The Goal of Life

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goaloflife

Pearl’s dad retired ten years ago at age 54. “Take that, Freedom 55!,” she says. And while he managed to lock away $500,000 in savings, the family lives on air.

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“His pension and both my parents’ CPP payments bring in about $25,000 a year after taxes,” she says. “It costs about $15,000 to run our household.” Just fifteen grand? To live in Vancouver?

“Yes, Garth, $15,000 pays for the basic necessities for two parents, two adult children (who are working on moving out – this is a multi-year process involving defying the parental guilt trips typical of Asian cultures), three dogs, plus property taxes, electricity and natural gas, and vacations. Sure, we notice the effects of inflation.  BC Medical premiums went up by 4% this year.  You can’t buy full-sized birthday cakes for 99 cents at the clearance rack at the supermarket anymore.  Transit passes went up by 10%.  But as long as my parents don’t have to dip into their savings to pay for living expenses, nothing I say about inflation gets through, and, by my brief estimates, nothing I say will get through for at least another 10 years.”

Pearl says she reads this blog daily. “I know you shake your head whenever you see the lemmings dive headfirst into 1.2% GICs, and I thought I might offer some insight into lemming psychology…if you’re curious.”

Of course I am. A half million dollars ‘invested’ at less than 1.5% means a loss of purchasing power every single day. It’s extreme behaviour, emotionally and psychologically driven, divorced from the actual conditions of the world we live in. Why would anyone choose to have less, when they can have more?

“Yeah,” Peral admits, “it breaks my heart to watch my mother moan about GIC rates and fight with TNL@TB for an extra 0.01%.  This is a woman who still wants to diligently roll over T-bills at 10% like it’s 1979.  Cheap Immigrants can be very risk-averse, craving security and guarantees.”

But it’s not about immigrants, of course. The streets and cities are full of people who have chosen fear over confidence, mostly because they’re uneducated or misinformed. Hence this pathetic blog, Pearl. You are hereby instructed to tie your parents down and force them to read this, no matter how they scream, beg for water or hurl abuse on Harley owners.

Banks take money from people like your folks, pay them peanuts and then loan the same funds out for things like mortgages to intemperate people without money or HELOCs so dentists can buy Porsches. The only reason anyone would tolerate this is fear of loss. Banks have done a number on the heads of millions of Canadians, the result being a majority of TFSAs in savings and $900 billion in GICs. No wonder people are steered into such wealth traps the moment they enter a branch.

What are your parents afraid of? Risk, of course. Yet by burying their life’s savings in non-producing assets, in a world where prices and taxes only increase, they lose not only capital value, but quality of life. Supporting four people and three dogs on $1,250 a month is nothing to be proud of when there is $500,000 donated to the bank. That money, even at a 5% return, could swell family income, improve every hour of every day, and still preserve the capital. Is it not irresponsible and almost selfish to impoverish those around you because you refuse to learn what risk is? I think so. Time to change that.

Tell them to start by not thinking in extremes. While stock markets have richly rewarded investors over the past four years, and a balanced portfolio returned 10% last year, 8% over the last three and almost seven per cent over the last nine (including the meltdown), it’s not a choice between ‘the bank’ and ‘the market.’

For example, a simple (and essentially riskless) money market fund today pays the same as banks are giving for locking up your money for four years in a GIC. So while the rate remains abysmal, you have something the GIC denies – liquidity.

Of course, why give your money to the bank for a pittance when you can invest in the bank and receive far more? Buying bank preferred shares today produces a yield of about 4.87%, plus the dividend tax credit, boosting the effective yield closer to 6%. These are shares with characteristics of bonds, fixed dividends which never vary, a par value so you always know what they’ll redeem at, and extremely low volatility compared to common stocks. Preferred prices can be affected by interest rates, but they’re not moving soon, or by much. Besides, there’s so much demand for preferreds (for obvious reasons) values are unlikely to move much even if rates rise. More importantly, you get a continuous stream of cash.

Mix in a small percentage of quality REITs, which own the bank towers, have great cash distributions and have grown nicely in value, plus some investment grade corporate bonds (five-year bonds with a coupon of about 3.5% are yielding 2.5% to maturity, and liquid), and you have a very conservative portfolio which should kick out 5%, doubling their income.

Pearl, your parents should be old enough to understand life’s object is not to suffer so you can die with an undisturbed pot of money. Rather, the goal is to wisely spend the one commodity no human can replace. Time. A life richly lived brims with endless experiences, as uncurbed or shackled as possible by lack of means. Self-imposed and needless frugality is no virtue. Being cheap should bring no pride. Penury’s not the goal. Your folks are prisoners of their own unfounded prejudices, misconceptions and inertia.

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Yes, I do shake my head at stories like this. Of all our emotions, fear is the most debilitating. If you doubt it, keep reading. This blog is a swamp.

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avatarGarth Turner - The Greater Fool posted Sunday, February 3rd, 2013.

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