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August 19, 2015 | Such Luck

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

WET CAT modified

Do any normal people read this blog? You’d wonder. I do.

Here’s a note from Cheryl:

“I was introduced to your blog by a friend of mine. I am currently in a fight with myself for not getting educated on finance at the age of 21, when I won quite a large settlement of $180,000. My dad quickly took control, invested $37,000.00 into one stock (zero diversification), and then convinced me to buy a condo (which burnt down last summer). Such luck hey?

“My stocks are now at $13,000, and my condo is still under reconstruction.

“What should I do with my money? I am torn, and I know $13,000.00 isn’t very much money, but I am just not sure what’s best, if I should take it out, put it toward my current home and renovate, or save it, or reinvest it. I’ve asked a few financial advisors and they haven’t given me any definite answers. I am just feeling lost and confused as I’m being pulled in a few different directions.”

Reader Advisory: do NOT date or marry Cheryl. Evil things your way will come.

Well, this is classic. So many people believe there are but two asset classes in the world. Real estate and stocks. Both are fraught. In this case the leveraged property resided in a building Cheryl could not control. It burned. She suffered. A special assessment would have had a similar impact (and vast numbers of people will soon learn that lesson.) Meanwhile her numbnuts papa bought a single stock, displayed his ignorance, and lost the poor waif two-thirds of her capital. Now she has an unsaleable piece of real estate and enough liquidity to buy a used Kia.

The lessons?

Easy. If you want to own real estate, buy some. With dirt. If you can’t afford that, rent. It’s cheaper, safer, more flexible and allows you freedom and mobility. As for investing in financial assets, equities are fine – but never, ever dump your money into one stock. Or six. Use exchange-traded funds to purchase an entire index, because in that way you achieve better growth with less volatility. You have diversification, which is the difference between investing and gambling.

Oh yeah, and never listen to your parents. They’re so Nineties.

As to Cheryl’s question, also an easy answer. Sell the stock, warehouse the capital loss to be used on a future tax return, take the money and invest it within your TFSA in a two or three good ETFs – maybe picking up preferreds at today’s fetching price, large-cap US stocks and a little Canadian, also getting too cheap to resist.

Don’t use the money to pay down your mortgage. Certainly don’t renovate. And don’t waste your time asking the financial advisor at the bank what to do with thirteen grand. You’ll be sold a mutual fund ten times out of ten by a guy you’ll never hear from again.

Now, let’s look at the larger picture, as it’s growing a little spookier. Young people like Cheryl – with limited resources and limited knowledge – need to be careful about where to put their money. Pitfalls are everywhere.

On Wednesday crude oil lost an astonishing 5% of its value and tonight sits at forty bucks. That means Canada’s biggest export commodity has dropped in value by 30% in a few weeks. Massive energy companies are trading at 11-year lows. Stockpiles of oil in the US are brimming. In fact, there’s now a multi-year supply in storage – the most in eight decades.

In recent days there’s been speculation crude could hit $20 before it finds bottom. That sounds outrageous, until you realize it’s shed $32 a barrel since June. As you know, this is a big deal for Canada, right from house sales in Calgary (down 27% so far this month) to the outcome of the federal election in October. Already the national budget has gone from surplus to deficit because oil, and the Bank of Canada had to cut interest rates twice. Economists are bracing for crappy labour stats over the next couple of months, and our dollar at 76 cents US ensures higher consumer costs and less spending.

Core to this commodity price collapse and the impact on us is weakness in China. That country is the biggest user of raw materials on the planet. In fact China alone consumes 40% of the world’s output of copper, and half of all the aluminum. Weed-like growth there over a decade ago sparked a massive run-up in commodity prices which fueled the Toronto stock market, helped send real estate soaring and plumped the political fortunes of Canada’s Conservatives.

But that was then. Now it’s over. For how long is anyone’s guess.

The point, Cheryl, is simple. What worked for your old man fifteen years ago isn’t working today. You can’t throw a dart and buy a winning stock. You sure can’t count on sustained economic growth or wage increases to keep real estate moving up. Without engineered cheap rates and political trickery, housing would be in big trouble (and will be). And when it comes to investing, you must be balanced, diversified and liquid.

There ya go, kid. Good luck with the curse.

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August 19th, 2015

Posted In: The Greater Fool

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