Sustainability

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What better way to start off the first post of the New Year than to take a look at what we have in store for 2014.  There will be big changes that will happen especially now that the United States have changed their chairman or should I write chairwoman at the Federal Reserve.  This might represent the changing of the guard for monetary policy in America, which may have reverberating effects throughout the global economy.

So how does this tie into our own finances and what to expect.  With the United States economy slowly awakening from almost a decade long slump, this is going to create a long arduous road back to the norms that we were used to when the economy was not on life support.  This will mean a normalization of interest rates.  Zero percent interest rates were not going to last forever, despite the wishes of everyone who borrowed a lot.   The reality is that long term averages for interest rates has always been around 7-8%.  We won’t be expecting interest rates that high so fast and so soon, but eventually we’ll get there.

So what do we expect in a rising interest environment?  Well to put things in perspective we shouldn’t be getting used to seeing significant double digit gains for our investment portfolios.  2013 is simply unsustainable.  With the tightening of the money supply there won’t be as much free money roaming around to buy up assets.  If I were to predict prices to continue to climbing the way they did in 2013 for the rest of eternity, someone would request that my blog get shut down right away.  Imagine what would happen if detached home prices rose 18.9%, as it did in 2013, for the next 10 years in Toronto.

10yearhouse

The average price of a detached home would sky rocket from $864 361 to $4.9M.  Making this kind of prediction would land me in the same realm as Bill Gates saying 640K RAM was all you would ever need in a computer.  We all know where that ended up going.

Similarly we can’t expect equities and stocks to continue on their rampant run of 2013 with a 29.6% return every year, as the Dow Jones industrial average did.  If that happened, an investment made at the beginning of this year at $10k would make us all millionaires ten years later.

10yearstocks

Some of these numbers are pretty absurd, and they are.  I’m not trying to be pessimistic, but the fact is we have to be realistic with our expectations.  2013 was an anomaly, and it might be something that may never happen again.  Everything has to be sustainable.  Some things are just common sense.  Just like how we manage our own personal finances, we have to think about what we’re doing and whether or not it makes sense.  If what you think is stupid and unsustainable, then you’re probably correct.

Simply put, you should be creating a budget for yourself that is sustainable.   Don’t spend too much, nor live life so frugal that you become a hermit who never spends a dime.  Your budget should be well thought out and balanced so that there is room to spend and room to save.  Leave yourself some leeway one way or another so that you can be flexible.  Always remember that you should pay yourself first and continue with the good habits that you have been building to make yourself financially independent.

Building and executing a solid financial plan is a long journey and that is why sustainability is important.  It has to be something that you can continue to do without feeling like you have no life to live..  If you have started investing and tried to make your money work for you, stick with it.  Stay patient.  Let it grow and know that if you have long term goals, your money will do wonders for you.  If you still haven’t gotten around to making yourself a viable financial plan.  Now is the time.  Make a New Years resolution to get yourself educated so that you can start building yourself a financially independent future.

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2 thoughts on “Sustainability

  1. Going to agree that rates are going to rise (well, sounds like not until 2015 for Canada); but let’s not forget the long term average of 7-8% included the high inflationary periods of 1975-1985 where rates were 15%+. Current monetary policy is to keep inflation in check (by rising rates early) to avoid situations like that. Long term average based on this policy will likely be around 5-6%. Unfortunately, low rates have only caused greater investment in real estate and not in businesses; if anything, and as the government is trying to do, they will be applying greater restrictions on mortgage applications.

    Also, last year’s 30% gain while significantly above average (~10-12%), is not as much an anomaly as you might think. Since 1970 (the only data that was easily accessible), the S&P has returned 20%+ returns 12 times in those 43 years. If anything I believe with all the options and automated trading that takes place now, the market will see more wilder swings year-to-year (both positive and negative). Will 2014 produce 30%+ returns? Probably not – most analysts are saying 7-8% for both Canadian and US markets which is actually below historical average for both.

  2. Pingback: 2014 – Year In Review « Financially Yours

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