Entries from November 2020 ↓

Too safe?

Selena’s got a problem. It’s about life. “How safe is too safe,” she asks me. “Do we need to live a little?”

No, this is not about getting a new Harley, doing missionary work in China or volunteering as a virus vax volunteer. Alas, it’s about a condo. When you’re 35, living in a 640-square-foot apartment in house-horny Canada, what else is there to obsess about?

Here’s the back story. S is an engineer earning ninety thousand. Hubs makes $102k. Two cats. One dog. Five-year-old car. Net worth just over four hundred thousand. Big savers. But she’s not sure about her career. “I’m burnt out and might want to make a career change which could involve a paycut.”

The rent is $800 a month, two bedrooms, big shared back yard, great hood, iffy LL – even though he hasn’t increased the monthly in ten years. “Yes we save a ton, but the neighbors are hell and the landlord is completely uninvolved. Kitchen is falling apart. We do minor repairs ourselves. We are the only ones who clean the entrance and do some landscaping to make it nice, and it’s getting old.”

Well, they did what a lot of tenants do when they crave space and control. They went shopping. On Wednesday they visited a ground floor condo in a duplex listed for$740,000 – bigger, but an unrenovated basement and only one bedroom. “On Thursday, our agent calls us to tell us there is an offer that expires at midnight, and that there is a second one coming in. So we offered $752K with 20% down, wrote a nice letter, and somehow got chosen.”

“After an all-nighter drafting some preliminary drawings + costing to convert the layout to get another bedroom, bathroom and office (total 30K), and dig the basement (5-year horizon, around 90K), I got cold feet. The co-ownership agreement stated that you couldn’t rent out the place on “tourist” platforms, and since both my husband and I travel quite a bit for work under normal circumstances, it would have been nice to have that option. So we passed. Of course now I have regrets and feel like we could have done it. Can you tell me if we were fools for letting that place go?”

What about the costs?

Selena tells me the monthly overhead (financing, taxes, utilities) would be $3,600. The down payment would equal $150,000, plus another fifty grand in closing and immediate reno costs. Now she’s anguished at not moving ahead and has turned to a pathetic blog for reassurance, or a spanking. “Are we being too cautious? Do we need to live a little? WWCAGD? (What would chiseled-abs-Garth do?).”

Well, let’s be realistic. S and her hubs are doing well compared to their cohort. Good incomes. No debt. Four hundred saved. The current rent (in Montreal) is cheap. They save gobs of money. This financial cushion allows her to even consider getting out of a career she no longer enjoys. That’s huge.

Buying this unit would change everything. Yes, they’d get more space, but albeit after a period of costly and disruptive renos. The tab, however, is large. Added to the $3,600 monthly nut for basic ownership costs would be the lost opportunity cost of not investing $200,000 needed for closing, down payment and renos. That’s a thousand a month, for a total true cost of $4,600. Yikes – a $3,800 monthly increase over their existing rent, or a 475% bump in living costs.

Now let’s imagine they took that $3,800 and invested it over the next 20 years and earned a reasonable 6%. That would amount to an additional $2.38 million by age 55. Add in their existing savings and meagre pensions and this would create a lifetime retirement income of somewhere between $180,000 and $220,000. At age 55 – with thirty years to enjoy it.

Or they could buy the condo with the raw basement for $750,000 and $600,000 in debt.

Hmmm. But the choice does not need to be this stark. It’s not about spending twenty years in a 600-foot apartment (although it would be far more spacious without the cats). S and her husband could easily double their rent budget (or triple it) and land a townhouse or even a little detached place, and still save big. They could take the closing money for the failed deal (which would be flushed away in fees and taxes) and reno the kitchen in their rented apartment in exchange for a promise of no rent hike for a few more years. Or they could decide that the freedom to choose a new career, to have personal flexibility or possibly retire years earlier with lifelong financial security might outweigh owning anything.

So, Selena, have no regrets. ‘Living a little’ does not mean a six hundred thousand dollar mortgage and a hobbled future. It is the polar opposite.

Now, have you considered a motorcycle?

Missing the mark

Less than six weeks left in this miserable year. And it will end in a funk. Virus. Lockdowns. Crappy Christmas. Too much Zoom. Not enough hugs. Darkness. Winter.

Ellen wrote me yesterday. “I can’t take it,” she said. “Give me one compelling reason why I should not sell everything, go to cash or dump my savings in some low-rate GIC. At least I will still have my money next year, Mr. Broker Man.”

See what fear does to people? No wonder so many financial commentators truck in it. Fear sells. It’s the strongest emotion and motivator. If you’re in the business of flogging gold, annuities, newsletters or paid research, scaring the poop out of people is good for business. Peter Schiff, Marc Faber, David Rosenberg, Martin Armstrong, Nouriel Roubini. The merchants of doom are all over the financial press these days. Leading Ellen stray.

How have the warnings panned out?

Not so good. An advisor in NYC who goes by the moniker of ‘The Reformed Broker’ has a nice twist:

Talking people out of investing for their future because of this or that macro concern will always be a long-term loser, even if there are moments along the way where it looks temporarily smart. Everyone understands that there are potential drawdowns and negative developments that could occur. It doesn’t take talent to continuously harp on them. Smart people allocate assets, take appropriate risks and accept the uncertainty that comes along with the territory – they don’t twitch like squirrels every time someone snaps a twig in the forest.

By the way, here’s a little summary for you of how the financial terrorists have done over the last few years. If you followed their advice, eschewed growth assets like stocks or equity ETFs and hid only in the safety of risk-free bonds, here’s the scorecard:

Click to enlarge. Source: The Reformed Broker

As you can see, following any one of these guys would have cost you. Big. For most people the greatest risk remains running out of money, not losing it. They need growth. Listening to the growls of the bears is a failed strategy now, as it has been in the past. Remember history. Black Monday. Nine Eleven. Y2K. 20% mortgages. The credit crisis. Dot-com crash. Wars. Recessions. And now, again, disease. It is flattery to believe you live in a time of unique risk, or are special for the daunting challenges you face. You don’t, and you’re not. Get over it.

How to invest? In a balanced fashion, with about forty per cent of a portfolio in fixed income or safer assets. Nothing has changed. Put about half of that into a combo of government, corporate and provincial bonds with 15% in preferreds pumping out a 5% dividend and destined to rise with rates, and the remainder in high-yield cash. The rest of the portfolio should be growth assets, roughly a third Canadian, a third US and a third international with a small (5%) REIT component. The more you have to invest, the more complexity can be built in – adding a health care ETF, for example, plus small cap exposure. And don’t forget to hedge against the loonie with a quarter in US-denominated assets.

Be diversified. ETFs are best. Mutual funds cost too much, lack liquidity and can surprise you with taxable distributions. Individual stocks increase volatility and risk, and should be avoided unless you have a seven-figure nestegg, large enough to achieve diversification. Exchange-traded funds are cheap, efficient and liquid. Just don’t buy too many. No moderate portfolio should have more than 15 or 16 positions.

Be tax smart. Understand how to use RRSPs for tax-shifting. Always stuff your TFSAs. Take the free RESP money. Income-split with a spousal retirement plan or a spousal loan. Consider tapping into home equity to diversify and get a tax-deductible borrowing.

When to invest? When you have the money. Timing the market is impossible. 2020 should have taught you that. It sure made the bears look like fools and charlatans.

What not to do? Never chase returns or faddish investments. Never pursue the hot tip your BIL gave you. Don’t expect to retire happy on your company group RRSP or CPP/OAS. Unless you love KD. Don’t buy an annuity when rates are this low. Be wary of insurance floggers, since most people need only a simple, cheap term plan. Never sign up for an educational savings gig with one of the baby vultures. Never seek investment advice from [email protected] Avoid silver, gold and crypto. Don’t let the virus or the nihilists win.

And don’t be Ellen.