Entries from August 2018 ↓

Smoke & FIRE

Brittany’s 28, married, pregnant, rents, has an inuksuk tat on her forearm and two degrees. “We want to retire in seven years,” she said in our meeting.

After I’d mopped up the coffee exiting my nose, we continued. Perhaps she had a million or two coming from her mom. Was that the plan? But, nope, it was all desire, visioning, entitlement, expectation, hope and ignorance. B and her furry husband actually expect they can go from (literally) zero savings or investments now to a million bucks in less than a decade, while raising a family. That’s the first mistake. Ain’t gonna happen.

And then, they believe they’ll be able to live off a seven-figure portfolio for the rest of their lives – about 40 years – and have a cool time doing it. Mistake two. Lastly, they figure if you don’t have any investments you should go to an Investment Advisor and get some. Like Whole Foods. Or the Apple Store.

This, trust me, is not an isolated instance of money myopia. It’s all over Moisterville these days. An amazing number of people who have barely started into their careers are looking hard for the exit. Not only do they focus on quitting, instead of achieving, but there’s no concept whatsoever of how long, expensive or full of crap the average life turns out being.

I have an admission, though. This is partly my fault.

Years ago I took on as clients two aggressive, self-confident, unusually irritating Type A kids then in their late twenties working as IT flunkies for the banks. They eschewed buying a house, lived on air, saved prodigiously, and pumped every extra dollar into their balanced portfolio, which in a few years plumped from $500,000 to a million. They brought champagne to my office, then went to their jobs and loudly quit. Boom, Retired at 30.

This was followed by travelling, partying, book-writing, partying, cavorting, more travelling and then some partying. When we met they enthused about wanting to help other moisters live their dream. So write a blog and start a revolution, I said. And they did. The Millennial Revolution.

Now I can’t keep up with emails like this:

Love your blog. I’ve been reading it for years and really respect your work.

I never thought I’d write to you, but I’ve been thinking about something recently and wondered if you would give me your two cents on the topic.  Perhaps some other blog readers would be interested in it, too.

I’m sure you’ve heard of the financially independent and retire early movement (FIRE is what a lot of bloggers call it) that’s popular with millennials.  What do you think of it?  My partner and I are playing with the idea.  We’re in our early thirties, live in Toronto and rent.  I’m currently home with the kids and my husband works.  We want to move to a nicer neighbourhood for green space and better schools, but we can’t swallow the price tag because it’s so obvious prices will come down.  What’s the point in this rat race when a family like ours feels like leaving the city?  We work in finance and our jobs only exist in Toronto, which is why we’re thinking about FIRE and moving to a nicer city.  Are we nuts?

Many thanks,
Liz

So the FIRE movement has definitely caught a wave. Central to it (until Doug Ford arrived) was the notion of a guaranteed annual income – a basic amount every citizen would receive for, well, citizenship. Kind of like a gold star Participation Award for being special. And aren’t we all?

It’s a corollary of the gig economy, in which the notion of career is pffft. Resumes are cacophonous. Officeplace longevity is scorned. Pensions aren’t even on the radar. But there is a curious attraction to Big Government and a belief the future is all about sharing, not rugged individualism. An entire generation, and no cowboy boots. Few conservatives. Big expectations – like those of Liz and Brittany.

At the heart of FIRE are two tenets (which my now-famous clients excelled at): saving and side hustles. Nobody’s going to retire in their thirties without spending nothing, salting away everything and mooching incessantly. Now you might understand why 44% of Boomers still have spawn in the basement. As for the hustling part, FIRE devotees would rather run a website flogging junk financed through PayPal or supported by clicks than go to work for some company in exchange for a paycheque. Selling time is so, like, paleo.

Of course being cheap and non-linear makes for lousy spenders. So FIRE is also about anti-consumerism and do-it-yourselfism. Why pay anyone to do anything when you’ve got YouTube and Google? Better to life-hack, get by, build the nestegg, then check out.

Is there something to learn here? Maybe. But really smart people spend their lives doing what they want, erasing that line between work and the rest. Retirement for them is irrelevant.

By the way, my two clients have been living off a modest 4-5% income stream from their million bucks, yet now work far more hours than they did when the bank owned them. They’re obsessed with creating a FIRE franchise, online, in speeches, books and the media. The party ended. The big gig started. Selling vapours is really hard work. Who knew?

No easy choice

Pete asked me this week about dollar-cost averaging after he got a honkin’ big refund from the CRA for moving expenses. “Man, they took forever to respond,” he says, “but now I have this money and wanted to ask you if I should invest it in chunks to avoid making a mistake.”

DCA, of course, is gambling. By withholding money from a portfolio, where it can be doing some useful work, you hold it back in a gamble assets will get cheaper. But if they rise in value you pay more, or continue to sit on cash. So you might win, you might lose. If history is any guide, this strategy’s a fail. Especially lately.

In the past 12 months the Dow has gained 22%, the S&P 500 is ahead 21% while the tech-heavy Nasdaq (despite Facepalm) has surged 29%. Even the laggard market on Bay Street has added 12% since this time in 2017 – which is more than you can say for houses in the same city.

Markets don’t go down just because they go up. The conditions which led to the gains have to change. So far, when it comes to equity markets (especially American ones), no change. In fact this week investors are feeling frisky.

Stocks made new highs on news of the Trump US-Mexico trade deal. As mentioned here yesterday, the betting is Canada will join in. In fact, we have no choice. Failure to do so will result in punitive auto tariffs and tumbleweeds blowing through the empty streets of Oshawa and Windsor as unemployed CAW members shuffle hollow-eyed towards the water. A new NAFTA, called something else, is a done deal.

But the political cost to T2 could be excruciating. Trump has a hate-on for supply management. If Trudeau punts the dairy industry he’s toast in much of Quebec – where a majority of the 75 federal seats went red. This might also fry young Andrew Scheer, who won his Conservative mantle in part with the support of the milk guys (over Max Bernier, who just stabbed him). Losing Quebec means losing government for the Libs. Thumbing Trump, however, is perilous for the entire economy. And the government. No easy choice here. The deplorables are storming the gate.

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The latest from Victoria: Sales are down so far in August by 21.5% (over last year). The number of listings is up 32%.

In Calgary sales in August are off 8%, listings are up 22% and the time it takes to sell a house has advanced 24%.

Vancouver is a mess.

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“I’m a big fan of your blog – I usually read it out loud each night to my wife before we go to bed,” writes Julius. This worries me.

We are both 30 and sold a home in Ottawa in 2014 when I was transferred to Toronto. We had around $225k in equity after the deal was done and attempted at that time to purchase in the Big Smoke, eventually giving up after losing several bidding wars. We ended up renting a loft (ya I know…millennials) that we thought would just be a holdover for a year or so, but we’re still here 4 years later. We both work downtown and we would like to start a family in the next couple of years and our loft, although great for us now, is definitely not a place that we can raise a baby.

We invested the equity from our house and as a result, have about $350k in accessible investments. Over the last couple of months, we’ve been moving to a cash position on roughly half of that amount to be prepared in case we see something we want to buy (and because of volatility fears due to the orange man in the white house). In addition, my wife has a defined benefit government pension and our gross combined annual income is around $225k/year.

We’d like to buy a house soon, ideally in our neighbourhood (Leslieville/Beaches). We have recently reached out to our agent  (who is a family friend and someone we trust) and started looking for houses. Like our agent, we truly believe the value the of homes in our area is steady and will outpace the rest of the GTA market. I don’t see commuting times getting better and think people will be willing to pay a premium to live in houses near the core (albeit in a tiny semi). Although I religiously read your blog, I can’t help but have a FOMO feeling. Despite trends in the GTA market, when I look at the TREB data for these specific neighbourhoods, prices are continuing to rise with relatively low average days on market and many sell over asking with multiple offers.

We expect that if we do proceed with a purchase, that we would live in this house for at least 10 years – which should give us enough time to ride out any short term correction. But…the price-tag to get something in this neighbourhood (a semi) that will work for us will be in the order of $1.2M. We would put down 20% to retain some of our investments in our TFSA’s (I figure there’ll be about $50k) and feel comfortable with the monthly payments that come with a mortgage of this size.

I know this seems very much like we will be putting all of our money into a singular asset, which from reading your blog I understand is a big mistake…but I don’t think we’re quite as bad as some of the cases I’ve seen you write about. Maybe I’m kidding myself? But if we can’t do it in our financial position, then who is buying these houses? I’d love to know your opinion.

Please feel free to use any or all in your blog.

If you actually recite this blog to your sweetie in bed (A really. Bad. Idea.) be careful. Lysistrata, dude. It’s out there.

First, what’s the motivation for buying, taking on a $1 million mortgage, gutting your investments and morphing into your parents? A baby, apparently. But baby won’t know or care if you live in a loft for a year or two, nor require its own room during that time (or so I’m told). This urgency is totally manufactured.

Is it FOMO then, fear if you don’t buy now you never will?

Illogical, since we know the conditions that created stupid prices – record-low rates, sloppy lending practices and rampant speculation – are now behind us. Do not fall victim to realtor self-interest (and never hire a friend to buy a house or invest money for you). Ignore the media. Use common sense. Do you really want to spend a decade in half a house in an intensely urban area inhaling the neighbour’s pot smoke, raising a young child?

Financially, this could be a disaster as much as a boost. Your wife’s DB pension might go poof if you decide to have a couple of kids and eschew day care. Could you survive – house overhead, a seven-figure mortgage, the costs of raising children while saving and investing for the future – on one income? What about job loss for you? If you have a million-dollar mortgage and less than a hundred grand saved, where’s the Plan B?

The bottom line seems simple. You’re free, earning lots of dough, with growing investments, living in a place you like with no borrowing or responsibility. Your life has flexibility and liberty. Your work sounds full of promise and meaning. If you stayed on the present course your net worth would be at least $4 million by age 60, providing an eternal income of two or three hundred thousand.

But you want a baby, a semi and debt? Ugh.

This is why nobody should ever read this blog in bed.