How stressed are you about the economy and your personal finances?
With the topsy-turvy last couple of years — increasing gas prices and rising interest rates, for example — it is no wonder some folks are a bit confused and jittery.
Research Co. and Glacier Media asked Canadians how they would rate current economic conditions in the country; only 41% rated them as "very good" or "good," while 57% rated them as “bad” or “very bad.”
Many of us are not comfortable thinking about our financial situation.
According to a recent study by Payments Canada, almost half of the people surveyed pay more attention to their social media feeds than pay details on their pay stub.
With all this in mind, The Squamish Chief sat down with Squamish's Mark McGrath, senior wealth advisor with Sweeney Bride Strategic Wealth Advisory, to discuss many things money.
What follows is an edited version of that conversation.
Are we in a recession right now?
The U.S. is technically in a recession, but Canada isn’t, at least yet, and according to the latest numbers. Canada is probably in a recession, but we don’t know yet. We often follow the U.S. into a recession.
Economists have always looked at a recession as two consecutive quarters of negative GDP growth for the country.
That is a well-accepted definition.
But I think a lot of people confuse a recession from an economic standpoint and a drop in the stock market, right?
Can you expand on that?
A recession is an economic event, and economic events are based on backwards-looking data. So, when you hear job numbers and inflation numbers, that's all backwards looking. That tells you what happened over the previous quarter or 12 months.
When we hear that news, it's there to kind of inspire fear and action from the media. But there's nothing you can do about it to get ahead of that because it's already happened.
Now, the stock market is very, very smart. And what I mean by that is, there's nearly a trillion dollars of transactions going on every day in the stock market. And because it's so fast, it incorporates information really, really quickly.
When you see a stock price going up and down every half second, that's a reflection of the decisions being made by all of the market participants, demonstrating what they feel the future of that company is going to be.
The price is telling you what my opinion is and what your opinion is at the same time. And when you multiply that across the globe, the price of the stock tells you what it thinks about the economy and the stock itself. So what we always see is the stock market drops ahead of a recession.
The drop that we've experienced in the stock market over the past few months really was telegraphing the recession. So now that it's here, it doesn't necessarily mean the stock market's going to continue to drop, right? We saw that in 2008. By the time we realized we were deep into a recession, the stock market had actually started to recover because it's looking at the future. It could be different if you're thinking about the impact on your job and that type of thing. But if you think about the stock market, a recession is already kind of priced in.
A lot of us are looking at our RRSPs and watching them decrease and wondering if we should jump ship. What is your advice?
In a lot of ways, it's going to depend on how you're currently invested. But assuming that you have a well-diversified portfolio, and when I say diversified, I mean you have lots of different asset classes, like stocks, bonds, real estate and commodities. If you are working with an advisor and you've built a portfolio, generally, it's going to be very well diversified. So, if you have a diversified portfolio, and it's in line with your risk tolerance, your goals and your time horizon, you should really never jump ship. You should stick to that plan over the long run.
When we make retirement projections for clients, for example, we assume a rate of return of, let's say, 5% over the long run for their portfolio. And we know there's going to be years where you're down 10, we know there's going to be years where you're up 15. That's where the 5% figure comes from; it assumes that there will be downtimes in the markets and uptimes in the markets. So, as long as your portfolio is built for the long run, you shouldn't tinker with it. And there's very good data to suggest that the more you tinker with your portfolio, the worse you do over time. It's an emotional decision for a lot of people.
If you have a plan, and it's well crafted, this is actually a better time to be contributing to your portfolio because markets are down, prices are cheaper, and returns are expected to be greater in the future.
Another thing people are worried about is their variable-rate mortgages. What's your advice there?
That's a really tough one because it's based on a few things. One is on predictions about where rates are going to go from here, right? We don't know. Nobody knows.
Even experts are really split on this.
Are rates going to go higher? Are they going to have to cut interest rates back down to kind of stave off the recession? What are the central banks going to do? A lot of these central banks control a good chunk of what rates do. So there are a couple of ways to think about it.
One is just from a risk management perspective.
When you've got your variable rate mortgage, there's likely a discount to the fixed rate. So, if fixed rates were 4% at the time, you probably got yours at 2%, so you already have a bit of a buffer built in because the fixed rates are always more expensive anyway. So from a risk management perspective, I think it's useful to think about this as, "Do I have this tolerance in my budget to accept higher payments over the next little while? Or do I just value the certainty that comes with knowing what my monthly payment is going to be, so that I can plan — so that I can sleep at night, even if that rate might be higher?" It might be a better decision emotionally for you just to lock it in, and then not really have to worry about it.
Knowing, of course, it might not be the mathematically optimal decision, but it might be the psychologically optimal decision.
On the other hand, the bond market is a pretty good fortune teller about the state of the economy and what rates are going to do. So it's likely a sure thing that at some point, rates will have to come back down, right? So it's a matter of if I lock in now for five years, but then in late 2023, rates start coming down, am I going to be kicking myself for not just riding out this curve, right? So it's one of those decisions you can only validate in hindsight.
In Squamish, most of us assume owning a home is a good investment. But in some countries, like Switzerland, renting is more popular than owning. What is your take?
When buying a house as an investment, we buy one little piece of land in one tiny corner of B.C., and one tiny corner of Canada in North America in the world called Squamish. That's a hugely risky proposition because your net worth is now anchored to the value of that little one piece of land that you own. And that can be influenced by many things that are well outside your control.
We could get a new government that stops immigration, for example. That'll put a lot of downward pressure on housing prices.
People don't realize this, but if you look back over the past 25 years, the Canadian stock market has outperformed Vancouver real estate, Toronto real estate, and Montreal — every major urban city centre in Canada. The TSX stock market has performed better than the appreciation in prices in those centres over the past 25 years.
The reason people get rich in real estate is actually the leverage, meaning they're buying a million-dollar asset for only $200,000 down. So when the house goes up in price by, say $50,000, you just made 50 grand on a $200,000 investment.
What a lot of people don't realize is that leverage cuts both ways. And we're seeing that with people who bought late last year for a million, and now their place is worth $800 000, but their mortgage is also 800. Right? So they lost their entire down payment in a few months.
I think you should never think about housing, like your own primary residence, as an investment.
One other reason people like owning is it is forced savings. But for most people, if you were to rent and then save the difference into a decent portfolio, you come out about the same. Homeownership is very expensive with maintenance and property taxes, and utilities. A lot of people look at that as a big dream. But they don't do a good job of factoring in all the expenses and the opportunity cost of not being able to invest their money. So I don't think you should look at it as an investment.
Another thing about using a home as an investment is for that investment to work out for you, you have to be able to turn it back into cash. You can't sell your house off, you know, brick by brick to pay your bills. So, if you have done well, now what are you going to do? Are you going to sell your house and move? Well, guess what, the place you want to move to is just as expensive, right?
So unless you're planning what we call geographical arbitrage is just like, OK, Squamish has done really well, I'm going to move to a small town in Saskatchewan, where this hasn't happened. Yeah, then you can tap into a lot of that investment. For a lot of people, that's not going to be the case,
I think maybe in a few generations, it won't really be that big of a deal if you own a home or not.
If you live in New York, they are two generations removed from that time period where everybody grew up with a backyard, right? Normal people aren't complaining about the price of real estate in New York. They're complaining about rent prices because they're all renting apartments. So I think we're kind of seeing the first generation that is being forced to not be able to own, so I think we'll forget that in the next couple of generations.
Most people don't have pensions anymore, so what is a good bet for saving?
One way is something called reverse budgeting.
Budgeting is really boring, and it is kind of hard to do, but if you think about it the opposite way, and you think, what do I need to save to fund my future goals?
This is hard but doable. You figure out what you need to save to meet your retirement goal, or your kids' education or whatever goal it is. Let's say that number is $500 a month. You don't have to worry about your budget if you can meet that savings goal.
Like, spend the rest guilt-free on mountain biking gear. It doesn't matter because you've already paid your future self, which is really your most important bill at that point. And you can figure that out.
If you have an automatic deduction coming off your paycheque and start small — $50 a paycheque — it becomes this positive feedback loop where you start to put money away, and you don't really notice it's gone.
Over time, you see your account balance going up. And it actually activates the reward centre of your brain. And you start thinking, I can increase this to $60 or to $75, $200.
In your experience, what can you say about people's relationship to money?
The quote I always use that my dad kind of instilled in me was, "Control your money, or your money will control you." I think many people procrastinate and try to sweep their finances under the rug because they just don't want to think about it. That is an apprehension or a fear that if they open up their books, it's going to be worse than they thought.
But if you can just get in it, put everything down, and start getting organized with it, that will be huge. And 90% of people realize it's not as bad as they thought. And there are things they can do.
Don't fall into the trap of letting your future self deal with your past self's problems.
Set your future self up to thank you when you get there.
~With files from Mario Canseco & Alanna Kelly/Glacier Media
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