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November 24, 2015 | Confused

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.


On Tuesday, while the CEO of the CIBC suggested Canadians have been spoiled by cheap rates and swelling real estate, we got the latest from America. The growth rate there is now more than twice ours, real estate prices are rising in 20 major cities (not one-and-a-half), unemployment is falling and wages increased by more than a hundred billion in the last three months.

So, Canada lags. Look at the TSX. It’s down a withering 9% this year, while the S&P is slightly positive and European markets are 12% higher. Investors in maple have seen their portfolios nibbled away by rabid beavers, while those with globally diversified accounts are cool. The big banker knows this isn’t going to change anytime soon as commodity prices stay in the trash. He also knows his bank has too much exposure to energy and housing.

If the Fed delivers on the rate increase slated for December 16th (current odds are 70%), then expect another kick. That will boost the US dollar, drop ours, depress oil and copper further and make people spending $1 million for beater houses in East Van look even more ridiculous.

So it’s a confusing world. Investing is scary. Most people don’t go near it. But on this pathetic blog we are, as your mom always told you, special. Every day I get questions about what to do next. So let’s answer a few. Here’s Carol:

Hi Garth, long time blog dog, first time writer here. I’ve come into a sizable chunk of change, and plan to invest it (we’re happily renting for now, so it’s not going into a down payment). I have a fee based bank adviser, and I want to go in prepared when I meet up with him to decide how to best invest this new wad of cash. My portfolio is mostly preferreds and ETFs, not a single mutual fund in sight so he seems legit, but he seems to have a strong pro-Maple bias. When I asked why, he said that when he invested my money, Canadian assets were cheap and US/global assets were expensive (I transferred the funds to him very recently).

I understand why you warn against overexposure to Canadian assets, seeing as how they likely haven’t found a bottom yet (especially with the US rate hike coming), but my question is, where’s the inflection point? When do Canadian assets get too juicy and cheap to pass up? Should I be less hesitant about just continuing with my adviser’s Maple-heavy strategy, given things will inevitably recover well within my time horizon of 30-35 years?

Thanks again for all the work you do Garth, your blog has really helped me and probably countless others.

The home-country bias among Canadians and their advisors is stunning. Over 70% of investors here have 100% of their stuff in maple. Amazing. Canada, as you may know, accounts for 3% of world markets – so this is a myopic lack of diversification. Nowhere have I seen this bias more pronounced than among those who work for bank-owned brokerages – the same guys who often underwrite domestic securities. Incredible coincidence.

Anyway, you’re allowing a mistake to occur, since there’s no floor evident for commodity prices, the oil sands, canoe futures or companies that dig stuff up. Yes, these things (oil, copper, grain, aluminum, nickel) will rebound at some point, but why would you wallow around with them for even a year or two when your money could be growing in a balanced fashion? Having one-third of your growth assets (or about 15% of your total portfolio) in maple is plenty. If that makes you feel guilty, download some of Justin Bieber’s latest crap.

Here’s young John, in Vancouver:

Hi Garth: We are just over 1 year married in our mid-20s, living in an eastern suburb and earn modest incomes (combined $100k+). We are renting a house and are happy to do so for eternity if necessary. I also have monthly income from an investment condo (bought with some help from parents) that more than covers the costs.

Despite your blog constantly pointing to a looming housing correcting in YVR (and I sure hope it does come so that I can “swoop in” on good deals), I am finding it increasingly difficult to resist house lust and fear. It seems even if there is a correction, it will only make a small dent on singe detached houses. I find it extremely tempting to invest in another investment property, either a condo or a house further out east – thinking that it may be better to hold on to more land?

So my question is, in our situation, should I even consider owning another property? If so, what type? At this rate, it seems like prices will not come down significantly within the next 5-8 years. On the other hand, should I be ashamed that people like me are possibly contributing to the skyrocketing prices in YVR? Am I just super greedy and should stop being influenced by all the real estate talk in YVR?

Yes. Get a life. For a couple of twenty-somethings to be lusting after a detached house in a city where one costs well over a million is insane. Give your head a shake. Get your priorities straight. More consequential should be your careers, your mobility, flexibility and the freedom you’ll only come to value and understand later in life. There will be time enough for you to accumulate both stuff and debt, to crave capital gains and covet wealth. But this ain’t it.

Meanwhile anyone who thinks Vancouver is immune from a price correction is as screwed up as you. So I suggest you get new friends. Perhaps even parents.

Let’s see if Jeff is less weird:

I ‘m switching investment companies and looking at where to invest next. I am looking at bond ETFs and Preferred shares like you have advised. But I also see the US market going up and have heard commentaries say it’s overpriced due to Price to Earning ratios being at unsustainable levels. Is there a counter point to this argument? To me it makes sense that when all other investments are giving poor returns, due to the manipulated interest rates, that people will disproportionately invest in stocks. And that the time of manipulated monetary policy (at least in the US) will be coming to a close, slowly but surely. Is the understanding correct? I am not a doomer, I think that US will continue to grow but may see a correction in the near term as monetary policy starts to normalize.

An argument oft made, Jeff. Some people look at an index number (like the Dow at 18,000) see that it’s close to record levels, thus conclude stocks are expensive. But a better way of judging is to contrast valuations with the money corporations are earning. Right now the P/E of the S&P 500 (the broadest measure of large cap stocks) is about 19 – a five-year high (which reflects the US economic recovery that’s happened since 2010).

Is this expensive? Well, the average P/E since the 1870s has been around 17, and during bubbles it’s bloated to far higher levels – like the 30 hit during the dot-come days or the 100+ during the turmoil six years ago. By historic measure, equities still seem reasonable. But they’re also essential holds for anyone looking to build their wealth in an era of slow growth, low rates, low inflation and yet rapid technological advance.

If you believe the world will continue to inch ahead, then you need growth assets. The best choice are index ETFs, along the lines of the weightings this blog has previously recommended. As for rates rising, this is ultimately an affirmation of a strong US economy. Stocks will not crumble as a result. Ignore it.

Finally, here’s Joanne’s question:

I have been reading your blog for a while now and I want to start off by saying thank you for taking the time to do what you do. We actually spoke briefly over the phone a few years back about my financial situation. You provided great high-level advice. The purpose of my email is that we have been talking and we have come to the conclusion that we won’t make any significant gains in improving our financial situation if we don’t aggressively set aside funds to invest. In order to execute this we are considering the strategy of selling our home, investing the proceeds, renting a similar home and make regular capital contributions to our investment portfolio. We believe that by selling our home and harvesting the equity we will be able to save at a rate that would not be possible should we continue with home ownership. Does this make sense?

You can borrow up to 65% of your home equity in the form of a HELOC, make interest-only payments and deduct 100% of those payments from your taxable income if the money is used to invest. Sure, Joanne, you can sell, rent and invest if you wish – but perhaps a less radical action is to use existing equity without exiting the real estate market. That’s your choice.

Nonetheless, borrowing at prime plus a half (3.3%) to invest in a portfolio that could average 7% over five years (as a 60/40 has done) and writing off up to half the interest means you’re absolutely gaining ground. But, like selling and putting the proceeds into a portfolio, there’s always a downside. If you panic at any losses and sell, you lose. If you invest badly, risk swells. You should ensure your money’s properly managed by a guy who is no cowboy and keeps you liquid, so if things turn south you can always bail.

Finally, pit this risk against keeping all your net worth in real estate. No contest.

Meanwhile, in Alberta...

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November 24th, 2015

Posted In: The Greater Fool

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