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July 17, 2016 | Courage

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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The banks pay you one half of one percent to keep money there. What if they paid you nothing? What if you had to pay the bank to keep savings for you? Would you do it?

Over 75% of depositors, in a global survey done by ING, said no way, dude. They’d pull the cash. But put it where?

In Japan twenty years ago people used to save 23% of their incomes. About a year and a half ago, savings turned negative. Incredible. And why? Japan has a rapidly-aging population, in part because it eschews immigration. The country’s greying at an alarming rate, and old people spend their savings, instead of saving their income. But mostly, why put money in the bank when you get 0.002% on deposits? That’s two bucks a year on $100,000. (The only consolation might be this: the inflation rate in Japan is negative .5%.)

This is probably why sales of home safes in Japan have ballooned lately.

As mentioned here, half the bond debt in the world now pays 1% or less. A quarter of the global population lives in countries with negative interest rates. It’s an indication growth is slow, with a huge oversupply of commodities, labour and industrial capacity. One direct consequence is a big squeeze on the middle class. So we get Brexit, Trump and social unrest as a result. In nation after nation, the divide between the rich and the rest is growing. And no amount of rioting in the streets, punitive taxation, shot cops or political change will alter that.

Sucks. But it should also encourage you to try and be on the winning side of that equation. That’s what this blog’s all about. It won’t do much for global GDP, but it might help save your tosh. Advice follows, below. Here are five things.

Don’t even bother saving your money. Invest it instead.

There’s a depressingly significant chance the Bank of Canada will again nip rates, even as the US Fed raises them there in 2016. This country is now on the wrong side of the curve, which means savers will be doomed to collecting less in interest than they are robbed by inflation and tax. Nobody will be able to retire adequately on savings accounts, GICs or a bond-heavy portfolio (plus the piteous Canadian pension pogey). Investing in growth assets may be more volatile, and it may be scary. But running out of money’s the far greater risk.

Avoid tax. Disappoint politicians.

The more the rabble feels disenfranchised, the more tax will be piled on. Look at the laughable move in Vancouver to punish people for not living in their properties full-time. Or the new T2 tax creating a bracket taking more than half the income of most doctors. Or the 50% slash in the most democratic and effective tax-saving vehicle in the nation. These are not rational moves. They’re political.

So the first action for everyone should be to fully fund the TFSA, then invest in broadly-diversified growth assets, not savings accounts. After that, stuff your RRSP, not necessarily for retirement but immediate tax relief and to shift income from high years to low ones. For your kids, open RESPs, where money can grow tax-free for a couple of decades, and the government will hand over grants. It’s the easiest 20% you’ll ever make. And avoid interest, 100% of which is taxed. You’re better off to collect income in the form of dividends and capital gains, where taxes are reduced by up to half.

Invest in growth, not debt.

As interest rates sink, the return on fixed-income dwindles while central bankers flood the world in liquidity. So a river of money flows into equities. It’s happening now. Brexit may have hurt the voters who made it reality, but the event has helped stock markets climb to historic highs. Bonds paying nothing make dividend-yielding assets look a lot more attractive. Ditto for REITs with great distributions and preferreds’ 5%+ yield. The days when retirees could sit back and clip coupons are gone, gone, gone.

Shun the doomsters, the scared and the skittish.

I once knew a money manager who for two solid years said markets were overpriced and would correct. They actually did, about four times – normal dips – yet he invested nothing, fearing more declines. His clients ended those years with single-digit gains while the TSX and the S&P shot ahead more than 12%. Such lack of experience and judgment is common. It takes courage and confidence to invest when others are timorous and tepid. There are always reasons to be afraid, and in a world of over-information, paralysis by analysis is commonplace. Just look at this blog’s comments section full of losers and nihilists.

Stay liquid, diversified and balanced – and that includes real estate.

Having said to invest, not recoil, do so intelligently. Don’t lock your capital into long-term assets, like five-year GICs for example. Ensure you have a broad diversification among various asset classes and also geographically. No individual stocks. No mutual funds. Not too much maple. No deferred-sale-charge products. No leverage, unless you really understand the risks. And always maintain balance. Safe things in your portfolio as well as growth assets. Yep, some bonds included because they help reduce overall volatility. As for your house, balance matters there, too. Remember the Rule of 90.

Finally, the Royal Bank just called the Vancouver market a ‘bubble’. You know what that means, right?

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July 17th, 2016

Posted In: The Greater Fool

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