Where do you invest your money? That’s likely the most salient question of the times. There are so many ways to go wrong. A recent article in The Economist, summarized the historical fury of bear markets that have substantially wiped out wealth:
1. In 1946 when bond yields were at their current 2.5% level, 75% of their value was lost in the following 25 years in Britain.
2. When investors hurried into gold in its last peak in 1980, the price fell by 2/3 in the next 20 years that followed.
3. By the year 2000, when the world was highly exuberant about the internet, the dividend yield on American equities was just one per cent; and the annual real equity return over the next 10 years just under that, .08%.
4. In 2011, despite strong growth in India and China, emerging equity markets fell 23% in the third quarter; resulting in those shares trading on a discounted valuation compared to developed-market counterparts.
In Canada, we are comforted by strong banks and a strong, stable real estate market. Today residential housing development represents about 20% of the domestic economy, according to the Canada Mortgage and Housing Corporation, and rising real estate values continue to drive consumer confidence. What’s noteworthy, however is that residential mortgages are the biggest single asset on Canadian bank balance sheets, according to an October 15 article by Postmedia News. What happens if the real estate bubble bursts? What could make it burst?
Demographics, for one thing. Will baby boomers downsize out of their empty nests? Will their 20 and 30-something children stop buying homes with all the uncertainty? Will they default on mortgages if we enter a deeper recessionary phase? How will that affect the balance sheets of Canadian banks? My co-author Robert Ironside says this:
“The issue with respect to the banks, should we have a major real estate correction, is of great concern. The banks are shielded somewhat by the existence of mortgage insurance on their high ratio mortgages but their income and asset growth would be significantly affected.”
Wealth preservation seems to be the name of the game today, but an additional issue is this: even if we are great savers, what will our current dollars buy in the future? If we hold on to the wrong things; we face the winds of financial erosion. Those winds include the potential for recession, deflation, inflation and taxes. Continuing to make new money is a strong defense, and then carefully investing it into the future, to offset that erosion, is also a must.
This is easier if you have a stable income from employment or self-employment; much more difficult if you are living on a fixed income in retirement, although a savvy eye to investing in income-producing assets is important; so is an indexed pension plan. Managing tax and debt loads is an important part of every strategy because it preserves capital today, maximizing returns on investments. It is also something we can directly control.
Where do you invest the money? In writing Financial Recovery in a Fragile World, my co-authors, Robert Ironside, Al Emid and I have attempted to provide a macro overview of the causes for the dilemma we find ourselves in, and how investors and advisors can use a framework for thinking about preserving and building wealth going forward. We continue to be of the belief that financial recovery begins at the micro level; with financially stable households.
It’s Your Money. Your Life. It makes sense to get your financial affairs in order in this climate. We are not out of stormy seas yet, so we need to manage as much risk as possible as we tack carefully forward. Managing debt loads, especially mortgage debt, is important. So is tax efficiency.
Evelyn Jacks is President of Knowledge Bureau and has recently been named one of Canada’s Top 25 Women of Influence. Her book, Essential Tax Facts, 2012, is at print and she has just returned from a national tour, discussing the financial recovery with an inter-advisory audience at the Distinguished Advisor Workshops November 2 to 10.