Just recently a relative of mine cashed out in the frothy GTA real estate market by selling her home. It was quite a haul for a home that probably went up 2 times its original value. Now the question became how to retire on that amount of money? Of course this was a person from the previous generation where real estate was the ONLY kind of investment. And of course, people who know what I do in my spare time, told said relative to talk to me about investing.
I mention that real estate is the ONLY investment type, because with my Asian background, this is actually true. It’s rare to find any of my relatives or friends in the Chinese community invest in equities because it has always been synonymous with gambling. A home is considered a physical asset and something that is required. So it makes perfectly logical sense to most conservative investors to only put their money in real estate. The worst that can happen is that you can live in something that you already own right?
It came to no surprise then, that during discussions about what to do with the windfall came down to “I want to protect the principal”. “I don’t want to suffer any losses”. “So what do I buy?”
Guaranteed principal. No risk but that means no gain. It’s really as simple as that. With the reluctance to even consider purchasing equities of any kind it’s really difficult to come up with a balanced portfolio. If indeed the principal must be preserved, then the only option is to go with high interest savings accounts and GICs. Ugh… the bane of any balanced investor.
My relative was only concerned with short term movements of the markets. “If the market goes down, does that mean I lose money?”. “Yes”. “No, that’s too risky for me, I don’t want to lose any money”. Unfortunately, with equities it’s impossible for the market to rise everyday. In fact, it’s impossible to predict whether the market will fall or rise that year. The only thing we can do as investors is mitigate risks.
The goal of creating a balanced investment portfolio is to provide enough passive income to retire. No to preserve the wealth forever. Perhaps I wasn’t really getting that point across very well.
All The Stereotypes Come Out
If you think racism and sexism is rampant right now in society, then let’s get some of the stereotypes out the door about investing. It’s not gambling. Mutual funds aren’t stocks. BlackBerry and Nortel aren’t the only stocks in Canada. When I try to talk to people that are uncomfortable with stocks, these are the only things that come out of their mouth.
Watch too many commercials from Questrade? “Mutual funds are too expensive, I don’t want to buy that”. “I don’t want to lose all my money like Nortel.” Are these all common phrases that we hear?
Oh and gambling. Don’t get me started on gambling. So many people think investing in equities is gambling because everything is “rigged” against them. They’re looking for quick gains rather than actually investing for the long term. These are things that the older generation don’t understand. How to build wealth through the long term, rather than next month. Yes, your mahjong playing friend isn’t investing. They are day trading and trying to play the market like a casino. That’s why it’s called gambling.
You Are Going To Run Out
Unfortunately the elders know better, but despite my pleas of creating a balanced investment portfolio consisting of index ETFs, bonds and preferred shares, it falls on deaf ears. “You’re going to run out of money!” is my response. With no defined pension and no house to live in, the situation could get dire after a few years. GICs don’t pay enough to keep up with inflation in the GTA. CPP and OAS barely give you enough to pay for food. And where is the money coming from to pay rent in the expensive GTA? The windfall?
With over 20 more years of life expectancy, she could be spending up to $25,000 a year renting a single bedroom condo in the GTA area. Without investment income the large windfall from the home sale would dwindle to nothing near the second decade. As an elder, isn’t it too risky to be living on the streets? **SIGH** Apparently not.
I Give Up
Sometimes it’s not worth it to play the losing game. In this case, I knew I was going up against the Trump Mexican wall. There was no way I was going to get past it. The only suggestion I could conjure up was basically tell her what she wanted to hear.
Find some high interest savings accounts from EQ Bank, Simplii, Tangerine or Oaken Financial. Throw it there and move it around every 3 months like how many other people do to chase after a few more extra percentage points of interest. Throw a large amount into a GIC paying 2% interest. Perhaps buy some gold, it seems to only ever go up right? Or perhaps buy a condo and rent it out. Seems to be the popular thing to do in Toronto. At least she’ll have somewhere to live when she runs out of money. Did I miss anything? I really hope her children will be there to save her when she turns 80…