Tuesday, October 14, 2008

But It was real money

I recently read something with CBS News that talked about the values of the stocks dropping and that the relative drop was a cashless drop in value since the cash was not really withdrawn from the market to be actually lost in hard dollars.

Simply put, if you bought the stock at $10.00 and the value increased to $100.00 over whatever many years you held the stock, and it was in your portfolio last week, you had a 40% adjustment in value in 3 days. This has since bounced back about 5%.

This led me to ponder a few different points.

When Bre-x stock was trading at $ 40 to 60 dollars per share and then skyrocketted into the hundreds, one of my clients danced gleefully at the money he had made with his sound investment. When they stopped trading in Bre-x and tried to verify the gold deposits, then commencing trading again, [he] "invested" another $100,000.

This was their retirement nestegg. The proceeds of all their savings. They would/could have had a GIC at a Canadian Financial Institution that was Guaranteed and sound but paid a pitance in interest dividends. They could have invested in Bank Stocks and received a better return.

In hindsight. they lost not only the value of the shares when they collapsed but the entire seed capital for their retirement fund. This was not a stock mismanaged. This was fraud and this investor was defrauded.

Another thought comes to mind. Charity Organizations raise money on an annual basis but their commitments to finance projects are often planned over 5 or 10 years. Those funds sit in Investment funds, usually stock portfolios, to gain the highest interest possible, and funds are drawn based on the capital disbursements commited to in any given period. These Charities also work hard to fund their programs.

What is the point of all this? Simple. When you are young and your working career will span the next 40 or 45 years, investing in riskier high paying investments is a sound business choice. When you are nearing retirement the investments in your portfolio should be more of segregated funds or guaranteed annuities. Protecting at least the principal balance.

The gamble of buying a house needs to be viewed from a slightly different perspective. You need a place to live, Start your family, and to establish your nest egg in a neighbourhood. Markets will fluctuate from time to time and this is actually my third downturn.

If the market shifts even 10 % on the purchase price of a home; and you had stayed out of the real estate market in Toronto, you would paid an average rent of $ 1,500 per month times twelve months for $ 18,000 annually. On a year over year basis you are in exactly the same position. If you paid your mortgage for a year and the value remains constant ( NO CHANGE) you are in exactly the same place, except you own and owe less. Again No Change.

I remind people when asked, its impossible to time the markets perfectly. By the time we notice a historic trend in increased values, we have already missed the lowest point. I am referring to the values of homes that slid from 1992 thru to 1995. We did not notice the upswing for a period of 6 to 9 months into the 1996 calendar year. Those who bought in the slide of the early 90's have received a paper profit of almost 100% of the purchase price of their homes.

Not a bad return when you consider most home are purchased with 10 - 20 % as a downpayment.

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