Monday, September 15, 2008

Is it time to freak out yet?

Much like John McCain, there's a great deal about economic issues I don't really understand as well as I should. However, on the plus side for me, at least I don't aspire to be president of the United States so the only really damage inflicted my lack knowledge on the issue is on myself and Cathy. And not, you know, the entire planet.

This has obviously been one deeply scary 24-hour period. Nothing like watching huge investment banks collapse like, well, since it's that time of the year, giant towers. Things you thought could never fail and then are reduced to rubble in the blink of an eye.

It's some deeply scary shit no matter what your level of expertise on economics and fiscal matters (I take some small, cold comfort in that if I'm having problems grasping the extent of this crisis, then people much smarter than me are also having problems defining its scope). Cathy and I have been chatting about some of these things in recent weeks. With my impending return home, the plan was to meet with our financial advisor, top up our RRSPs and put some more money away for the "house fund."

Hell, we were even thinking about using the house fund sooner rather than later. Given how small our apartment is and the highly unlikely possibility of finding another apartment in town that meets our needs (reasonable size, allows dogs, and where I won't want to kill the neighbours) anytime soon, we'd begun to think about buying a house in Iqaluit at some point next year.

It was, of all things, something in the Scope which said the average house price in Canada in July of this year was a shade over $300,000. Which does put into perspective that the $350,000 to $400,000 for something similar up here is out of whack, but not completely mental, like I've thought for the past three years.

But then you read the news this morning and my first reaction was probably something similar to what my grandparents and great-parents had....that is to find a large pillow or to start hollowing out the mattress.

I know that "this too shall pass", but there is something about giving your advisor, say, $5,000, and watching it magically turn into $1,000 over night that does give you pause. I was talking to my dad the other day, letting him know I was coming home and what was on the agenda. He said investing some money right now would probably be a good idea because the market had probably reached bottom.

Understand, my father is pretty adept at his investments and is considered in my family to be very well off and to have his retirement finances nicely lined up. So seeing him proven this spectacularly wrong in quite so short a period of time does give you some pause.

So I guess we'll see about investing more money right now. Or buying a house.

In the meantime, I'm off to join the recently returned Kate Nova and friends for an alcoholic beverage or two. Drinking seems a sane reaction to the day's events, when you think about it.

Last Five (this is quite the random set of Canadian 80s/90s pop music.)
1. Misunderstanding - Grapes of Wrath
2. Moonlight desires - Gowan*
3. Arias and symphonies - Spoons
4. I will remember you - Sarah McLachlan
5. She kiss away - The Pursuit of Happiness


Mireille Sampson said...

It's funny, I'm looking at the situation and thinking it's soon time to start putting our money back in the market.

Markets are down about 20-25% now. The dot-com crash caused markets to drop 50% from their high and I wouldn't be surprised if we see a similar drop. But had you bought at 50% ust look how much your money would have grown. The thing is, even buying at 25% is still a discount, even if you see it go down for a year or more. If you're investing for retirement it's what happens over the next 25 years that matters - and if you put in now while the market is lowering you will have a greater "margin of safety" than if you put in when the market is rallying. Margin of safety is about probabilities and roomm for growth.

I find looking at the big picture helps. CBC's money section has a chart plotting function for the various stock indices. It'll let you do it over 5 years. Take a look at that and you'll stop being so nervous. Just click on one of the index names to get to that function.

There's no point in waiting for the financial talking heads to declare the market has hit bottom, usually by the time they declare it the bloody market had hit bottom 6 months before and is already on the way up- and you've wasted valuable investment time at the one of the best times you could be in it. The financial experts aren't psychic, nor is your dad, nor am I. It's doesn't mean you can't sleep at night.

If you prefer buying books at 25% - 50% off, you should view stocks the same way.

And, I know I'm going to sound like a broken record here, but it really is best to contribute to an RRSP every month or every paycheque. I can explain the math behind it, but it does put you further ahead and expose you to less risk because of the math. Email me if you want that.

Mireille Sampson said...

I just realised something: the numbers $5000 turning into $1000, those aren't just made-up numbers are they? Shit.

For that to happen the stock or mutual fund the money was invested into had to drop by 80%. The TSX is down about 19% (just did the math on cbc ticker) from it's height, the Dow is down 22.5%. If your mutuals have gone down by 80% that means your advisor had you in something very high risk. And, if memory serves me correctly, you bought these at a time when the Canadian market was already or close to a historical high. That means a high risk mutual at a high risk time...throttle your advisor, don't buy anything more from him/her.

You shouldn't cry in your beer, you should consider dumping that fund. Even if the fund doesn't lose even 1% more from it's current value, it will have to go up 500% in order to break even. To put that in perspective: the TSX has had the greatest bull market rally of it's life, between 2003-2006/7. During that time it went up approximately 112%. In order to break even that fund would have to seriously outperform the stockmarket for the remainder of your pre-retirement years. That's not a great probability.

After the dot-com bust the whole markets were down by 50%, but tech stocks were down by 95%, that's what dragged the overall stock markets down so low. It's not possibly for recovery (not during out lifetimes anyway) after a 95% loss.

Toss your financial advisor and either find a new one or go it alone. Maybe take a look at ING's Streetwise funds - they're low-cost index funds.

towniebastard said...

No worries, Mireille....those are made up numbers. Our last conversation with our financial guru was back in August and our investments were stable. As in, they hadn't grown, but they didn't shrink either. And in this market, that's about as good as it's going to get.

Although I imagine the last few days probably haven't helped them all that much. But no, we haven't been cleaned out, nor have we gone into anything high risk. But thanks for the concern.

Mireille Sampson said...

That's good to hear. Pity the poor bastards that found out their jobs at Lehmans are gone - ditto the value of their company stocks. If AIG goes it could get even uglier, apparently they are also in the insurance business...not sure how that would affect all those people whose homes have been totalled in the recent hurricanes, but I'm thinking they'd be pretty low on the list of creditors to be paid up.