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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

June 11, 2017 | Be a Man

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.

So it’s been a while since we mailbagged it. Here are a few of the questions I receive that don’t involve telling me what to do with myself.

“I’ve been fan and avid reader of yours for several years now. I’ve even taken some of your advice,” says Matt, with the obligatory suck-up. “However, there is one piece I struggle with. On Friday you again alluded to it being time to lock in the mortgage. Right now our variable capped rate is 2.2%. We’re halfway through a 5 year term with $355k owing (bought for $431k in 2014).

The credit union here in Manitoba is offering a five-year fixed rate of 2.5%. So it would cost us around $1k/yr in extra interest to lock in now. I’m not convinced it’s worth it. The ‘lock in now’ alarm has been sounding forever. By going variable against popular advice on our first house in 2008, I calculate we avoided paying thousands in interest (it was a very cheap house).

Anyways, I would appreciate any advice or slander you can offer. Enjoy the sunshine and ice cream. My wife and I are off to Costco now to load up on savings…

What Matt may not realize is that 2017 is not 2008. Back then rates were plunging in order to keep the lights on. By the end of this week we will have had three Fed increases in six months, while the odds of a Bank of Canada hike took a leap forward on the latest jobs stats. As warnings about our insane debt levels become  more shrill, markets are factoring in a gradual and sustained rise in the cost of money. The party, dude, is over.

Besides, the difference between 2.2%, with the potential for an increase within a few months, and 2.5% locked for years, is minimal. Moreover, if you ask [email protected] sweetly, she’ll probably lower the fiver to 2.4%. This could be the cheapest insurance you ever bought. Finally, if you’re going to be cheap and capricious, take the extra monthly dollars, invest them inside your TFSA and use the proceeds to pay down the mortgage principal upon renewal.

Costco’s full of tacky crap from China, Matt. Stay home and wash your Kia, instead.

Here’s Mike, who says: “I was recently put onto your blog by one of my friends, and I have to say I have been reading it daily and loving it (not to mention the comments). I am also now following you on Twitter.” Okay, Mike. You may proceed now.

I have a question about Guelph, that I was hoping you might answer pro bono, if you aren’t offended by the proposition. I’m a lawyer, and understand this would not be official advice and would be for education purposes only. I want to purchase a condo downtown Guelph for my own use. Looking for a 2-bedroom, and they are rather pricey at the moment (tough to get under 500). Do you expect the Guelph area to follow the same trend as Toronto (price decline), and if so, can you suggest a window where a buyer might seriously consider a purchase.

I would appreciate any gut feelings you have on the time frame and the area. I understand nobody has a crystal ball.

Pro bono, Without prejudice. Unofficial and for education purposes only. Got it. My hourly rate is better than yours and, naturally, the advice is always judicious, and salacious. So, no, you should not buy a condo in Guelph. Not yet.

The commutershed cities – even distant Guelph – were jacked in the last year by the GTA frenzy and it will take months more for this to wear off. Face it – half a million to live in a box in a city 95 kilometres from utopia, with desperate, clogged Milton and Mississauga to crawl through on the way – is nuts. Wait until next year and you’ll do much better. And when you do buy, get a real house. With dirt. There’s a reason people move to smaller centres like the Royal City, and it ain’t to live in an apartment overlooking the Speed River and a bunch of messy students.

And now, Trevor, who comes here to flaunt his gold-plated government pension.

“I’ll save the spiel about how much I enjoy your blog and all the pictures of dogs, so I can get right into it,” he begins, unwisely.

I’m 28 and I recently began a position within the Ontario Public Sector, and with that comes the opportunity of earning a pension (yes, I’m the scorn of all evil!). So while I’ve taken your advice to balance my TFSA portfolio at a 60/40 ratio thus far, should the fact that I will now be paying and (hopefully) receiving a pension in 30+ years time, mean I should adjust my balanced portfolio to become a little more unbalanced? Say, a 70/30 or an 80/20 split?

This question comes from the fact that if a pension will be there for me in 30 years, won’t this help my overall portfolio by keeping a stable amount of income down the road? Meaning, there’s room to increase volatility because of the pension and my age? Or am I just fusing words together into makeshift sentences while making no sense at all?

A fair question, Trev, that I hear often. The answer is no.

First, there’s zero guarantee you’ll be working for the government for the next three decades. Things change. Lives twist. Even public sector jobs disappear – the odds of which are growing as politicians find it impossible to balance the books. Defined benefit pensions are so incredibly at odds with the way most people have to fund their retirements that, at some point,  they will be in danger of reform.

Second, a 60-40 portfolio with a fixed-income component is designed to reduce volatility as a defense against human nature. People always want to buy high (chasing hot assets, for greater profits) and sell low (when losses make them fear greater losses). With a balanced portfolio the odds are if equities dip for a while, the safe stuff will bail you out. For example, where Brexit happened stocks lost 6% in a couple of days but people with a balanced portfolio saw only a 1% temporary decline, since bonds bounced. So they were not tempted to bail.

Everybody, Trevor, is a risk-munching Stallone when markets are okay. But when the tide turns, they fold. Be a man. Be balanced.

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June 11th, 2017

Posted In: The Greater Fool

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