Entries from November 2018 ↓

Mill Day

Hide the denture paste, prostate cushions, Depends, penile splints and fecund RRSP accounts, Boomers, because it’s Mill Day here at GreaterFool! You wrinklies have had six decades to figure stuff out, and most of those years were, well, groovy. Now the kids are having a tough one coping with stupid house prices, a lackluster economy, soaring rents and a pile of debt for uni degrees that look dubious (to be kind). Alas, they hate us. Such a relief that we don’t care.

Anyway, let’s spend a few minutes trying to make amends with some seasoned, Boomer-tested advice. Here’s Nat:

Hi Garth, I really enjoy your blog! However, most of your advice is for people who have large savings or are interested in real estate. I was wondering if you could share some advice for first-time investors with smaller savings?

I’m a 20-year-old college student (Business Administration & Marketing) with a general understanding of how the markets work, and $9,000 in the bank that I want to put to use. I currently have $3,000 in a TFSA, using a one-year GIC with a yearly interest rate of 2.5%. I make an average of $25,000 per year, still live at home and will for at least four more years (in the Windsor area). I am talking to advisors from different banks as part of my research. But I was hoping you might be able to share some insight on to which areas I should invest in, and when to start. I also have no plans on buying a home for many years.?

Thank you for your consideration, PS; I believe a puppy picture would make a nice header for this topic.

Sounds like you’re studying something useful, Nat, at the same time as you’ve got a PT job and having mom wash your shorts. Good call. As for your finances… (a) take all of the bank cash and dump it into your TFSA. It’s the best vehicle to use since all growth is taxless and RRSP contribution room should be saved for future years when you are earning more than slave wages. (b) Trash that awful GIC since you’re wasting valuable TFSA space. Being a moister you should own growthier assets, then ignore temporary volatility (which most of the doddering old farts who read this blog seem incapable of doing). (c) And stop talking to [email protected] You’ll end up owning a few expensive, dodgy bank mutual funds sold to you by someone who owns a Kia. ETFs are far superior – cheaper, more liquid, nicely diversified.

Given the small amount you currently have, five funds would be sufficient. Put a quarter into US equity (lots more to come), the same into the Canadian market (it’s cheap), 20% into preferred shares (oversold, on sale), 20% international (currently battered) and 10% into REITs (solid). (This blog does not recommend individual ETFs, for a host of good reasons. Go with the majors. You can figure it out.)

Finally, never tell your mom you’ve become an investor. You pay no rent. Don’t blow it.

Now here’s Patrick, also a mill but shacking with his GF in DT TO. “Yes,” he says, “I know we should be married.” Compared to Nat, these kids are rich.

Together we have a household income of $300-400k. We are both in sales so it varies.  And have combined savings of around the same – all in a mix of maxed TFSAs, RRSPs and cash savings. Today we rent a nice, one-bedroom place that is just enough room for us at $2,200.

As said, I am bearish about the housing market generally but I have fallen for the idea of buying a cottage, renting it out on Airbnb when we can and keeping our rental in the city. Neither of our families have a cottage there and we have flexible arrangements with our jobs. This keeps us enjoying the flexibility we need, a place we can retreat to and (hopefully) not be over extended.

After six months, and as many trips, we have landed on a decent waterfront that we think we can get for $650,000. We plan to put about $50-60k into it and hold for the next 5-10 years. Now that it’s the colder side of a cold Fall market, we think it’s the time to strike.

I know cottages are a very esoteric property type, with value depending lake-by-lake, but what are your thoughts on that side of the housing market? I am worried that vacation homes are more sensitive than normal homes and that current values are just due to the goosing we have seen in southern Ontario. However, I am fearful that the worst has happened, like how it looks in the GTA. And that these types of homes will become more in demand (with very limited supply) as Millennials look for city getaways and boomers look to downsize. Is it a great time to buy or still too early if one is risk averse?

I’d love to know your thoughts. We are on the fence and need a brutal assessment

You’ve come to the right place for brutaity. Let’s begin.

Why are you buying a property that’s hundreds of km distant, requires constant maintenance, is costly to insure and finance, that you don’t need and will never live in full-time? Simple. You’ve got real estate lust and believe you can’t afford what you want in the city.

It’s a myth and romantic fabrication that you’ll spend bucolic getaways in the woods with the bugs, since it’s going to be AirBnB’d to a stream of messy, disrespectful, cheap vacationers. Yuck. As for cottage FOMO, you’ve got to be kidding. Secondary properties are far more volatile than those in an urban location, and take a hit when the economy slides as people realize they were piddling money away on a rec property. Just like a boat. Or a horse. Might as well dig a hole in the bush and shovel your $400k into it.

Dude. Buy a house in timeless Leaside. You can well afford it. Get a plastic moose for the backyard. And marry her.

One down. Two to go.

Marianne runs two car dealerships (not GM) and seems good at it. Ten years from retirement, she has business equity and an investment portfolio of just over two million. Sweet. But M suffers an affliction. She’s a Type A person who makes quick, gut decisions and takes her own advice above all others.

After doing fine for a year, in October her portfolio got the shakes like everything else. She called. “It’s down 2%,” she bellowed. “What gives?”

That was an easy answer. US stocks were blowing off froth in an overdue correction. Trump was being Trump, whipping up America for a Mexican invasion. The US midterms were happening. Interest rates were rising. Trade wars were continuing. Oil prices were swooning. Virtually every asset class was being blindly dumped as markets went risk-off.

Ignore it, I told Marianne. You don’t go and shutter your dealership when a seasonal slump hits, but rather hang in and anticipate sales will improve. Same with your portfolio. It’s balanced and diversified and boring. Relax. By the way, I said, my accounts have exactly the same stuff as you – and I’m not going to cash.

But she did. Marianne took a $40,000 paper loss and turned it into a real one. That, I told her sympathetically, was simply and truly dumb. ‘You’ll regret it.’ Two weeks later, the assets she punted restored. The forty grand she lost would have been returned to her portfolio. But she tossed it away.

Now she’s got millions sitting in a cashable bank GIC paying 1.9%, fully taxable, not even pacing inflation. And here I thought she had oodles of business acumen.

Why, I asked, did you do that? Answer: she read on some doomer blog that markets would crash. The US was going into recession. Things would get terrible. It was time to run and hide – despite the global economy growing, more Americans working than at any time in half a century, stocks near record high and corporate profits shooting out the lights. In the end, fear won.

What’s the story now?

The market rally in New York and Toronto on Wednesday was monumental. Perhaps pivotal. It occurred after Fed boss Jay Powell gave a speech saying US interest rates – after nine increases – were ‘just about neutral’. Neutral is the Holy Grail for central bankers – the point at which the cost of money neither encourages nor discourages economic activity. It was only a few months ago that the guy was convinced we were ‘a long way’ from neutral, leading markets to brace for five or more additional hikes.

So what changed?

The market roiled. Trump tweeted. Oil swooned. US house sales fell as mortgages swelled. The Fed looked at the impact of its actions to date and apparently reconsidered its aggressive path forward. So while everyone expects another rate hike in December, there likely won’t be three or four more next year. The markets roared higher as one big negative faded.

Now, two more to go.

The next Big Thing happens Saturday at the G20 summit in Buenos Aires – probably the most anticipated political gabfest in decades. In the midst of a global trade war that could get worse – or dramatically fizzle – Donald Trump will sit down to dinner with China’s boss, Xi Jinping. If they don’t see eye-to-eye the US leader has said existing tariffs on Chinese goods will double and billions more be hit. But if they do agree on a trade framework (as Trump has done with the EU and Canada/Mexico), markets will cheer again.

Here’s the latest: “President Donald Trump said he is very close to “doing something” with China ahead of a planned meeting with Xi Jinping, raising expectations again that the two leaders may be able to hash out a ceasefire in their trade war.” (Bloomberg)

The third hurdle is Brexit. UK leader Theresa May has the backing of European leaders for a workable departure from the EU while still maintaining trade ties. The thing goes to a vote in Parliament soon with the Bank of England warning of tough days for Britain if it doesn’t pass.

Here’s the view from my fancy portfolio manager buddy Ryan, always happy to show up and confuse us with a chart. “Technically, the S&P 500 is coming up to a key level around 2,740 to 2,780. This marks the confluence of the short-term downtrend, and the 50- and 200-day moving averages. We need to see a break about this range for us to move out of this current correction and resume the uptrend. I expect this to occur.”

Here’s the chart. Phew.

Well, I haven’t called Marianne in a few days. No point. She made an emotional decision, ignored reasonable advice, and blew it. Human nature being what it is, she’ll be defensive, maybe arguing that the End of Days could still come next week. Everybody wants to think they’re money geniuses, even when they suck at it. So, why push?

This is a volatile world. It won’t stop. Worrying about every little gyration, burp, plop, pop or pizzle that comes along is pointless. Exhausting. Marianne should focus on next year’s models. Because, yes, there’ll be a new year. And many thereafter.

About the picture...

Paolo writes this of Ruby: “She is a small Labradoodle with a hint of golden retriever. Unfortunately for her, she lives in Sudbury, but just for a little longer, as I am retiring to Niagara. She loves walking in the forest, chasing anything that moves. She eats everything, from celery and cucumbers to avocado and eggs with truffle oil. After dinner, while I am watching tv, she drops one of her toys by my feet and stares at me until I lie on the carpet and play. Contrary to my wife, she is always very happy to see me when I come back from work. Ruby is my shadow. Lovely.”