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November 5, 2017 | What We Fear

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.

Investing is hard. It’s scary. Buying a house, in contrast, is easy. It’s mainstream. No wonder 70% of people (and almost 80% of Boomers) have real estate, while less than 10% of own stocks and only 7% have maxed their TFSAs. It’s also no coincidence the savings rate has dropped and debt has exploded at the same time house prices have romped.

So, obviously, the biggest danger most families face is from a real estate correction. And yet all people seem to worry about is the Dow or S&P being too high. Weird. (But that’ll soon change.)

Because this blog is about balance in life (real estate + investments, equities + fixed income, kids + canines, spouse + Harley, head + heart) maybe we should address the reasons most people don’t have financial assets, or suck at managing them. Over the years hundreds of couples have sat across my desk baring their souls, their stress and their goals. I’ve heard it all. Too many of us end up concentrating net worth in a single asset. No balance. Big risk. We forget you can always lease a roof. You cannot rent retirement income. Big regrets may lie ahead.

So why do people get all squishy when it comes to building a portfolio or seeking help, even when their heads tell them to? Three deep-seated fears keep emerging. Close the door. I think it’s time we talked about them.

Trust. The big one. An inability to trust others lies at the heart of indecision and financial paralysis. It’s not just trusting a financial guy – many spouses don’t actually trust each other. Not when it comes to bank accounts or investments (as opposed to sex or children). The relationship many people have with money is very unhealthy, something which needs secrecy, hoarding and protection. That usually leads them to stick it into brain-dead, growthless GICs, make decisions bringing more tax, or fall into do-it-yourself investing based on some pathetic blog.

Sometimes it’s wise not to trust, of course. Giving your money to a commission-based mutual fund guy who will shackle you with deferred sales charges and a 2.5% fee is not a great idea. Ditto for some badass broker who flips weed stocks and promises a 30% annual return. But finding someone to provide experience and balance is better than leaving it in the hands of a rank amateur (that would be you).

Fees. Also scary. This is why 95% of financial advisors in Canada bury the cost of their services inside products they provide to people, so it looks like they work for free. The banks do that, which is why they make so damn much money. Clever. But this is not the best thing for investors, as people who do some research know.

You can give your money to a robo-advisor and have an algo invest at a cost of about a half of one percent. But don’t expect tax advice, marital counseling or puppy stories. A fee-based advisor (about 5% of the industry) on the other hand provides financial counseling, tax advice, portfolio management and help with retirement or offspring living in the basement. That should cost 1% per year of the amount you invest, with no trading charges or any other fees, and come entirely out of growth. On non-registered accounts the fee is tax-deductible. On RRSPs (or RRIFs etc.) it exits the account but isn’t counted as income – so the government pays a big chunk for you. If you’re making 7% or so a year consistently, seems reasonable.

Markets. “Everything is high, in a bubble,” is a common excuse not to invest. Not a great one, though. Two reasons: first, it ain’t true. US stocks may be lofty these days (because of robust corporate profits, tax cuts, Trump) but lots of other asset classes are not (preferred share or bond prices, for example, plus REITs and commodities). A diversified portfolio holds many different things. More important, if global growth’s back on track after eight years of slacking off, why not participate? There is absolutely no reason to believe it’s about to end.

Second, a balanced portfolio isn’t tied to the American stock market. A properly-constructed portfolio might have about 12% exposure to large-cap US companies (the kind that make up the S&P 500), with 88% being in other stuff (various assets, different countries). Moreover, ‘balance’ means you own growth assets (60%) as well as safe ones (40%) so if stocks suddenly decline, the other stuff usually rises – protecting your butt, and saving face with your spouse.

So, investing is not gambling. It’s not ‘playing the market’. Properly done, it poses less risk than borrowing $800,000 to buy one asset on one street in one city in an environment of rising rates and shifting regs. Moreover, we all need liquidity. We need income, cash flow for our entire lives. Concentrating wealth in a building inevitably needing to be sold puts you at risk of having to do so when conditions are poor. Financial assets can be sold as you need the money, and are always 100% cashable. No 5% commission. No property tax, condo fees or Audi-driving realtor.

Balance. That’s the key. Have a house, but also strive to invest in other things. Find love. Get a dog. All good.

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November 5th, 2017

Posted In: The Greater Fool

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