• Last Updated:
  • Aug 30th, 2015 12:22 am
Tags:
None
Banned
User avatar
Nov 1, 2014
4317 posts
558 upvotes
Toronto, ON
KnowledgeHungry wrote: So, does that mean Cash is the best investment? It has no volatility whatsoever.
?? Cash has tremendous volatility

Cash has dropped more than 20% in value over last year
Deal Addict
User avatar
Jun 28, 2007
3863 posts
1026 upvotes
KnowledgeHungry wrote: So, does that mean Cash is the best investment? It has no volatility whatsoever.
Depends. If there is a market meltdown, and credit spreads are widening, then yeah, "cash is king". Surely you are well read enough to have heard that saying?
Deal Fanatic
User avatar
Apr 11, 2008
5754 posts
473 upvotes
gomyone wrote: ...the reason why the chart you showed is inflation adjusted is that it makes little sense to look at historical time periods without doing so. Same thing with equities - you can't compare time periods because its the real return that matters.

As for your comment "you could live comfortably on dividends if you retired in 1929" you might want to read a couple of history books. They called it the dirty 30s/ Great Depression for a reason. Many companies, or at least those that survived, stopped paying dividends after the 29 crash, due to a massive global liquidity crisis. No dividends and no hiring either. it wasn't until the mid 40s (and the war effort) that corporate earnings were beefed up and the 50s when stable economic growth returned. In fact, the 1930 and 40s period was actually very similar to today's economic environment.(Which is why they called the 2008 downturn the Great Recession).

When I mentioned diversification, I didn't mean within the asset class, I meant between asset classes. From a personal finance standpoint, you shouldn't have all your assets solely invested in the stock market. Similarly, your entire asset base shouldn't only be composed of your principal residence. Some diversification between these assets is optimal in the long run.

PS: here is a good article about why its wrong to look at highest absolute returns over time as the basis for investing in one asset class (stocks) over others (bonds, real estate etc)

http://www.investopedia.com/articles/st ... uities.asp
We don't need history books, we have real numbers. Dividends not only didn't crash in 1929, it went up in real term. It's not until mid 30s, the dividends crashed by less than 40%, but it recovered quickly in several years. The point is you can't ignore dividends back then.

S&P 500 gives you exposure to REs in all regions. Broader indexes give you exposures to REs around the world.

PR is a terrible way to diversify. Unless you are telling me you can afford to keep your PR at a constant percentage in your asset, you are either extremely over exposed in your 20s or extremely under exposed in your 60s. Not only that, you are not exposed to the overall RE market at all. The oil price crash impacted Alberta RE disproportionally whereas Ontario RE probably was helped by it. The independence movement destroyed Montreal house price and it probably still lag Toronto after it gave up its status as the most populated city in Canada. Markham went up significantly, but Brampton has had this bad reputation. Could you have predicated the house price in Detroit in its glory days? In order to be exposed to Canadian RE market, you will need a house in each neighborhood or at least a significant number of neighborhood. It's said you need at least 35 stocks to be considered diversified, I certainly can't afford 35 PRs, the CRA wouldn't allow that either.

We are not looking the absolutely highest return for stocks, we are looking at the absolutely lowest return for stocks. If you want to look at the absolutely lowest return for RE, it went down by almost 50% from 1895 to 1921 in real term.

This is however not an argument against PR. I totally agree that you should get a PR and probably as early as possible. However, I wouldn't pin my retirement hope on it. They simply serve different purposes.

p.s.

I just ran the numbers. Assuming somebody retired on Jan 1st, 1929 and had $71649.45 (equivalent to $1M today) invested in S&P and assumed he spent $1791.24 (equivalent to $25K today) each year. It's not until Sept. 1934 before his dividend would not cover his expenses, and only by 73 cents. Over the previous 5 years, he would have saved $3769, enough to cover 2 years of expenses.

Things start to turn sour in Jan 1935, he would have a deficit of 7 cents for that month and it continued for 9 months for a total of $23.75 in deficit. Wow, big panic. But by Oct 1936, he would have been making the same surplus as before.

At the end of the decade, dividends drop again, but he never went into deficit.

30 years later, in Dec, 1958, he would have doubled his worth (assuming he reinvested his surplus) and pass it on to his children.

I wish my retirement would be that easy.
Deal Fanatic
User avatar
Apr 11, 2008
5754 posts
473 upvotes
LandKing wrote: ?? Cash has tremendous volatility

Cash has dropped more than 20% in value over last year
Exactly and it loses value continuously. Given the current monetary environment, anything is probably better than holding cash long term.
Deal Fanatic
User avatar
Apr 11, 2008
5754 posts
473 upvotes
gomyone wrote: ...the reason why the chart you showed is inflation adjusted is that it makes little sense to look at historical time periods without doing so. Same thing with equities - you can't compare time periods because its the real return that matters.

As for your comment "you could live comfortably on dividends if you retired in 1929" you might want to read a couple of history books. They called it the dirty 30s/ Great Depression for a reason. Many companies, or at least those that survived, stopped paying dividends after the 29 crash, due to a massive global liquidity crisis. No dividends and no hiring either. it wasn't until the mid 40s (and the war effort) that corporate earnings were beefed up and the 50s when stable economic growth returned. In fact, the 1930 and 40s period was actually very similar to today's economic environment.(Which is why they called the 2008 downturn the Great Recession).

When I mentioned diversification, I didn't mean within the asset class, I meant between asset classes. From a personal finance standpoint, you shouldn't have all your assets solely invested in the stock market. Similarly, your entire asset base shouldn't only be composed of your principal residence. Some diversification between these assets is optimal in the long run.

PS: here is a good article about why its wrong to look at highest absolute returns over time as the basis for investing in one asset class (stocks) over others (bonds, real estate etc)

http://www.investopedia.com/articles/st ... uities.asp
Another interesting simulation. Let's assume a couple started to work in Jan 1929 and retired in Dec 1958. Would they be able to do so given that they were in the "dirty 30s"?

Let's assume they were not very frugal and only maxed out their TFSA (if they had those in 1929). That's $20,000 a year in today's dollar.

By 1959, they would have $400K in their account, or $3.3M in today's dollar. But more importantly, they would have a dividend income of $9,000 a month in today's dollar. Comfortable retirement and they probably paid off their primary residence by then as well. Ah, the happy times of the great depression.

In fact, the dirty 30s were one of the better cycles for investment since the crash came early. The last 30 year cycle on the other hand would only yield slightly less than $2M at the end and only $3K/month for retirement. Still comfortable, but probably not nearly as good.
Banned
Aug 24, 2015
22 posts
25 upvotes
North York, ON
Archanfel is a voice of reason around here. Unfortunately reason stands no chance against a handful of posters who relentlessly spam these boards about how real estate appreciation at 10% is normal and will continue until they are all multimillionaire starter home owners
Banned
User avatar
Nov 1, 2014
4317 posts
558 upvotes
Toronto, ON
Firethemall wrote: Archanfel is a voice of reason around here. Unfortunately reason stands no chance against a handful of posters who relentlessly spam these boards about how real estate appreciation at 10% is normal and will continue until they are all multimillionaire starter home owners
Well the thing is.... on average as an aggregate..it makes sense and is valid...BUT.. it doesn't apply to actual RE purchases by people since people do not buy average or indices when they buy a home... they buy a specific home in a specific location. You can't compare it like that.. it's like comparing the overall market to the performance of a specific stock over 30 year time horizon.

I mean the fortunes are very different if you invested in newsprint media sector (let alone individual stock) vs tech sector (again let's not talk about the aapl and goog).. this is the problem with trying to compare RE to indices .. a home purchased in orillia would have very different returns than a home purchased in a new community in markham over a span of 5/10/15/20+ years.
Deal Fanatic
User avatar
Apr 20, 2011
5310 posts
481 upvotes
Vancouver
LandKing wrote: Well the thing is.... on average as an aggregate..it makes sense and is valid...BUT.. it doesn't apply to actual RE purchases by people since people do not buy average or indices when they buy a home... they buy a specific home in a specific location. You can't compare it like that.. it's like comparing the overall market to the performance of a specific stock over 30 year time horizon.

I mean the fortunes are very different if you invested in newsprint media sector (let alone individual stock) vs tech sector (again let's not talk about the aapl and goog).. this is the problem with trying to compare RE to indices .. a home purchased in orillia would have very different returns than a home purchased in a new community in markham over a span of 5/10/15/20+ years.
Only on Canada's deal board(this one) are rising prices abnormal lol. Everyday I wake up and know that this is Canada with demand from around the world, instead of an unnamed European country in which it is socially acceptable to rent for life.
Deal Fanatic
User avatar
Apr 11, 2008
5754 posts
473 upvotes
LandKing wrote: Well the thing is.... on average as an aggregate..it makes sense and is valid...BUT.. it doesn't apply to actual RE purchases by people since people do not buy average or indices when they buy a home... they buy a specific home in a specific location. You can't compare it like that.. it's like comparing the overall market to the performance of a specific stock over 30 year time horizon.

I mean the fortunes are very different if you invested in newsprint media sector (let alone individual stock) vs tech sector (again let's not talk about the aapl and goog).. this is the problem with trying to compare RE to indices .. a home purchased in orillia would have very different returns than a home purchased in a new community in markham over a span of 5/10/15/20+ years.
Luckily, we don't have to buy individual stocks anymore. We have very low cost ETFs that tracks whatever indexes you would like to purchase. However, I do agree that all these are academical. In principle, I agree with you and Kenobi, and I don't think you are spamming.

I am not so sure about these new communities in Markham though. I just don't see the point of a huge house on a small lot. House don't appreciate, only land does, so why not buy a large lot with a crappy house instead? To me, that's still a life style choice, not an investment decision. In 30 years, the "new" community would be old community and people's taste in houses might change (I am sure back in the 70s, people loved 8 feet ceilings). A new airport in Pickering and Markham might be right under the flight path. And running a little risk of being racist, there's no guarantee Markham wouldn't become another Brampton.

As you said, people buy a specific home in a specific location. We all know it's extremely risky to put all our money into one stock because we are not professional stock players. Yet we are more than willing to put our life's saving in a specific house. Now, I did that (albeit a very small house) because I like the neighborhood and want to live there, but if I were purely to invest in RE, I would probably buy land in multiple locations instead and wait for the appreciation. A even better way is to purchase high yield condos in the States back in 2008 (if you had the cash) and live on the rents. $1M could probably get 20 condos back then.

However, since I am lazy and didn't want to argue with the wife, I bought a house that I want to live in and keep my retirement savings in passive indexes. Totally the wrong decision mathematically, but there are things more important than money in life.
Deal Fanatic
User avatar
Apr 20, 2011
5310 posts
481 upvotes
Vancouver
It seems that thing's are very different in Ontario. In BC for many years already everyone sees the purpose of a home built to the largest possible FSR(ratio) on the lot. If the house in question is of a specific Canadian design, it even appreciates lol.

For people that don't already known, property taxes in the US are 2 to 3 times higher than in most of Canada.
Deal Addict
Jan 16, 2009
4021 posts
1642 upvotes
Toronto
popbottle wrote: It seems that thing's are very different in Ontario. In BC for many years already everyone sees the purpose of a home built to the largest possible FSR(ratio) on the lot. If the house in question is of a specific Canadian design, it even appreciates lol.

For people that don't already known, property taxes in the US are 2 to 3 times higher than in most of Canada.
It's actually because Canada's comparable house are 2 and 3 times more expensive.

The question is..do you want to save on tax or the costs of the house?
Deal Addict
User avatar
Jun 28, 2007
3863 posts
1026 upvotes
Archanfel wrote: Another interesting simulation. Let's assume a couple started to work in Jan 1929 and retired in Dec 1958. Would they be able to do so given that they were in the "dirty 30s"?

Let's assume they were not very frugal and only maxed out their TFSA (if they had those in 1929). That's $20,000 a year in today's dollar.

By 1959, they would have $400K in their account, or $3.3M in today's dollar. But more importantly, they would have a dividend income of $9,000 a month in today's dollar. Comfortable retirement and they probably paid off their primary residence by then as well. Ah, the happy times of the great depression.

In fact, the dirty 30s were one of the better cycles for investment since the crash came early. The last 30 year cycle on the other hand would only yield slightly less than $2M at the end and only $3K/month for retirement. Still comfortable, but probably not nearly as good.
...lol you are the first person i have ever met that looks back on the dirty 30s and the Depression era as a great time to be an investor and retiree. Either you are oblivious to history (and the fact that only the significantly rich had any money left over to invest following the 29 crash, while most others had no job, no food and most had no roof over their head either.) or you have simply dismissed "common sense" and are just using the benefit of hindsight to get you to an optimal conclusion.

Same thing today. You could have definitely made alot of money if you invested your life savings in the market exactly at the bottom in December 2008. Did most people do it. No, because the market volatility scared them away (while at least in the US, people had other concerns, including finding a job or putting a roof over their head). most only returned to the market after the big gains had already been had.

Anyways, this is all semantics. The group that tends to have the highest wealth on average, are people who own both stocks and real estate. I'd prefer to be that person, than someone who thinks they can time markets perfectly and put/keep all their money in what is obviously a very volatile and not for the faint of heart, stock market.
Deal Fanatic
User avatar
Apr 11, 2008
5754 posts
473 upvotes
gomyone wrote: ...lol you are the first person i have ever met that looks back on the dirty 30s and the Depression era as a great time to be an investor and retiree. Either you are oblivious to history (and the fact that only the significantly rich had any money left over to invest following the 29 crash, while most others had no job, no food and most had no roof over their head either.) or you have simply dismissed "common sense" and are just using the benefit of hindsight to get you to an optimal conclusion.

Same thing today. You could have definitely made alot of money if you invested your life savings in the market exactly at the bottom in December 2008. Did most people do it. No, because the market volatility scared them away (while at least in the US, people had other concerns, including finding a job or putting a roof over their head). most only returned to the market after the big gains had already been had.

Anyways, this is all semantics. The group that tends to have the highest wealth on average, are people who own both stocks and real estate. I'd prefer to be that person, than someone who thinks they can time markets perfectly and put/keep all their money in what is obviously a very volatile and not for the faint of heart, stock market.
I am not sure what you are trying to say. Are you saying S&P is lying about their numbers? There's no timing involved. You chose the date (30s-60s) and said the returns were bad in those years. You also said someone couldn't have retired on dividend in 1929. I ran the numbers and showed you otherwise. Both investing and retiring in those years were highly doable.

Let's do it again for the investment scenario and this time precisely on the date you picked from Jan 1930 to Dec 1959. After investing the equivalent of $20,000 each year (e.g. $119.42 in Jan 1930), the couple would have the equivalent of 3.6M by the end of Dec 1959. No timing involved, just purchase S&P 500 at the beginning of every month using their pay checks. Today, you can let the bank do it for you automatically if you don't think you have the discipline to do so yourself. There's no easier way of investing.

If you want, you can choose another date and I will run the numbers for you again. This is not all semantics at all, but hard cold numbers that you can't change.

And again, investing 20,000 each year does not stop you from purchasing your PR.
Banned
User avatar
Nov 1, 2014
4317 posts
558 upvotes
Toronto, ON
Archanfel wrote: Luckily, we don't have to buy individual stocks anymore. We have very low cost ETFs that tracks whatever indexes you would like to purchase. However, I do agree that all these are academical. In principle, I agree with you and Kenobi, and I don't think you are spamming.

I am not so sure about these new communities in Markham though. I just don't see the point of a huge house on a small lot. House don't appreciate, only land does, so why not buy a large lot with a crappy house instead? To me, that's still a life style choice, not an investment decision. In 30 years, the "new" community would be old community and people's taste in houses might change (I am sure back in the 70s, people loved 8 feet ceilings). A new airport in Pickering and Markham might be right under the flight path. And running a little risk of being racist, there's no guarantee Markham wouldn't become another Brampton.

As you said, people buy a specific home in a specific location. We all know it's extremely risky to put all our money into one stock because we are not professional stock players. Yet we are more than willing to put our life's saving in a specific house. Now, I did that (albeit a very small house) because I like the neighborhood and want to live there, but if I were purely to invest in RE, I would probably buy land in multiple locations instead and wait for the appreciation. A even better way is to purchase high yield condos in the States back in 2008 (if you had the cash) and live on the rents. $1M could probably get 20 condos back then.

However, since I am lazy and didn't want to argue with the wife, I bought a house that I want to live in and keep my retirement savings in passive indexes. Totally the wrong decision mathematically, but there are things more important than money in life.
I agree...if for purely investing..I'll buy land..but huge majority of people buy re as place to live..you can't live on land or a lot..you live in a dwelling that's on the land... Unless you do a tear down which is the minority and not the norm. You can also always renovate the house to increase its value

Furthermore..the actual demand for hosuing is more than land in that there a lot more buyers for houses than actual land since land is very expensive to develop

That and most can afford a home..even a 900k or above one..but not land... Unserviced land is 5million an acre in Markham now for low/medium density
Deal Fanatic
User avatar
Apr 11, 2008
5754 posts
473 upvotes
LandKing wrote: I agree...if for purely investing..I'll buy land..but huge majority of people buy re as place to live..you can't live on land or a lot..you live in a dwelling that's on the land... Unless you do a tear down which is the minority and not the norm. You can also always renovate the house to increase its value

Furthermore..the actual demand for hosuing is more than land in that there a lot more buyers for houses than actual land since land is very expensive to develop

That and most can afford a home..even a 900k or above one..but not land... Unserviced land is 5million an acre in Markham now for low/medium density
That's why I think it's a more of a life style decision than an investment decision. I remember somebody said that he bought a house so that he could have coitus on the stair. You can't argue against that. :)

I can't imagine that people buying those 900K+ townhouses at Otto 101 is making a smarter investment decision over buying older detached house on a bigger lot at a better location, but I can't question their life style decision.
Deal Fanatic
User avatar
Apr 20, 2011
5310 posts
481 upvotes
Vancouver
Ceryx wrote: It's actually because Canada's comparable house are 2 and 3 times more expensive.

The question is..do you want to save on tax or the costs of the house?
www.realtylink.org www.zillow.com you'll see most US properties have taxes 2 to 3 times higher
Deal Fanatic
User avatar
Apr 20, 2011
5310 posts
481 upvotes
Vancouver
US property taxes are lower than those in most of Canada, and Vancouver's property taxes are among the lowest in the nation.
Deal Fanatic
User avatar
Apr 11, 2008
5754 posts
473 upvotes
popbottle wrote: http://www.huffingtonpost.ca/2014/09/27 ... 90090.html
"And guess what? Vancouver still comes out as the lowest property tax jurisdiction. The average property tax bill there works out to $2,322 per year."
"A project manager at the firm noted, though, that different cities cover different services as part of their property taxes, which makes it "impossible to compare everything the same way.""

Top