About the only thing 2011 lacks so far is a plague of locusts. But it’s only April. So far we’ve had revolution and unrest across the Arab world, quakes and floods in Japan, surging oil prices, nuclear disaster, a plunging US housing market, two more European bankrupts, American government shutdown and a brand new war. Real estate sales are down, mortgage rules tighter, gas is $1.40 a litre and the latest jobs numbers suck. So how can my investment portfolio be up so far by 11% annualized?
Two reasons. One, it’s balanced. It holds both growth assets and fixed income. When stocks fall, bonds rise. That’s called negative correlation, and it’s better than KY Jelly. It also makes money through a variety of assets, from those REITs I told you about (up 22% last year) to US small cap ETFs (equally impressive) to emerging markets (now on sale). Anyone who thinks diversification is a bad idea needs to think about Reason Two.
Here it is: this is a dangerous time. People with the bulk of their net worth in one asset, like real estate or equity mutual funds, will seriously regret it. There’s a very good chance oil is going to $120, triggering more European debt crises and screwing up global growth. Dramatically higher energy costs (I almost regret owning a Hummer) are causing food to explode in price and leading to inflation high enough that rising interest rates are an inevitability. Meanwhile the crap has only started to fly in Syria, Yemen and (probably) Saudi Arabia.
Stock markets are ahead of themselves and the government stimulus helping to support them will end. Just look at the catfight in Washington. Obama’s in trouble. The Tea Party yahoos would happily see Wall Street cratered, and a survival-of-the-fittest austerity era commence, replete with protectionism and chastity belts. Meanwhile in China, interest rates are rocketing higher as the country tries to fight deflationary poverty and inflationary urbanity at the same time. Maybe it’s time to wonder what happens if Japan and China stop buying US bonds.
This is exactly why 70% of my net worth is in liquid financial assets. And this is why you’d be wise to emulate. If America and Europe are any model (and why wouldn’t they be), the greatest threat the middle class faces is a drop in real estate values. This grows more likely with each tick higher in oil prices, each new American misery and every additional dollar a Canadian family borrows.
There’s only one reason why the real estate market continues to seduce and enthral. House lust, which is what greed has evolved into. It is overwhelmingly powerful, and inherently trite. In a hail of Tweets, it can be gone.
So, don’t get distracted by eye candy. Don’t heed the nutbars who rush here to lure you astray.
Be a manly man, like John:
In 2006 my wife and I left university with negative net worth and a combined income that has climbed to around $85k. In 2008 we put 10% down on a 40yr $285k VRM for an adult-oriented condo — and then started reading your blog as the markets sagged. That year we paid off our debts and knocked about $1500/month off the mortgage principle.
With a baby on the way now, we have sold the condo (on the first day to a Chinese buyer) and will rent a townhouse until we know how long we can stay in Victoria. We have ~31k in TFSAs, $10k elsewhere, and we will clear another $75k from the sale. Our net worth has gone from 0 to $115k in 5 years, which is comforting. Last month our real estate liability represented 250% of our net worth (did I do that right?), and this week it represents 0.
I have two observations:
1) To buy, carry, and sell the condo over 3 years cost us an average of $1100/month. That includes no transfer tax (first time buyers), a VRM below 2% much of the way, and a small capital gain. Our new, larger, rental goes for $950/month and I don’t have to worry about the roof.
2) The transaction costs on the condo are what made it more expensive than renting. (Carrying costs are about $750 right now). Worse, our bank has stopped offering open mortgages for the next time we buy. I wonder how many first time buyers know what city they will be working in or how many children they will have five years from now. I know two guys who commute over 50 km from houses that are too small, but who can’t afford to break their mortgages.
See? Not everyone in Victoria suffers from mould. And not all young couples are house horny. Some actually think.
In a world of risk and temptation, remember my family motto: Keepeth It Zipped.
