Well, just another day for middle-class Canada. ‘Canadian housing peers over the edge’ said a story in the Globe. Hours later it was replaced by, ‘Year-over-year home sales plunge 15.1% in September.’ Hours after that the wires buzzed with news Canadians have so much debt they make Americans look anorexic.
“Overall, this supports our bearish view that Canada’s housing boom is unsustainable and the eventual correction, which we think is already underway, is likely to have a material negative implications for growth,” said Capital Economic’s David Madani. He’s right, of course. The Canadian middle class is trodding merrily down the same path that the Yanks forged. It ends in a cliff.
With the bulk of their net worth trapped inside easily-illiquid real estate, most of the people you know are substantially at risk, yet blissfully unaware. The latest numbers prove we’re in a debt orgy, with no real income gains and an anemic job market. It’s a massive exercise in borrowing from the future, which looks to me just like today, but swaddled in deflation.
Given that, this pathetic blog has been urging you for the past two years to love liquidity, balance and diversification. I’ve written often about the Rule of 90 – to keep your real estate within reason. (Deduct your age from 90 to get the proportion of your wealth that should be in your house equity.) I’ve also urged you to have a balance of assets, and dissed the metalheads who are 100% in gold and silver the same way I’ve trashed those with every dime in real estate. Both are high-risk strategies with doubtful outcomes.
So, you need balance. We all do. In what proportion is a function of your age, the amount you have to invest, your stomach for risk and how much your spouse trusts you. I’ve told you often that for many folks, having about 40% in safe stuff (called ‘fixed income’) and 60% in growth-oriented assets is a good model for the volatile times we inhabit.
I’ve also told you I don’t like direct equity investing, nor mutual funds. Individual stocks – even the bluest of the blue chips – can easily swing in price by 3% a day. Unless you have big bucks to put into a portfolio, such volatility can wipe out the benefit of collecting dividends, and keep you wide awake at night. As for funds, many are lacklustre performers, with traditional active-managed equity finds costing too damn much. Why pay some guy you’ll never meet 2.5% to run a fund when you can have an advisor at 1% who builds you a personal portfolio? Besides the advisor’s fees are tax-deductible, unlike the fund’s MER.
So, ETFs are a better way to go. Exchange-traded funds are more liquid than mutual funds (they trade on stock markets), more diversified than holding equities, less volatile because of it, while still passing through dividends. This is my choice for the growth component of a balanced portfolio. A nice mix might be 20% in Canadian assets (large cap, small cap and REITs), 15% in US (large, mid, small and micro cap), 20% international (large cap, some emerging markets and small cap) and 5% in alternative strategies (this is where a little gold might go).
As for the fixed stuff, I will repeat past suggestions: half in a mix of bond ETFs (government, corporate, inflation indexed and a small amount in high-yield) and half in the preferreds of banks and insurers. Bonds pay little these days, but add a lot of stability and balance. Bank preferreds pay over 5% and serve you up that juicy dividend tax credit – meaning they rival GICs at more than 6%. When was the last time you saw one of those?
This is a reasonably sedate, non-cowboy, conservatively-aggressive portfolio which has done well over the last eight years – which included the disaster of 2008-9. In fact my own investments (which follow this model) yielded an average of 6.46% over that time. So, given the fact 2008 is not going to happen again in the next eight years, expecting 7% is no stretch.
But remember, this is not 7% a year, every year, year after year. In 2008, for example, this portfolio lost 23%. The next year it recovered all that lost ground. The year after it returned almost 15%. Last year it was flat. This year it’s robust. The point is to get it built, have it tweaked as necessary, and stick with the plan.
Of course, there are thousands of funds, preferreds, REITs and bonds to choose from. No one size fits all. This blog has never recommended individual securities, and never will. The best advice is to get some advice. But never forget the three kings: Balance. Diversity. Liquidity.
I’ll have more to say about this in person next Tuesday night in Toronto, plus an analysis of the GTA housing market and I might try out a few new dance routines, since the Amazons have graciously consented to appear in their little sailor outfits. No sidearms this time, thank goodness.
Those who signed up to attend should receive a confirmation email in the next day or two. You can frame it, of course, bring it with you next week, or just look hot when you arrive. Since a whack of people want to come, best arrive a little early at the DoubleTree Hilton Hotel. There will be special seating for realtors.