. GDP reports always refer to real growth. Add in inflation and it is higher.

A number of people then chimed in with explanations that missed the mark. Mark at 61 was generally supportive but missed Ahmed’s main point.

Another item explained and agreed to by Garth was that the number of shares bought on a given day is always precisely equal to the number of shares sold. References to investors as a total population selling off stocks on a given day are simply mathematically incorrect. (They gotta sell to someone…)

Be careful who you listen to on this blog and elsewhere. There are gems of knowledge here such as provided by Ahmed and (ahem) a few others.

#108 joe campbell on 01.02.15 at 12:49 pm

i dont disagree with the fundamental message or recommendation, i just don’t believe you can support a claim of 7% return over a decade on a diversified portfolio.

to achieve a 7% return over this period of time (14 years) would mean 100 dollars becomes 260 dollars. FV = PV × (1 + R ÷ 100) ^t. meanwhile the market is up at best 60%.

based on the time period and the return, the simple return (without dividends) is 3.4%. i do not think you can produce a balanced portfolio in which dividends provide more then an additional 1.5%, which would be generous.

http://www.ssab.gov/publications/financing/estimated%20rate%20of%20return.pdf

nothing more more dangerous then unrealistic expectation.

#109 Chris Husen on 01.02.15 at 1:03 pm

Mark #87

CIBC had a report that real estate in Toronto will double in 25 years, so going by that metric, 3.52% to 3.75% from net rental income and another 2.81% from real estate prices appreciating, this is a 6.33% to 6.56% annual rate of return.

This is not even including rental rate increases on top of this.

This is not that far from the 7.00% annual rate of return so talked about on this blog.

You have to look at the total return of net rental income+capital gains appreciation.

I don’t think that 2.81% annual rates of appreciation on average over 25 years is unreasonable.

Our 3 rental properties have gone up more than 5 fold in 30 to 35 years.

This is about a 5.00% annual increase so 2.81% is only 56% of this amount, about a little more than half the last 30-35 years performance so it looks like a very likely outcome.

#110 Chris Husen on 01.02.15 at 1:11 pm

To Mark #87

We are not traders so our bonds, strip bonds, zeros etc. are held and will be held to maturity almost achieving 6% rates of interest right now and for decades still left until their maturities.

We are waiting for interest rates to rise which they seem that they do not want to do. I already explained that we are looking at dividend paying shares if we don’t see higher interest rates like back in 2011 or earlier when 4.6% to 5.00% was the norm.

We are also looking at tax issues for this shift in future years. We are sticking with 3.00% to 3.10% 5 year GIC’s and mid term bonds 3.00%+ so when future longer term interest rates rise, we will have them available to reinvest at much higher rates, 5%+ hopefully.

#111 Bob on 01.02.15 at 1:24 pm

Here is how the 7% yearly can be misleading. This is one extreme situation but it illustrate how the % per year increase can be misleading.

Start with investing 100 000 at a given point in a fund that track market index.

Year 1 we experience worst market crash -95%

You now have 5000.

Year 2 market goes up 50%

you now have 7500

year 3 market goes up 50%

you now have 11250

year 3 market goes up 100%

you now have 22500

year 4 market goes up 50%

you now have 33750

year 5 market goes up 50%

you nowhave 50625

After 5 year people tells you investing in the market is the gratest thing and average return for the last 5 years is 41% each year and that if you had invested 100 000 you would have well over 500 000 by now… but wait you did invest 100 000 and now have 50625??

How can that be?

Nubmer are deceiving, it all depends when and how you got in. Do you invest regularly or not? The return will be different for

everyone depending on exact timing. The % return although will appear great consistently.

If the market went down 95% you’d be more concerned with fighting people for bugs to eat. — Garth

#112 Jim B` on 01.02.15 at 1:29 pm

#50 Shawn Allen
#36 Ahmed

And when you add productivity growth to the equation (even if it only averages between 1% and 1.5% globally) seven percent long-term looks even easier to achieve.

#113 Mark on 01.02.15 at 1:46 pm

“Ahmed gave an accurate and concise reply at 36 noting that companies on average grow as they retain earnings. The dividend is over and above that.”

But firms can grow their earnings without retaining earnings. Simply through revenue growth arising from inflation in the value of the output.

Classic example of this is when a firm makes a large up-front capital investment (such as a power plant, railway, or telephone network), and then operates that investment over the long term. Retained earnings in such instance will be close to zero. Payout ratios of 100% (or >100% in the early years as non-cash D&A appears on the income statement) are perfectly acceptable if adequate liquidity can be maintained. Over the long term, retained earnings can be negative, yet such entity remains perfectly viable and solvent.

Back to the original point, the return of a firm over the long term will be its earnings. The net present value of a firm will be the discounted sum of all of its predicted future earnings plus the discounted terminal liquidation value. A stock trades on the stock market at a valuation that reflects investors’ perceptions of both the magnitude of those future earnings, as well as perceptions of what might constitute an appropriate discount rate on those future earnings and the terminal value of the business. Dividends are irrelevant to the discussion in the long term as eventually all net earnings will be paid to the owners of the business as dividends or will represent a contribution to the terminal value of the business.

Logically a firm will not pay a dividend if they can identify, internally, opportunities for re-investment with returns that exceed the cost of equity capital. However, the cost of equity capital can paradoxically be influenced by the mere payment of dividends, particularly to “income investors”, hence, firms often find it useful to take a balanced approach of retained earnings and paying dividends.

#114 Ontario's Left Coast on 01.02.15 at 2:13 pm

#79 and 80 Chris Husen
I’m super rich blah blah blah… I don’t recall anyone asking to hear your life story. By the way, congratulations on those three houses you bought when you were 16. Well done!

Detalumis: tired of hearing your tirades against marketers here and on the G&M. Just face it: you’re old and invisible. Stop complaining and do something about it already!

#115 Shawn Allen on 01.02.15 at 2:15 pm

Mark versus Warren Buffett

Mark at 106 said:

Even the famous Warren Buffet likely harbours the same fatal flaw in his portfolio. Over-reliance on the US economy. Over-exposure to the US financial sector. Over-exposure to “consumer” stocks. He may be a genius for allocating to those sectors and using leverage when he did, but without balance, excess wealth is temporary at best.

*************************************
Mark, you respond to everything 25 times a day. Sometimes you have something useful to say. But often you are wrong. Today you deign to give investment advice to Warren Buffett.

As I said, people need to be careful who they take seriously on this blog and elsewhere.

#116 Obvious Truth on 01.02.15 at 2:20 pm

Markets have very little to do with the economy in a GDP sense. They only account for a portion of it. In many countries government spending accounts for the majority of GDP.

They are for providing capital for companies to grow. As much as possible. Sometimes investors want our capital returned and other times we want the CEO to use it to grow and acquire more for us. You get to choose the companies and how they will likely operate. Some will tell you they try to achieve high single digit total return. Others would laugh at that.

ETFs allow you to buy a whole average basket. No need to differentiate or pick winners, losers, growers or those that return capital.

As for bonds. Who really cares. You have to pay to own German 5 years. Seriously.

#117 amigo - 7% is not worth it on 01.02.15 at 2:40 pm

7% is not worth even the minimal risk of being at times underwater….

do business my man and make 50% a year. buy on credit, renovate, flip and make a killing twice a year

yeah, I know, it take GUTS and Cojones which some guys do not have.. hahahaha

to hell with 7% – that’s the real inflation rate…

#118 Retired Boomer - WI on 01.02.15 at 3:05 pm

There, got my Tax stuff all ready….already.

2014 was a good investment year. Who can complain when your 60/40 account delivers in the middle single digits? No, not every year will be this good, but if it averages 6% this retired family will do well.

This is merely a supplemental income to my modest pension, and our social security. Does a retiree NEED to shoot out the lights? If he must, he has not planned well.

#119 Nomad on 01.02.15 at 3:15 pm

BNN: “Low oil means softening housing market in Alberta” – http://www.bnn.ca/Video/video-hub.aspx

You think?

#120 Nomad on 01.02.15 at 4:12 pm

#117 Amigo: “do business my man and make 50% a year. buy on credit, renovate, flip and make a killing twice a year”

House flips apparently made money for some. Less likely from 2015 onwards. Possible, but less likely, and more work.

I’m more impressed by Dolarama stock which made 427% in 5 years, or Amaya that made over 1000% percent. No need to deal with contractors. Just two clicks. Similar risk as buying a house on leverage.

Actually, risking your money on stocks as a huge advantage: you can buy on stocks on leverage and tax deduct your margin interest.

Since you are confortable with risk, take the money you made on the flip and put some on Intertain, Avigilon, DHX and AutoCanada.

#121 Doug in London on 01.02.15 at 4:20 pm

Despite knowing better, everybody buys high and sells low.
—————————————————————-
I still fully don’t understand that. There’s a shopping mall not far from where I live, and all last week the parking lot was full of cars as bargain hunters were scooping up good Boxing Week deals. Why is it different for stocks and ETFs? The latest good deals these days are HNY, XEG, and CSE. Don’t miss these bargains! The TSX is clearing out last year’s inventory and almost giving away these stocks and ETFs!

#122 Karlhungus on 01.02.15 at 4:25 pm

question for anyone, is there any concern about currency conversion when owning lets say a US index ETF as a Canadian?

#123 everythingisterrible on 01.02.15 at 4:25 pm

#75 nonplused

Thank you for that totally irrelevant piece of information about your daddy issues. Why do 5% of people use this financial blog as therapy? you and smoking man should get together, hug each other and have a good cry.

#124 Chris Husen on 01.02.15 at 4:32 pm

To #114 Ontario’s Left Coast

My spouse and I are 54 and 56 so we were married when we were 20 and 22 years old.

This is when we bought our first house. It is not exactly 35 years, it is around 33 to 33.5 years but since you want to be so exact, I was 23 and my wife was 21 when we bought our first house not 16 years old.

I can see math is not what your strong suit.

Get some education and training in a high demand, skilled profession and maybe you will have money too!

I know you like low interest rates because people with money are getting at least 50% to 60% less interest income than they would of otherwise but putting $375,000 a year because we work 120 hours a week between us is where most of our wealth comes from.

So I guess you have jealousy issues! Good luck with that!

#125 Smoking Man on 01.02.15 at 4:52 pm

Communists!!!!

Pearson, the most expensive airport in the world, 20 min to open the plane door. Two hours for luggage. And it wasn’t that busy.

Canada I tell you…

#126 Victor V on 01.02.15 at 4:53 pm

#121 Doug in London on 01.02.15 at 4:20 pm
Despite knowing better, everybody buys high and sells low.
—————————————————————-
I still fully don’t understand that. There’s a shopping mall not far from where I live, and all last week the parking lot was full of cars as bargain hunters were scooping up good Boxing Week deals. Why is it different for stocks and ETFs? The latest good deals these days are HNY, XEG, and CSE. Don’t miss these bargains! The TSX is clearing out last year’s inventory and almost giving away these stocks and ETFs!

======================================

Simple: Fear and greed. It’s hard wired into most everyone, which is why most will fail in their investment choices.

#127 Victor V on 01.02.15 at 5:01 pm

#124 Chris Husen

Perhaps not necessarily just jealousy but rather lack of context.

A couple in their early 20s today just finishing University and heading to med school are typically already in debt. Then adding on additional debt for grad school, means they get out in their late 20s with much to pay back. Granted, they will have the income to manage and so will catch up quick into their 30s.

In your case, your story does not mention how you were both able to pay a mortgage while also managing to pay for your degrees. Times were different then, so even if you were self-made without parental support, that’s unlikely to be the case for today’s young professionals who face a double whammy with respect to inflated education and housing costs.

#128 Whinepegger on 01.02.15 at 5:04 pm

Have a look at this chart to see how various investment classes have done over the last 10 years: http://awealthofcommonsense.com/wp-content/uploads/2015/01/Asset-Quilt1.png

7% is within your reach. As a matter of fact, if you doubt your own skills and want to get 7% without any fuss why not invest in the Saskatchewan Pension Plan? http://www.saskpension.com/index.php?page=spp.php Open to ANY Canadian, low MER (1%ish) and have averaged 8%+ over the last 28 years. Plus you get a tax receipt just like an RRSP deposit. Downside is that your money is tied up until you’re 55. But at over 8% average who cares? Invest and forget.

#129 Millenial on 01.02.15 at 5:50 pm

#90 Detalumis on 01.02.15 at 9:48 am

#76. No Millenial, Boomers ain’t at the age where they don’t spend a lot. The bulk of them are in their mid 50s.

********************************************

http://www.economist.com/blogs/freeexchange/2013/08/ageing-and-personal-finance

#130 Mark on 01.02.15 at 6:27 pm

“CIBC had a report that real estate in Toronto will double in 25 years, so going by that metric, 3.52% to 3.75% from net rental income and another 2.81% from real estate prices appreciating, this is a 6.33% to 6.56% annual rate of return.”

It is doubtful that RE will appreciate faster than the rate of inflation for the next 25 years. After all, RE appreciation has solidly beaten the rate of inflation for the previous 25 years, and its P/E multiple is sitting at roughly 3X that of the stock market. We know from Shiller‘s research into the topic that the long-term after-inflation return of RE, going back hundreds of years, is approximately zero. In other words, RE over the very long term should only be expected to appreciate at the rate of inflation, and periods of above inflationary growth must eventually be followed by periods of below inflationary growth in prices.

Of course, yes, you receive rents, and those will continue to be a part of the total return. However, a common mistake of most landlords doing pro forma calculations is to underestimate long-term maintenance inputs (are you allocating as a maintenance reserve 1% of the value of the property per year in your calculation???). And obviously the nature of such income is that it is fully and heavily taxable, compared to other forms of income such as that received from a corporation for business ownership.

RE, of course, belongs in every portfolio at the right price, but the numbers you quoted are symptomatic of the sort of over-valuation, and thus, high probability of poor returns, to face Toronto RE owners in the future.

#131 Ontario's Left Coast on 01.02.15 at 6:35 pm

124 Chris Husen on 01.02.15 at 4:32 pm
To #114 Ontario’s Left Coast
My spouse and I are 54 and 56 so we were married when we were 20 and 22 years old…

I can see math isn’t your strong suit either, seeing as you believe 56 puts you in your early 50s, genius. As for money, I’m just fine: well into six-figure salary with a multi-seven-figure net worth. What I’m not is a fore-flushing liar. Cheers, “Doc!”

I can see math isn’t your strong suit either, given that you think 56 puts you in your early 50s, genius.

#132 Mark on 01.02.15 at 6:36 pm

But often you are wrong. Today you deign to give investment advice to Warren Buffett.

Where did I give investment advice to Warren Buffet? I merely pointed out that the rich do not remain rich forever, and the reason for such is usually that they don’t diversify. Worse, most of the ‘rich’ who don’t diversify, adopt a sort of dogma against certain asset classes or investment ‘styles’ that end up working against them.

This is why wealth rarely lasts more than a few generations. Because it is in the nature of people to only chase winners, and to ignore sectors which have fallen out favour for the long term.

The logical inference from such is that a new crop of investors can become spectacularly wealthy by identifying the worthy investments that are passed over by the rich, invest in them heavily, and eventually supplant the ‘rich’ as the new rich themselves. Of course, usually falling victim to the same trap themselves if they do not diversify.

#133 Bastiat79 on 01.02.15 at 6:44 pm

The post and some comments fail to notice that Tim (and many others) is utterly confused between the rate at which wealth is created (how fast the tap is opening) and the rate at which it accumulates (how fast the bathtub is filling).

#134 Doug in London on 01.02.15 at 7:56 pm

@Victor V, post 126:
That’s odd, it’s greed that drives me to want to scoop up investments when they are dirt cheap!

#135 Jon on 01.02.15 at 8:05 pm

Garth never talks about people that buy high and never sell. Many people just want a suitable house and don’t look at it as an investment.

#136 Rochelle on 01.03.15 at 12:45 am

Thank you “What about CMHC?” and “Bottoms_Up” for your recommendations.

Much appreciated!!!!