Issue #34 - Fall financial priorities, stock markets are crazy lately, and be careful how much home you buy.

Read time: 3 minutes

Hello everyone! I hope you had a great long weekend. 

I certainly did. Had a great day with some old pals at Shawnigan lake. Yours truly got up on one slalom ski - a huge feat after 15 years without an attempt - got half way out of the wake on the first cut lookin' pretty sharp until I caught an edge and did 4 cartwheels and the body pain to prove it 7 days later. Guess I'm no spring chicken anymore!

Anyway, welcome to all new subscribers this week, we have a top shelf group of people here.

Let’s get to it.  

1. Personal Finance

Kids are back in school, business is picking back up for most folks and it's a great time to get going on various initiatives for the fall.

Time is precious and might as well get started now instead of tomorrow which inevitably turns into next year and then never happens.

For our financial life, we have a few priorities for the Fall.

First, Mj and I will sit down and iron out our budget for the next 12 months. You could say, why not wait until year end to do this? Well, Christmas time is so busy that it’s a total write off. And January everyone gets hyped up on New Year’s resolutions but quickly burn out and drop em. 

So why not now, good a time as any and time is precious as we all know.

Our approach will be flexible but the general game-plan for this exercise looks like this:

1. Review and update net worth, monthly budget and annual forecast.
2. Review last 12 months spending patterns, identify areas of waste (ie multiple stream services) as well as areas we may want to double down on (ie childcare that frees up more time to generate income).
3. Identify investment accounts to continue funding (RESP, TFSAs, RRSPs, non-registered). This includes budgeting for a future home purchase. We are happy as clams renting right now, but eventually we’d like to own, so we will factor that as well.
4. Most importantly, have a free flowing conversation about our life goals both near-term and long-term and tie it back to finances. Because like it or not, most everything in this world costs money. 
5. Last but not least, finalize our Wills. How we want our assets to flow, guardianship for Julia, etc. You don’t need a Will per se, the government will happily make on for you when you’re dead. But that is costly both in time and money and especially if you have kids you want to be sure they are taken care of by someone other than a provincial court.

PS - In the investing course I offer it comes with multiple excel spreadsheets that handle net worth, budget, asset allocation, retirement calculator, etc. While they took me many hours to create, they are very easy to use. I’d like to give them out for free but honestly that’s a spit on the time I spent creating them along with he course material. If anyone is interested in the course and excel resources, check out the offering here. 

2. Stock Markets

US stocks post biggest daily declines since August

-headline from my Google finance watchlist. 

Yes, broad stock markets have had a lot to digest lately:

• slowing economy 
• record consumer debt
• weakening labour market
• prospect of World War Three 
• Kamala vs Trump and the US election
• Central banks lowering interest rates on slowing inflation

But I remind you: while stocks go up and stocks go down, over time, they usually go up. 

Borrowing a chart from a great blog I follow, they show that over the last 31 years you've never had a negative return once your holding period reached 11 years. 

How you can read the chart, choose any year and go down any number of years and the corresponding square will tell you the annualized return from that starting point.

For example, investing in 1997 and holding for 20 years - through both the Dot Com Bust and the Great Financial Crisis of 2008 - your annualized return is 8%.  

I see this: investing consistently + time + patience = $$$

Tell me what you see.

3. Real Estate

As expected the Bank of Canada dropped their interest rate by 0.25% to 4.25%.

This is the third cut by the BOC this year and welcome relief for variable rate mortgage holders, those with Home Equity Lines of Credit, or unsecured lines of credit. 

Cue the real estate bulls that are yelling now is the time to buy Real Estate!

Why? Because ceterus peribus (fancy Economics word for 'all else equal'), lower interest rates mean higher asset prices. This is because the world of finance depends on interest rates for valuing a future cash flow back to today's dollars. More on this in another newsletter - it's important.

So yes, all else equal, lower rates should bring buyers back to the table.

HOWEVER, reality is never equal, and we still have a long way to go to get back to "cheap money" (see chart below).

It is entirely possible that a flood of sellers come back and outweigh the demand increase, lowering prices.

Given record consumer debt, inflation that has permanently lifted general goods and services prices by 40% including costs of home ownership (think utilities, insurance, maintenance, cap ex, etc) and an economy that looks generally weak, many homeowners may throw in the towel once and for all.

Who's going to win? the Supply Side or the Demand Side? Sorry to disappoint you, but that is not a question I intend to answer.

Predicting short term economic events is not how to make major investment decisions. 

If you are in the market to buy a property, that's great. Having owned two properties, I know homeownership has many advantages and if you are a new buyer, it's an exciting time. 

But it does come with some risks. Made lot's of money on the first property, but the second, not so much. After factoring in higher interest costs, increases in strata fees, insurance and property taxes, I sold for a profit but not nearly as much as one might expect.

Whatever direction you choose, just make sure you can afford it. 

Remember, at the end of the day, if you can't pay your mortgage payment in full, the bank effectively owns your property. 

1 Quote

“Don't wait. The time will never be just right.”

-Napoleon Hill. 

A Question

What to you is the meaning of a good life?

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Thank you

Eddie Gudewill, CFA
 

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