CHRISTMAS GONE, TIME TO MOVE ON, THE SALES ARE ON!
Little does everyone know, this year I went a little nuts to really setup Christmas at my house. Here’s a snippet picture of just one of the rooms containing my prized Christmas Town.
You see, I grew up in a home where Christmas wasn’t really a thing, so it’s quite different for me now to be embracing Christmas (more specifically the decorations) as much as I do. I started with the tree three years ago. I really enjoyed it, and the general holiday feeling that it brings.
On the following boxing day, I was just doing some unsuspecting browsing at the stores and realized all the Christmas stuff goes on crazy sale on boxing day and the following days after. Before I became “Father Christmas” I never really cared too much, but this was a real opportunity for me. Invest in next years decorations now. Get em all on crazy sale the year before I need them. Perfect.
This year though, I haven’t gone out to buy any more Christmas stuff, because I just don’t need it right away and can allocate that capital towards other initiatives, which brings me to my first point about how to go about investing and budgeting in 2024.
ALLOCATING CAPITAL, PLAN FIRST, FIGURE OUT YOUR BUDGET
Relating back to the Christmas story, this year I’d rather just not spend money on something that I just don’t need. Taking a conservative perspective. Maybe focusing on paying off debt, or investing, before buying something that I just don’t need is a better move.
They do say groceries are going to rise by about $700 bucks for the average family this year. (I wonder if I can find the article in my big stack of papers? Challenge accepted)
Anyways, the point from my Christmas story is, before deciding about what you invest in (whether Christmas Lights, TSX stocks (stock market), or real estate), figure out how much you have. Figure out your cash flows (be realistic), and then figure out if you have any leftover for investment.
Tip – don’t be in a huge rush to payoff mortgage debt, but always aggressively payoff any unsecured or high interest debt. Credit cards will let you have debt at 21% in perpetuity, whereas a mortgage is a structured, amortized, and pre-planned investment/debt vehicle, with a security that should be an “investment” for you.
So, if you ever have any credit card debt, and have enough savings or HELOC room (home equity line of credit), payoff all your credit card debt right away. This is in most cases. Side note, $20,000 or $30,000 in credit card debt will sink many mortgage applications.
PLUG – if you’re in the situation where you have some savings, have some unsecured debt, and want to purchase a home, call me first and we can strategize a plan, it takes about 15 minutes.
OK, so now if you’ve figured out how much you can invest and ensured your unsecured high interest debt is paid off, then start to decide WHAT it is you need to invest in.
CHRISTMAS LIGHTS, STOCKS, OR REAL ESTATE?
I name the three above as examples of things you might be able to invest some money into.
Before we jump to try and pick one over the other, bring your investment strategy back to the basics. Before even categorizing investments, you have to think about it in terms of “value”. What value does an investment bring to you? Anyways, by the end of the blog, you’ll mostly believe the answer is either Christmas lights, and real estate. Of course this is tongue in cheek, but read on.
What I say first is, invest in “value” investments. That’s kind of a broad term, right? Of course. But now I’ll break it down in terms of the three that we have as our options.
WHAT DO YOU MEAN BY VALUE?
A value investment or purchase can generally be defined as an investment that is “on sale”, but also presents “good value” for the purchaser over the long term. It will either provide the investor with consistent and predictable returns, be “on sale” when he bought it, and/or fulfill a need the investor has at a cheaper cost.
ARE THE CHRISTMAS LIGHTS A VALUE INVESTMENT?
When I saw all the Christmas lights stuff on sale, I found a “value purchase”. It’s not really a stock because it won’t bring me more financial return, but it will serve a purpose for me at a significantly cheaper cost. Instead of me buying all those things in the following year for much more money, I’ve invested in my Christmas for the next year at 1/3 the cost. That’s value to me.
IS THE STOCK MARKET A VALUE INVESTMENT?
Of course it is. If you invest wisely, that is. In my view, more specifically, we have to look at value stocks. Value stocks can be found in any sector, and we are looking at companies like banks, insurance, utilities, energy, resources, some tech, manufacturing, retail, whatever! – these can all be great value investments that will bring you good returns over time. As long as you are finding the stock on sale, and not at a premium.
Stick with the fundamentals here. Don’t pay a huge commission for management. Do your homework. Don’t be overly risky. Don’t put all your eggs in one basket. And generally, mutual funds have expensive management fees. So if you have some cash in RRSPs, consider stock indexes or other investment vehicles that just pick a broad spectrum of stocks without the high cost of management.
I know all my financial advisor friends will be piping up here about my generalizing something that is very complex, so needless to say, this is not official advice on how to invest in the stock market. It’s just what I’ve learnt and seen and work for myself and other clients along the way.
So why did I say I almost always pick real estate, anyways? Well, there are a few major differences between real estate and the stock market. Let’s look at it.
REAL ESTATE. ITS ALMOST ALWAYS A VALUE PURCHASE
Any way you slice it, real estate in my opinion is almost always a value purchase, as long as you decide to own it for the long term and invest wisely. It’s returns can be entirely predictable (rental income, or even just living in the house yourself instead of renting). So, if you own the home for a few years, it will go up in value, all the while your paying off the mortgage and getting a place to live too.
Can you name any of your friends that have owned real estate and complained about bad returns? Only in very rare cases.
Can we think of some friends that have been burned, or just had poor returns in the stock market, mutual funds, crypto, or precious metals (just to name a few)? Of course you can. Their values aren’t tied to land and house that you use, but rather, variables that are entirely out of your control. When you purchase a home, live there, invest in it, the value presents itself more.
Arguably, even if you bought a house at the height of the market in 2022, economists are already saying that housing prices will return to peak 2022 prices in late 2024 or 2025. So just hold on folks who bought in 2022, your time is coming.
IT CAN YIELD HIGH RETURNS WHILE MAINTAIN IT’S SAFETY
Further, and again, for another blog, I’d say that we are in a buyers market, where people looking to invest can find those “value investments” for much cheaper. I’ve had a few clients snag up small houses in Colwood and Victoria for $700k to $750k, and in the “hot market”, these same houses would easily have been $900k and more. If you see a house that’s “on sale” compared to it’s value from a few years ago, that could be considered like a “value stock” (versus a hot stock).
LASTLY AND MAYBE MOST IMPORTANTLY, LEVERAGE!
Let’s look at a basic example.
If you take $100,000, and invest it safely in the stock market or mutual funds, you could expect a 10% to 15% return in really good years, maybe 2-5% in decent years, and you might even lose 10% to 50% in bad years. 50% loss being over a major crash, such as in 2008.
So, in a good year, you’d have $110,000 to $115,000, in an “ok year” you’d have $102,000 to $105,000, and in a bad year you might come out with $90,000 or less.
Say instead you took that $100,000 and invested it in those houses that were $700,000 to $750,000. Also consider that investments in the real estate realm can somewhat mirror what the stock market returns.
But now consider the value of the investment that you bought.
In a “good year” your $700,000 house may now be worth $770,000 or up to $805,000. You’ve turned your $100,000 investment into $170,000 or $205,000, actually giving you a 70% to 105% return on your initial investment.
In a decent or more normal year, your $700,000 house will be worth $714,000 to $735,000, giving your initial investment of $100,000, 14% returns up to 35% returns.
And in the down market? Should I calculate? No. Why? Because your plan isn’t to sell or dispose of real estate in a down market. Keep the house, rent it out, live in it, whatever. Just wait for the market to bounce back and don’t ever realize that “loss” that could be if you do in fact sell your property in a down market after purchasing a year before that. Keep the house and don’t realize the loss.
Even in a down market, you also paid your mortgage down, all while living in the house or renting it to others. Your investment returns go up, as your equity increases, and your equity increases in those two ways – capital appreciation (the ROI), and the debt payoff.
Due to these main factors, I do think properly purchased and used real estate is a better investment for most people out there. The stock market really becomes a place to invest after you’ve already bought a principal residence.
GOTTA WRAP THIS UP SOMEWHERE!
So, I guess in this mid-holiday boxing week message, I have to say a few things to wrap this up.
Take time this holiday week to prepare for next year. Plan. Budget. Allocate your money wisely.
Invest in value investments. Be conservative on purchases you don’t need, and take calculated risks when appropriate.
And if you have some extra money, go get some cheap Christmas stuff to enjoy next year.
Signing off for now,
David Steinberg, AMP, BComm
Owner, Lead Broker
AS ALWAYS, I appreciate your feedback! Feel free to email me back by replying to this email, or if you need some expert advice on your mortgage, real estate, or investments, call me at 250-858-7160.
My phone and email are open!