Sunday, August 5, 2018

The ‘Secrets of the Rich’ delusion – KISS wins again

Tiger 21 club; HNW clients with more than 1 million in liquid assets; no they must have at least 5 Million in liquid assets on top of their paid-off residence! This is all hype created by banks and money managers that try to seduce you into buying their (non-existing) secret investment sauce and of course they do so for a modest (hahaha) fee!  The rich need advice from lawyers, accountants and any other sycophant who preys on the funds of those ‘wealthy’ and as a favor also advice you although you are not ‘quite there’.  All those news stories about ‘how the rich do it’ are pure marketing baloney – yet here again another such article in the Globe and Mail.

Most of those HNW advisors have no wealth of their own and the banks put employees on their HNW clients who can only dream of accumulating large amounts of investable funds. If 68% of Americans live from paycheque to paycheque and less than 1% of households have a Net Worth INCLUDING their residence and other real estate in excess of $1 - 2million, who really has 5 million in liquid investable funds?  I bet it is less than 0.1% of our population – not exactly a large market for Banks and HNW advisors to make significant money. Rob Ford’s residence was recently put up for sale for 2.5 million. Rob Ford, a son of a wealthy family that includes his brother Doug Ford, Ontario’s newly elected premier That is not exactly a shockingly high price for a Vancouver or Toronto single family home. Many Torontonians and Vancouverites and home owners elsewhere in the country have houses in that price range. The recent housing boom made them wealthy, but their assets are difficult to handle for these so-called HNW managers. How many of these home owners would want to sell their homes to create liquid assets for investment in a 'higher return' stock market, which we all know carries a lot of risk.  

The HNW industry is really about seducing you to hand the management of your RRSPs and other liquid funds over to them. Vultures, so they can put it in a bunch of investments that create lots of commissions. Really, market ETFs that earn 7% at current inflation rates and with minimal commissions is where most real wealthy investors make there money along with some real estate. If you pay a wealth manager 2% of assets under management every year then to out perform that 7% they need at least a return 9 to 10%. For that you must put all your eggs in the high growth portion of the stock market. If you have 10% in cash and another 40% in fixed income it is nearly Impossible to make such returns - i.e. you incur lots of risk not your 'wealth manager'.  There is no-way you can achieve the returns these ‘wealth managers’ need to achieve for you to compete with a normal market ETF portfolio performance.

Reality is that real estate markets are a bit boom-and-bust and they can be as volatile as stock markets. Look between 2000 and 2008, the Calgary real estate market was on fire; especially with some leverage you could make a fortune. Just like it was between 1978 and 1982 when we also experienced a major oil boom. For the rest of the time the market was climbing very gradually in value with a couple of major busts in between. Montreal real estate was virtually dead for years until recently and Vancouver as well as Toronto were like many major population centres in politically ‘stable’ countries experiencing major price increases due to super low interest rates and investments from overseas investors who tried to park their new found wealth away from the corrupt greedy claws of the governments in their home countries.  Now these trends are about to change. After nearly a decade of dormancy the Dutch real estate markets are on fire with improved economic performance. And Calgary, with improved oil prices and hard fought-over pipeline access is about to recover and leap ahead, likely outperforming Toronto and Vancouver once again. 

U.S. stock markets since 2008 have tripled but Canada’s lagged. During the 2001-2011 commodity boom, Canada out performed the U.S. big time. There seems to be always this pattern of under and outperforming markets in all kinds of asset classes. But nobody invests only in the bull markets. We allways have underperforming and outperforming assets and thus there are very few real wealth managers that can really provide you a good 7 to 10% return on your entire portfolio plus their 2% fees. Don’t fall for it. It is like voting for a government that takes ‘care of you from cradle to grave’. There is no such thing, but they will charge you an arm and a leg in taxation and bureaucracy. Reality is that the buck stops with you! There is no miracle sauce or black box that makes you rich and certainly not overnight. 

You think the wealthy have a secret investment advantage with low commissions and high profits? Nothing is further from the truth!  Most are cost-conscience small business owners that build up equity over the years with hard work. Or they are frugal money saving employees that sock away every year a bit of money. These 'rich' rise often from the middle class, whatever that exactly entails. They have access to much lower commissions than that of 2% demanding wealth managers through discount brokerages.  As shown in the previous post, you can keep your commissions low AND get (sometimes) good advice from you full-service brokers by NOT trading in-and-out of stock holdings but by building up a steadily performing portfolio of stocks, often dividend paying. Yes, the buy and sell commissions are high, typically 1.5 to 2% of the investment value that you bought or sold. But if you only pay that on a slowly changing portfolio where you keep capital gains taxes low (and thus get an interest free loan from the government) your overall annual commission-cost can be as little as that of that what you spend on the discount brokerage annually.  Paying someone 2% AND outperform the markets is a ridiculous concept.

With a portfolio of international stock market index ETFs you have a good chance of making 6-7% plus inflation. That means that your net worth doubles every 7 to 10 years. You paid off your house which could be worth over a million when you retire because you are likely to go through at least one of those real estate booms during your lifetime. Saving and investing in an stock ETF portfolio will lead to a doubling of your portfolio every 7 to 10 years. So, say that in your first decade upon reaching 35 years of age you saved $50,000 then it 'doubled' to roughly $75,000 (you didn't accumulate all those savings in year 1); the next decade (you are now 45), your portfolio is $150,000 plus another $100,000 (you are now saving $10,000 per year) or a net worth of $250K plus your house paid for (even if you just made your monthly mortgage payments for 20 to 25 years). By 55 years old, you should have saved another $150,000 while your portfolio doubled again to $500,000 for a total net worth of $650,000 plus your paid-off house. By age 65 you saved as an empty nester and at peak salary over that decade $250,000 – no more mortgage payments, no large purchases, kids are out of the house. Plus, your portfolio doubled again; it is now worth $1.3 million and your net worth is 1.3million plus the $250,000 in new savings for a total of $1.55 million plus a million-dollar paid-off home plus a Canada Pension and OAS worth around $150,000 per spouse. Guess how much your net worth would be if you kept on working until 75? Many 65-year-old baby boomers don’t want to stop working. What do you think would be the case for Millennials when they reach that age? 
  
Getting rich in Canada is not difficult with a good saving habit. But… it takes time; avoiding the clutches of the tax man and the ‘wealth managers’. If you buy a diversified portfolio of ETFs emulating market indexes in Canada, the U.S., Europe and I suggest also in China or Asia in general, you will achieve those numbers without major brain-power. KISS - Keep It Simple Stupid wins again!

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