Moister math

Jason has $19,000 in his CIBC chequing account earning 0.05%. “That sucks,” he says, and it does. But there are tens of billions of dollars in Canadian bank accounts on any given day losing money, even with inflation at just 1% (which is 20 times more than Jason is earning).

Maybe you should flip this cash into your TFSA and invest it, I said. Crickets. Then, “How?” he asked.

This 32-year-old has two uni degrees and now works for the federal government in a responsible position wielding semi-judicial powers over citizens’ lives. He has an apartment, a steady GF and a DB pension. Life is good. But J’s a case study in the financial illiteracy that permeates society. When banks are the only place you learn money stuff, and TNL@TB is always selling you into GICs or mutual funds, no wonder so many people are pooched. No wonder they see gambling on real estate as the only way to get ahead when their liquid assets lie comatose and softly bleeding in a bank vault.

Jason can open an online trading account with CIBC Investor’s Edge, for example, buy a clutch of ETFs and pay $6.95 per trade. He could try one of the robos, like WealthSimple, where an algorithm invests for him and he pays an annual management fee of 0.5% on his twenty grand plus embedded ETF charges. He could throw his cash in with his mom’s and use her fee-based advisor, paying 1% and getting an actual human to help with tax planning plus decisions about cars, houses and personal relationships (seriously). Or he can go to the bank, get free help and end up with mutual funds costing 2.5%.

Any of those are better than what he’s doing. So, I’m giving the moister a few ETF names (he only needs four) with which to build a balanced and diversified portfolio inside his tax-free account. If he just keeps his hands off them (no silly trading when Trump blows up or the markets correct), and shovels in the yearly max, the result will be sweet.

The math is simple. Start with twenty grand in the TFSA and add a hundred bucks a week. Assuming a 7% annual return (consistent with the past few decades) by age 62 Jason’s TFSA will contain $747,000, of which $556,000 will be tax-free growth. If he retires with his gold-plated, federally-kissed defined-benefit pension, he could draw more than $50,000 a year from the tax-free account to supplement his monthly retirement allowance, still retain the $747,000, be entitled to CPP and OAS without the extra fifty grand being added to his income and taxes.

So if a moister like him learned nothing else, it would be this. Stop saving money and invest it instead. Empty your savings account, cash in all GICs and put the dough into a handful of cheap, liquid, efficient, diversified ETFs. Open only one account – a TFSA – and make the maximum annual contribution ($5,500). Tell mom you don’t want cash for a condo down payment, but you’ll kindly accept a cheque for $52,000 to fully fund your tax-free account. PayPal wold be fine, too. No bitcoin, though.

As for the current moister investment of choice, things just keep getting worse for real estate. A new poll finds 86% of the 25-30 crowd think property is a great investment, despite the fact anyone buying today is probably going to lose money for the next decade. The evidence is everywhere. Even the realtors are screaming it…

Over the next two or three years interest rates will rise slowly, steadily and painfully for those with fat mortgages and skinny equity. The bank stress test will likely be in place this October, just in time for the next round of mortgage increases. By the end of 2017 the price drop in the GTA from April highs could be 30%. Maybe more. That would equal the US housing bust’s low point and approach the 1990 crash, from which the market took 14 years to recover. There will be no major community in Canada immune from higher loan costs, less credit or falling equity. Anyone who buys now with all their savings and big leverage will wish for a do-over.

Yeah, it’s not an easy time to be 32. But it never really was. Three decades ago mortgages cost 12%. Nobody could buy with 5% down. So houses were cheap. But back then there were no TFSAs, online trading accounts or wealth-builders like exchange-traded funds. Inflation was 7% (not 1%). Unemployment was 50% higher.

So, Jason, we inhabit an aberration. The cost of money, like inflation, will go back up. Real estate will come down. The economy will continue to expand and financial assets should do well. But never before have so many people been so indebted, so deluded, nor so willfully imprisoned in their homes. The world, in short, will be the oyster of the liquid, the flexible and the free.

Best start today. Now you know how.