Entries from April 2016 ↓

The crime

SUN modified

Bob’s a cop in Metro. A detective, actually. Prides himself on being absolutely meticulous, ethical, researched, by-the-book. “Gut means nothing,” he once told me. “I follow the evidence.” You sound like a bad cop TV show, I said. Bob looked like he wanted to arrest me.

Anyway, when it comes to investing his gut wins. Two years ago he loaded up his and Cheryl’s non-registered account and a TFSA with a single stock. Apple. “These individuals will be changing the world as it is presently constituted,” he told me in cop-talk. “We will be there.” Despite a huge concentration risk in having a couple hundred grand in one stock, they did well, seeing shares rise from just under $100 to about $130. Sell, I said. Take your gain, diversify and retain a little if you want.

Bob refused. Two reasons. His fav stock was gonna travel to the sun making him rich, and second, there was no way he was going to pay capital gains tax on his 30% increase. “That’s a crime.”

Well, you know what happened. Apple peaked at $132, toppled into the 90s, regained some ground and yesterday was creamed for a 6% loss. In a single hour of trading, this company shed $43 billion in capitalization after a lousy earnings report and (worse) losing the faith of the markets. As great as the Apple guys are, they’ve apparently run out of juice. Smart phone sales have plunged, the iWatch is a toy and many people now believe the stock will turn into a doorstop  – a dividend-producing monolith no longer cool or spiritual. And no big shareholder profits.

But this is not about Apple. It’s about investing. Bob is now underwater by a buck or two. His 30% capital gain has disappeared and he’s gone two years without anything to show for it. Now he’s afraid to sell because he does not want to take any loss and deludes himself the stock will shoot higher. It’s a guy thing.

Holding individual securities is not investing. It’s gambling. On Wednesday, for example, while Apple was being chomped, the US market as a whole nudged higher. The exchange-traded fund called XSP, which owns the 500 biggest American companies, actually gained on the day while Apple investors were wailing. Once again being diversified was absolutely the best defence against unexpected events, like a falling fruit.

And while we’re talking portfolios, make sure you stay balanced, as well. As I’ve advocated, having a 40% weighting in safe fixed-income assets, and 60% in growth-oriented stuff (like XSP) is a sound long-term strategy. The fixed portion should be roughly half bonds (government, corporate and high-yield) and half preferreds. This will pay you an income stream (interest and dividends) of roughly 3.5% – which means the growth assets don’t need to work so hard to get you to an overall decent return.

Now some visitors moan about the ground preferred shares lost last year when the Bank of Canada dropped interest rates twice. Being rate-sensitive, they shed capital value even as they continued to churn out a nice 5% dividend. Naturally, 2015 and early 2016 were giant buying opportunities. The US Fed raised its rate in December and will do so twice more before the end of the year. Canadian five-year bond yields have doubled since the winter. And the price of preferreds has swollen by 15%. There is quite a bit more to come – plus the 5% dividend and the tax credit it brings.

You should maintain a fixed-income component to your portfolio because (as stated above) this is not about gambling. Rather investors should be looking to reduce volatility and motor along with annualized returns of 6-7% over the decades to come before the money is needed. Having bonds – even with low yields – means overall portfolio swings are minimized, along with your emotions. A 60/40 blend produced an average 6.3% over the last six years, two of which (2011, the US debt ceiling crisis and 2015, the oil collapse) sucked. As it turned out, Bob would have been far wiser to creep along with balance and diversification than to throw everything on the sexy single stock.

So where from here?

Things are definitely looking up. Oil has topped forty-five bucks for the first time in ages. The dollar has spiked to 79 cents US, the TSX has recorded gains so far this year double those of US markets, and young Justin will spend more money than you ever imagined over the next four years, pushing liquidity into the system, prompting the Bank of Canada to move next year and rewarding investors who stay the course. Donald Trump will lose. Global growth will stay positive. The US recovery – which created 2.5 million new jobs last year – will continue apace. Adele will hopefully have another baby and retire. It’s all good.

Investing is easy. Just don’t think you’re smarter than everyone else.

In the bag

CAT BAG modified

Want to feel superior to all the poor souls who write me? Sure ya do. Let’s dive into this week’s mail bag.

“A co-worker recommended I contact you with regards to what is left over from the sale of our cottage,” says Miranda. “It isn’t a substantial amount, but it does represent an opportunity that I would like to gently nurture into something worthwhile.

“We have choices – pay down the mortgage, a TFSA, major renovations to the house which would be awesome, and/or what we are currently doing is letting it sit in the bank doing nothing. Eventually, enough weekend getaways and small purchases, I know it will be gone. Currently, my husband is not working, and that is making it even harder for him to agree to anything. I believe we can live on one income for the time being and still be able to do the renovations and live well without squandering our hard earned nest egg. Would you be willing to set us in the right direction?”

Sure. This is easy. The fact your husband’s unemployed should be the overriding factor. Your finances are uncertain, and while you can live on one income (for a while) it’s hardly the time to be throwing money at an awesome home reno you obviously don’t need. Forget that.

As for paying down the mortgage, why? It’s won’t reduce monthly payments and will increase equity in an asset that probably constitutes most of your net worth. Nope. Too much concentration risk. Besides, if the home loan has a rate of 3% or less, your money can work harder inside a tax-free account.

So, yeah, that’s the best choice. Between the two of you there’s close to $100,000 in contribution room. Stick the cash in there, invest it according to the balanced-diversified mantra of this blog, and don’t even think about taking it out for home improvement. Job one is finding work.


Here’s Bogdan, 35 years old, with wife and family – an immigrant dude smart enough to start reading this blog four years ago when he came here. And what says ‘Canada’ better than ‘GreaterFool’?

“We live in Vancouver. At the moment me and my wife have our TFSA maxed out (almost 70k invested in ETFs , preffered shares or other stocks) and also opened a RRSP this year for me (aprox 11k). We also have some cash (25k) in our banking account.  We also have a 2y old daughter. Between both of us we make aprox 100k. I am thinking in investing into house as an investment not to live in. One location that I have in mind is Nanaimo. If you could provide an opinion it would be great. I am sure that there are some other people interested in learning how to invest in real estate.”

Bogdan, baby, your total net worth is only about $100,000 and you’re considering blowing it all on a house in Nanaimo? That you won’t live in? You’ve done great since getting here, so don’t blow it now.

For starters, buying a house in Diana Krallville is not an investment. It’s a folly. You’ll never get a positive ROI from rent, and there’s no promise of future capital gains. Moreover, there are closing costs, commissions, insurance, maintenance, property taxes and evil, weird tenants to deal with. Putting all of your net worth into a single asset means no balance, no diversification. And how about your kid? Should you not be responsibly starting an RESP for her instead of subsidizing some biker-renter on the Island?

Finally, have you been to Nanaimo? Best strip clubs on the coast. So I’m told.

By the way, Bogdan, you should check out this note, from Jennifer – also in Vancouver.

“The absolutely insane is absolutely normalized here. It’s scary. Hubby and I (late 30s proper professionals) earn $245k gross, have no debt, won’t buy into Vancouver, and regularly get told we need to buy a detached house in Vancouver now.  All of our colleagues, professionals in their late 30s/early 40s earning $200k+ together, that have bought into Vancouver have only done so with family $ or they bought in over 10 years ago and reaped the rewards. We could be jealous of that, but then again our housing costs all in account for about 8% of our gross income. We sleep at night, save and invest like crazy, and don’t think twice when booking a vacation. Yet we’re considered the crazy ones here. Are we?”

Crazy like foxes, Jen. Keep earning, investing and waiting, debtless. Your day of retribution will come.

Meanwhile in Toronto, Ethyl and Jonnas already have real estate but because it’s rutting season and juices are flowing, they want more.

“Hey Garth, my wife and I (47 & 48)  wondering if you could share some thoughts on a decision we are contemplating….we own a home in Toronto – paid it off a while ago and have built up value in our other various investment accounts nearly equivalent to the value of the home.  We are thinking about a 2nd property in Collingwood….as we love it there on weekends ski/hike etc (it’s  4-season..could likely be a retirement home for us).   Would mean about 100k loan using some cash and other short term investments we have.  But…the market there is nuts too.  Sales in a few days, listings with multiple offers…..we have said repeatedly we will offer only where we feel there is good value.   We don’t expect too much in terms of investment return.  Should we just drop that pursuit entirely and continue to rent when we need to?”

It’s hard to find a more efficient place to flush away money than a cottage. But people continue to do it. Sales are up about 5% in the region year/year while listings are down almost 20% – resulting in quick sales and the occasional bidding war as the males lock antlers.

Cashing in your investment portfolio as well as adding new debt to get a place you might spend 20 weekends in (or 13% of the year) is hardly rational – unless you have a seven-figure portfolio salted away on the side. Trying to justify it as a “likely retirement home” two decades from now is lame. Nobody wants to retire in the rocks outside of Collingwood. Trust me. And once real estate markets turn, it’s the recreational segment that is squished the earliest, and the hardest. You’re far better off from a net worth and risk standpoint to rent.

There is no ‘good value’ among the pines, unless you’re a beaver.