Monday, June 24, 2013

If I was a millionaire I’ll be buying…

Not much. Barenaked Ladies may know how to write cute songs, but during these days of low interest, a million doesn't buy you a lot, unless you like Macaroni and artificial Cheese. So say you are one-and-a-half millionaire. Say you are a retiree with a paid off $500,000 house and a $1 million dollar RRSP which you have in a 1% savings account.

Oh my God, the rich guy makes an incredible $10,000 per year. That is not enough to live off! Oh, and to top it off if you take it out of the RRSP you have to pay income taxes on it. Thank G that you have a personal deduction of $17,000 but... oops, there is also inflation of 1.5%.
Well, at least the retiree has a home to live in with only $3000 per year in property taxes not to mention maintenance costs of another $2000 to $3000. This is in a nut shell the dilemma many retirees face. They saved during their younger days like Dagobert Duck. However today, they don't make enough to take a bath in the vault.
Blame the central banker who has ‘rescued’ the economic system and Wall Street Bonuses at the expense of these ‘rich’ retirees. To make matters worse, the younger generation blames these 'retirees' because the Canada Pension coffers are near empty and the youngsters feel that they have pulled the short straw in that Ponzi scheme. Even worse, because those old fogies can’t afford to retire, they keep jobs from younger people and don’t even have the decency to die and take off to heaven! There is health care in action for you!
Then you have all those seniors that didn’t even come close to saving a million for their retirement! Yes, I am talking about the parents of you youngsters! Those same ones who took you on vacation as kids; who bought you your first computer with Reader Rabbit and Treasure Mountain. Who fed you and helped you through university and through life in general. You call that fair?
In the meantime, fat cat central bankers like Bernanke and their cronies at Goldman Sachs or in the Whitehouse are telling everyone that they should save more and buy & hold while recommending to 'tax the rich'. Then when a factory collapses in India, the customers at Wall Mart are the guilty ones. Strange world we’re living in!
So, you may be afraid of inflation, but why? Some inflation is part of a better economy; finally, we’re losing our artificially low interest rate environment. Yes your dividend paying stocks may decrease in value, however, I think that it is very unlikely that Coca Cola, Johnson & Johnson, or the Royal Bank (to name a few) will stay down for long.  When the economy is picking up enough so that interest rates will normalize, chances are that we will be drinking more coke, buy more baby shampoo and we’re putting more money into GICs so that banks can sell even more mortgages. Chances are that corporate earnings will outpace or at least keep up with rising interest costs and so will dividends.
Really, it is about time that interest rates normalize and that we get returns exceeding inflation on our GICs and other fixed instruments. Yes, long duration bond holders will suffer, but don’t tell me they haven’t been warned for the last four or five years that we’re at the very top of the bond cycle. The real miracle is that it took so long for yields to go up. If you still own long term bonds sell them because there is only one long term trend: down!
For the near term stay in cash and sell your riskier, uncertain stocks. Hold on to your dividend aristocrats. In 3 to six months, you can start buying short term fixed income and possibly variable rate GICs or 1 year GICs with a yield of 2 to 3%. Then keep on turning them over upon expiry and you may out do inflation. Remember though the tax man, do this within your RRSP or your tax free savings account. We had a 30 year bull market in bonds but now we’ll be starting a long term bear market. So stick only to short term (less than a year) fixed income. Hopefully that 1 million will make $30,000 per year or better in the near future.

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