Nov 182019
 

Time + Ownership = Financial Freedom

When financial writer David Bach was just 7 years old his grandma took him to McDonald’s and explained to him that there were 3 types of people in the world: The minimum wage employees working there, the consumers who pay money and eat there, and the owners who aren’t there but can still make money from the restaurant. David’s grandma helped him buy 1 share of McDonald’s, and taught him how to read and follow MCD’s stock chart.

The next time they went to a McDonald’s restaurant she told him, “now you are not just a consumer here, you are also an owner. Every time you eat here you are paying yourself.” It’s a brilliantly simple concept; easy enough for a child to understand. Yet it’s an inspiring and powerful idea. David became hooked on investing. He bought other stocks over time to eventually become a millionaire. 🙂 From the time he bought his first stock to today in 2019, MCD shares have increased in value by over 250 times! But it didn’t happen overnight. It took decades.

McDonald’s menu in 1973 when David Bach was a kid.

Fortunately anyone can become an owner by investing in established companies like McDonald’s. And the best part is you get to earn all your money while you sleep. 🙂

It all comes down to saving a percentage of your income, and investing it on a consistent basis. And then simply wait. The longer you wait the more your money will have time to compound and grow exponentially. Although you can schedule to invest every month, or every quarter, studies suggest you should invest as soon as possible to maximize potential returns.

People who try to get rich quick stay broke long.” ~ David Bach

If we understand that financial success requires patience, then investing will appear to be easier and less risky. For example, imagine if 2 investors held 2 different views about buying a house.

Investor 1) I’m afraid prices might drop in the next year or so. 🙁 And it’s a rather large investment so I question if now is a good time to be buying.

This mindset makes it difficult to pull the trigger when a good opportunity comes. We act based on what we believe. If we believe prices may fall then of course we will experience more hesitation and concern when buying a house. But let’s look at the second mindset where patience is paramount.

Investor 2) I have the patience to hold this property for at least 7+ years. So after the year 2026, based on macro trends, house prices will probably be much higher than it is now. Most likely rent in the city will be higher as well. Therefore buying a house now and locking in a mortgage balance is probably better than buying a house later and risk taking on an even larger mortgage.

The first person is thinking about the short term, while the other is thinking only long term. The second investor has a better chance of putting his intent into action because his long term perspective provides him with more investment certainty. That’s because it’s hard to know what the market will do next year. But due to inflation and urban densification, it wouldn’t be hard to predict that Vancouver’s home prices will trend upwards over the long run.

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Mar 142016
 

I think believing in superstitions is bad luck. But bad things can happen to anyone. So one way to deal with unexpected situations is to be like Batman and have a contingency plan for everything. 🙂 I’ve recently updated my stress test page to reflect my current financial situation, which has improved since last year. A stress test removes uncertainty and doubt about our finances so we can sleep better at night. 😉

A Worst Case Scenario

Just for fun I have created a hypothetical worst case scenario to see if my finances could survive it. Consider the following events.

The economy contracts. People panic. The Canadian real estate bubble bursts and prices drop by 40%. Stock markets also fall 40%. Jobless claims skyrocket. I get laid off from both my jobs on the same day without notice. On my way to the employment insurance office I get T-boned by a distracted driver and my car is written off. The next day a devastating 7.5 magnitude earthquake hits Vancouver hard. My apartment building suffers heavy structural damage and is deemed unsafe to live in.

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Okay, so things may look bad on the surface. But it’s actually fine, because the whole point of creating a stress test is to protect ourselves against these unlikely what if scenarios. I may be frustrated after all the unfortunate events, but at least I’ll still be okay financially. 🙂 Here’s how things would play out:

  • My combined severance package would be about $10,000 of after-tax income, enough for 3 months of living expenses.
  • I would qualify for employment insurance benefits.
  • My dividend stocks would continue to pay out regular distributions like they did during the last recession.
  • I have a stash of gold and silver in case I need emergency cash.
  • Auto insurance will cover the car accident.
  • Earthquake insurance would cover the damage to my apartment. Strata owners would hold meetings with the property manager to discuss how to move forward using 3/4 votes as per the bylaws. The insurance company would pay our housing costs if we have to relocate somewhere else temporarily.

Luckily my finances would appear to still hold up through all the turmoil. I would have plenty of time and liquidity to get back on my feet.

How to Stress Test your Finances

Step 1: Make a list of all the risks, uncertainties, or potential issues that could effect your money or financial lifestyle.

For example:
Job loss, flooding, rising interest rates, upcoming major purchases, etc

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Feb 112016
 

House it Going in the Real Estate Market?

So this is the kind of house you can expect to buy in Vancouver today for about $1.19 million.

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To put this into context, the same $1.19 million could be used instead to create a dividend growth portfolio that would generate $40,000 each year of tax advantaged income for a lifetime. 🙂 Have homeowners completely lost their noodles in this city?

The economy has stagnated. The U.S. stock market is down about 10% over the last 12 month period. The TSX in Canada has seen worse, falling by 20% since this time last year. Canada lost more jobs than it gained last month, pushing the unemployment rate up to 7.2%. Low oil and commodities prices is costing us a lot of jobs not just in this country but also in emerging markets that export metals and other resources. Negative interest rates are as common as the flu. Asia’s growth is slowing down. U.S. Treasury yields have fallen from 2.0%+ to just 1.6% over the last 6 months. And as Lenore Hawkins, chief economist at Meritas Advisors, says, the slowdown of growth in “global trades is at levels we haven’t seen since around 1958.” It’s almost like the entire world is in recession.

But despite all the negative news and market volatility out there, local real estate as a whole has remained stubbornly bullish for the last 4 decades.

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May 132015
 

Not in my Backyard 

I recently read an article about a lower mainland couple who doesn’t like how a neighbouring $2 million house sits empty all the time. The yard is unkempt, there are no cars in the driveway and the lack of human presence is “driving [the couple] slightly bananas.”

SacrĂ© bleu! You mean to tell me that there are people who buy property only for investment purposes? How dare they offer above market price to purchase a house here, so that Canadians can unlock the full value of their real estate. What can we do with cash anyway? Buy a diversified portfolio of liquid assets like stocks and bonds to provide passive income for retirement? No thanks. I’d much rather put all my nest eggs into a single illiquid asset that produces no income, and lies on a major fault zone. 😛 Those pesky foreign investors who don’t even live here think they can just not contribute any waste to our sewage system, and not use the city’s garbage services, but somehow think they still have the right to pay the full brunt of utility tax and property tax. Some nerve! How dare those foreigners help fund our police, fire, and public education system when they don’t even have kids here to overcrowd our classrooms. It’s also unfortunate how quiet their house is all the time. Who would want to live beside quiet neighbours anyway? Not me. 🙄

Sarcasm aside, foreign ownership of real estate is a hot button issue around here. Should non-residents or non-citizens be allowed to purchase Canadian residential property?

There’s actually a petition to restrict foreign investment in Canada’s most expensive real estate market, which I’ve signed and shared on social media. To be frank I don’t believe this petition will bring about any meaningful change, but I think it’s an important discussion for fellow Vancouverites to have. 🙂

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click on image to sign the petition

There will also be a rally outside the Vancouver Art Gallery on May 24th, to focus on the problem of affordable housing for young people in a city where the average house costs more than $1 million. Feel free to attend and take a stand if you believe in the cause. 🙂

Foreign Real Estate Ownership

Some believe foreign ownership drives up the cost of housing which makes it less affordable to live in the city. But I think that’s largely a myth. The amount of foreign owned property is just a fraction of the overall market. Foreign investment laws haven’t changed much in Canada over the last decade. However mortgage interest rates have been cut in half over the same period. Raise the interest rate and watch as prices correct overnight.

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Mar 282015
 

According to a Financial Post report the average price of detached homes in Toronto passed the $1 million mark for the first time last month. 🙂 The GTA has experienced a housing bull market for almost 2 decades and there is no sign of it stopping.

I want to congratulate Torontonians for reaching the $1 million milestone. Welcome to the club. 🙂 Meanwhile the average detached home in Vancouver now stands at about $1.4 million. But hey, it’s not a competition. 😉 And extreme cases like the Point Grey mansion that was sold a few months ago for nearly $52 million will skew the average results. Can you imagine the commission real estate agents make around here?

We often hear complaints about how unaffordable housing is in Canada. But there are two sides to each coin. My friend’s parents bought a home for $70,000 over 40 years ago. They have since paid off their mortgage, and their home is now worth over $1 million. 😀 They plan to sell their house soon in order to downsize and will become liquid millionaires. That sounds great to me. The majority of Americans and Canadians are home owners. So financially speaking rising home prices should benefit most of us. 🙂

Recently a Vancouver house sold for $567,000 over the asking price. It was listed for $1,600,000, but sold at $2,167,000. People are even making jokes about how insane the housing market is. Below is a short video I found of a Vancouver real estate agent talking about his inexperienced clients. It captures the ridiculous nature of the current market around here. 😆

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