InvestorsFriend Inc. Newsletter June 1, 2008
“It Costs a Lot of Money to be Rich!”
I recently came across the above quote and it really struck home with me.
(I don’t know this from personal experience but certainly hope to eventually verify the truth of this quote for myself!)
When you hear about rich movie stars and the like they often have very expensive lifestyles. A $5 million dollar house comes with insurance costs and property taxes to match. Multi-million dollar houses often include gardeners, pool maintenance, domestic help and many other costs. These people can’t exactly buy their furniture at Sears. Similarly expensive cars and a yacht come with many associated costs. Then there would be club memberships and the costs of eating at the finest restaurants. Can you imagine what it costs some of these people to host a party? Not exactly BYOB! Before you know it people in these life styles might find themselves stating that there is just no way they could get by on less than a million per year in spending. And they mean it!
While one definition of being financially rich might be anyone who makes two or three times what you do, a more realistic definition of being truly rich might be a pre-tax income of at least $1/2 million per year and/or a net worth in excess of say $5 million. You can argue about the number, and you can argue about whether being “rich” is really all about money but…
There can be no doubt that it does cost a lot of money to live a financially rich lifestyle these days.
It also costs a surprising amount of money to be middle class these days. Many two income families are earning well over $100,000 per year these days. And $200,000 is not exactly that unusual. And yet with new houses selling for $600,000 or more in many Cities and with all the other costs of living many of these people are not exactly feeling very rich. It may be very hard to sympathize with these people but the fact is many families with low six figure incomes find themselves with heavy mortgage debt and wondering where all their money is going.
The costs of many things are going up. In addition there are many new toys that seem like must-haves. Ten years ago we might not have guessed that a cell phone for every family member, a $75 cable TV package, multiple flat-screen TVs and multiple computers in the house would seem like necessities of life. And who knew that “ordinary” people would consider paying $500,000 for a cottage? Who knew a year in hockey for a teenager could easily cost $3000 to $5000? (with training camp, league fees, team fees, equipment, and travel to an occasional tournament). And who expected to pay $50,000 or more for a house renovation?
I am not particularly complaining about the above. The fact is that an awful lot of people are leading very comfortable lives and living in luxurious houses. But the point is it is costing a lot of money.
This high cost of being middle class hurts investors in two main ways. First it becomes harder to save money when it costs so much to maintain what seems like a reasonable middle class life-style. Secondly it becomes apparent that funding the retirement lifestyle to which we would hope to become accustomed may cost a lot more than we thought.
For investors the solution is to continue to make saving a priority. Resist somewhat the constant urges to spend. Seek reasonably high returns, probably with a heavy allocation to equities. Seek to avoid unnecessary investment fees.
Scams
One of the worse things that can ever happen to an investor is to lose a large portion of their money to a complete scam.
CTV’s W5 recently reported on a real-estate scam whereby several retired investors had lost all of their retirement savings to a scam. A slick salesman had convinced them to invest in real estate. But it turns out it was a scam. If they got any real estate at all it was way over-priced and in some cases their money was simply taken never to be seen again.
Here are a few ideas for avoiding scams:
Be wary of any investment that is being sold based on heavy advertising and direct sales. Be especially leery if initially approached by telephone. Some of the real estate projects advertised on radio are probably good but do be wary. It’s hard to imagine ANY legitimate investment that would use cold-calling techniques.
Never invest more than about 10% of your money into any single investment unless that investment is controlled directly by you (like a house, rental house or your own company).
If anyone ever suggests that you should remove money from your RRSP to put into an investment they are touting, this is a major red-flag. You should contact the authorities in that case.
Be extremely wary of any investment where the pitch starts out by talking about how much tax you are paying and will pay in the future. Certainly there are legitimate tax-sheltered investments. But a classic technique of scammers is to get you angry about taxes and then have you hand over your money (usually never to be seen again).
Do your investing with large well-known financial institutions. (I really don’t like saying this because there are many very ethical and safe independent advisors out there, but you do have to be more careful with smaller firms). If a broker at a large Bank steals your money you will get it back. If a broker at a large Bank recommends an investment that is extremely high risk and not suitable for you, you might get it back. If a one-man mutual fund operation steals your money, you might have a lot more trouble getting it back. If a one-man operation is properly licensed and is affiliated with a larger entity then that might be perfectly safe. If you use a smaller firm, check out the licensing and check out references carefully.
If your stock portfolio drops 15% or more in a bear market, that loss will almost certainly be recovered before too long and your money will grow in the long term. But money lost to a scammer can be 100% lost, never to be returned. This would be devastating for older investors and is something you want to avoid at all costs. Do be careful.
Our Stock Picking Performance
The fact is that our stock picks have not done well recently. But the reality is that stock investments simply do not tend to do well every year.
My personal return was a cumulative 169% in the five years ended 2007 (consisting of 40.0%, 21.4%, 32.7%, 18.1%, 1.0%). Therefore I don’t think I need to be too sad about the fact that I am down around 3% this year.
Similarly the return for the stocks we rated Buy or higher at the start of each year since 2003 trough 2007 was 198%. Therefore the fact that these stock picks are down 9% this year to date is not exactly cause for alarm.
Investors in stocks should realize that not every year will be a positive year. In the long run stock investors tend to do very well. I am confident that we will continue to do well in the long run in spite of set backs some years.
The best year for our Stocks Picks since we started in 1999 was 2003. Investing at the end of 2002 took courage. We had just come through the big market crash of the early 2000s. Emotionally it felt like a bad time to invest. And yet it turned out to be an exceptional time to invest in stocks.
The best time to invest is not usually after the market has had a string of big gains, but rather after it has had some setbacks.
Are Stocks a Good Investment at this time?
No matter what the overall market is doing there are always some stocks that are good investments.
But it’s obviously easier to find bargains when the overall market is not overa-valued.
Today we updated our popular article on the valuation of the S&P 500 index. The results indicate that the broader U.S. stock market may indeed be over-valued. The S&P 500 index has been rising while at the same time reported earnings have been declining (not a good combination!).
Click here for our S&P 500 investment analysis article.
We also updated out article on the various segments of the Toronto Stock Market. This gives you the trading symbol for selected Canadian Exchange Traded Funds and also the P/E ratios and dividend yields. We indicate which segments look expensive and which look attractive. We also provide links to additional information on these ETFs.
ADVERTISEMENT for Vacation Rental Homes.
This is a bit off-topic, but if you are looking for a vacation rental home anywhere in the world, try the following link.
In case you happen to be interested in renting a vacation house in Tampa Florida, I set the link to my sister’s property in Florida. But from that link you can easily browse for vacation rental houses world-wide.
Regarding my sister’s vacation rental house in Tampa:
This is a vacation home (with screened-in pool) near Tampa Bay, Florida. This 3 bedroom house is now for rent by the week (discount for 1 month rental). The house is in Riverview which is adjacent to Tampa to the South. Only about a 20 minute drive to downtown Tampa. The house is in a quiet and newer subdivision. Most of the neighborhood houses are owner-occupied and working families so this is a quiet area.
You can sit out by the pool and use the free wireless internet to check your stocks! Also the house is set up with free calling within North America.
This is a house my sister has owned and lived in for about five years. She has just been transferred to Ft. Lauderdale and so is now renting out the Tampa house. This is a very nice house.
I have been there twice and I can attest that it is a great place to relax around the pool. Also it can be a base for day-trips to the beach and to Orlando and certainly into Tampa which has the Busch Gardens theme Park.
She is selective in who she will rent to and so not everyone who asks will qualify.
Here is a link to check out pictures of the house and more details. http://www.vrbo.com/182199 From that Site you can “Inquire About the Property” In your note, mention I sent you.
(As mentioned above, This link also gives you vacation homes for rent all over the world, if you are not interested in Tampa).
She just posted the house for rent last month. As the calendar shows, a number of weeks are gone already. Act fast if you need a vacation rental house in Tampa/Riverview.
END
Shawn Allen, President
InvestorsFriend Inc.
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