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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

July 14, 2016 | Salvation

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.

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Just as some people (Trump supporters mostly) think there are only two kinds of music (country and western), millions believe only two investments exist. Houses (safe) and stocks (scary). It’s this uneducated view which has marched so many down a path of increasing risk and debt as they obsess over real estate.

Sure, you need a place to hang out. But property shouldn’t constitute the bulk of your net worth. That’s a gamble you’re going to lose. The people who will emerge whole from the economic and financial reset ahead are those who understand balance. So you might as well start now.

You bet, stocks are scary. Unless you have a seven-figure investment portfolio, don’t even go there. Too much risk, volatility and danger in buying individual equities. Owning one or three or five companies is gambling, as opposed to purchasing the whole market and having ownership in all of the big firms. That’s why ETFs (exchange-traded funds) are so superior. There are hundreds of low-cost products now available in Canada, and my own balanced portfolio holds 18.

Don’t buy mutual funds, either. Yes, they also offer diversification, but at a big cost. The average growth fund will ding you for a management fee of about 2.5%, not tax-deductible, which is more than double what you’d pay to hire your own financial advisor.

Some people argue stocks (like houses) have been gasbagged by cheap interest rates and central bank stimulus. That’s essentially right. Markets in New York hit all-time highs this week on the expectation more stimulus is coming in our post-Brexit world. After all, this monetary largesse keeps corporate debt costs down and pads the pockets of consumers who buy cars, Pokemon crap and trips to Cuba.

Meanwhile cheap interest rates and slow growth have bagged bonds, sending yields to historic lows. So people with a questionable degree of financial literacy, but great at Googling, think buying at condo at the most inflated level in history is safer than having financial assets because, ya know, there’s too much risk out there.

It’s time to revisit a few basic points. First, never put all your oeufs in one basket. Not in a house, a few stocks or a vintage Porsche. In this volatile, changeable world diversification is critical. So own a variety of asset classes – equities, bonds, trusts, preferreds, cash – as well as more than just maple. My portfolio has twice the exposure to the US and international markets as it does to Canada.

Second, you need balance. A winning mix for decades has been 60% in growth stuff (equity-based ETFs, for example) and 40% in fixed income (bonds and preferred shares etc.). After Brexit you should know why. When stocks were knocked flat by the stupidity of electors, bond prices surged on the demand for safe havens. If you owned both, you barely noticed the turmoil. Bonds may not yield much, but that’s not why you should own some. They reduce volatility (letting you zzzzz) and also rise in value to offset equity dips. As far as yield goes, preferreds are paying over 5% (with a sweet tax credit added on as sauce), and should make up half of the 40%.

Third, what you keep is more important than what you make. So taxes matter. Money earned as income, interest on a GIC or rent collected from tenants is 100% taxed. Income earned in the form of dividends, from preferreds (for example) is taxed less due to the dividend credit. Capital gains (from an ETF that rises in value) is 50% tax-free. Better yet, all income in all forms earned inside a TFSA is not taxed. Ever. No tax on RRSP growth, either, but withdrawals are added to your taxable income.

Fourth, stay liquid. That means your investments can be turned into cash quickly, should the need arise. GICs, for example, are usually locked up for years – you even have to pay tax on interest you haven’t received. That sucks. Houses, too, can turn illiquid and stay so for ages. Just ask people trying to find a buyer in Calgary or Halifax. And lots of scummy mutual fund companies have DSCs – deferred sales charges – which are penalties for cashing out before a set period has ended, often seven years. It’s a mutual fund prison which keeps a lot of people psychologically locked into a bad investment.

So, how has a balanced, diversified, 60/40, tax-efficient, ETF-based investment portfolio done lately, in a world of Brexit, Trump and ISIS?

Sweet, actually. It’s up a little over 7.7% on an annualized basis YTD, sailed right through the whole UK vote fiasco and proved the power of balance. So far this year the REIT fund has added 22%, the Canadian stock ETF is ahead 13%, the US stock equivalent up 7% and the emerging market ETF positive by 13%. All bonds (government, corporate, high yield, real return) are also in positive territory.

BTW, balance doesn’t refer just to a pile of financial assets. It’s also about life.

I’d tell you more, but I’m a stale, pale, male 1%er. What do I know?

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July 14th, 2016

Posted In: The Greater Fool

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