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January 25, 2016 | Thick

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.


Sam signs his last name as “Retired,” which is a sad way to define yourself. But I guess it’s better than “Stressed.”

“Our significant savings sit in a bank account,” he writes me. “No interest and no income. Your latest blog is very informative. We do not have any options for returns with such low bank rates. The future?????”

Well, Sam, it probably blows. More stress. More of the ultimate risk – running out of money, which for millions of Canadians, especially women, lies in the years ahead. They’re cursed with being more conservative and living longer lives. It’s a tough combo in days such as these.

Recent posts here have tried to underscore the fact interest rates – at least for savers – are going nowhere. For years. Depositors are forced into the arms of unproven, no-branch, no-human outfits like EQ or Zag just to get a miserable (and temporary) 2% or 3%. After inflation and taxes, that’s akin to 0%. So if you’re somebody on a miserable and inadequate public pension, forced to live off your dwindling savings, it’s a financial death sentence.

Stats tell us there are far too many in this boat. Being fearful of market risk, they cling to investments that stopped performing almost a decade ago – guaranteed investment certificates, Canada Savings Bonds, term deposits, high-interest savings accounts, strips and government bonds. Not only has the interest rate environment crashed, but the tax treatment of interest income has remained harsh and now with a weak dollar, inflation’s come roaring back. Witness the Cauliflower Crisis (which has gained global media exposure).

If you’re in your 50s, or retired, get used to the fact nothing about this situation will change. Sure, US rates will creep higher now that the Fed’s started the process, but they remain minimal in most of the world. Until commodity prices bounce back and the economy revives, they’ll be near-zero in Canada. As stated yesterday, almost $400 billion currently sits in bank instruments, put there by savers who are getting goose eggs in return.

Why would anyone give over their life’s money for no return? No income? No growth?

Simple. They’re ignorant. Not intellectually, but financially. Innumerate. Money illiterates. People who believe, despite the overwhelming evidence, that losing their cash is the worst possible thing that could happen. So they watch it slowly but inevitably disappear.

Some weeks ago I related the story of Sue, a widow whose husband left her a modest house, a $50,000 CSB and virtually no income. She sold the home (could not afford even the property tax, let along the maintenance) and invested the money in balanced mutual funds for growth. Then in the GFC she saw a 30% drop in capital value, panicked, cashed in and deposited the money in a ‘safe’ bank account at CIBC. Eight years later it’s kaput. Life’s a nightmare.

Meanwhile the balanced funds she abandoned regained all of their lost value in 2010 and 2011 and went on to provide returns which some years approached 10%. Her savings account delivered nothing. Now it’s gone – all into rent and groceries.

This is ignorance on parade. It’s the irrational fear people have despite never experiencing a depression or a market collapse – that their investments could (and probably will) go to zero. It’s why they buy things which are going up (feeling safe, and greedy) and bail on anything that’s falling (pure fear). It’s human nature. Until that changes, ignorant investment habits will remain – which opens up a window of opportunity for other investors.

These days, with 32% of the population morphing into retirement mode (the most ever) and interest-bearing investments having collapsed, we’re probably moving towards a point of crisis. The rational conclusion is a big dump of residential real estate, as millions of people realize they don’t have savings, portfolios or cash flow to support them through two decades of not working. If you’re 42 years old with a couple of kids and all your net worth in a house, this is not what you want to hear.

Now for the point of this blog post. Here it is:


Yep, that’s the stock market over the last 50 years or so. You see the “panic point of no return” when Sue pulled her money out before it all potentially evaporated? You bet – in advance of the big rebound that took values 60% higher. In fact if you look at every market correction since 1987 – all 27 of them (when values declined by 10% or more) – you can see the negative effects of each were wiped away by a recovery rally soon thereafter. And it didn’t take years – usually just months – as was the case in 2008-9.

This is relevant now that fear once again stalks the land and sends chills through the boxer shorts of an entire generation. It’s even more salient in Canada when a crap economy means interest rates may not recover to ‘investment’ levels for a decade or more, if ever. Sure, stocks have dropped 7% over the past year in the US and almost 15% in Canada, but a balanced portfolio has protected capital, and investors with fixed-income assets have seen their income stream flow undiminished.

More importantly, life is long. Retirement’s now stretched over decades. It’s wicked expensive. And the government’s not coming to your rescue. You need growth – which will only come through assets that provide embedded income or the potential for capital gain, and which are kept in place.

Anyway, here’s a prediction for you. A decade from now I’ll still be writing about the Sams and the Sues. They never learn.

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January 25th, 2016

Posted In: The Greater Fool

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