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Sunday, April 30, 2017

A Personal Story of the Market Correction

Posted by Tim Stobbs on July 31, 2007

Since I just did my last net worth update at the end of June I’m in a nice spot to have a good look at what the world wide market correction did last week to my holdings. So using my RRSP account as a model I had a value at the end June of $12,800.

The account current market value today is $13,200 with a book value of $13,300. I did recently add some money to this account in the last month. So overall I lost all my yearly profit and $100 of my own money during the correction. So I would estimate I’m down around $500 at the most or 3.8% in this account.

So given all the media coverage of the event and the coverage in various blogs you would think this correction was a bit bigger. Yet this is the reason you diversify your portfolio. So if the markets tank they will be hard pressed to take you portfolio too far down.

Overall my net worth change I would bet would be less than 2%. So next time they tell you the ‘sky is falling’ do try to keep the long view.

The Dangers of More

Posted by Tim Stobbs on July 30, 2007

It’s an interesting ideal in our culture, the constant drive to get more and better. It drives new cell phones, books, cars, clothes, houses and just about every product out there in a constant need to sell people more junk they really don’t need.

Just how bad is all this. Well the other day I thinking about what was the last thing I bought. It was a chocolate bar. The strange thing about the purchase was the fact I ‘felt’ like buying something. Like somehow we can’t live without buying something for days on end. This awoke a interesting debate in my head about how much of everything I buy is driven by some marketing rather than an actual need.

So after a few days of observing my own shopping habits I determined I’m not heavily driven by marketing. Actually I fairly good at ignoring it most of the time, yet it still manages to get to me. For example, my last grocery shopping trip we had a coupon that if you spend over $250 you could save $30 off your bill. So like a good consumer we loaded up on stuff we didn’t need to get the deal. I have to wonder how much cheaper would my bill had been if I didn’t worry about the coupon in the first place?

You see that is the danger of more. You surrender your reason and get things you really don’t need and even don’t want all that much. You end up wasting money just to get ‘the deal’ or you get the larger house because you think you need the room. So after an additional $50,000 of mortgage you realize what you need to do if sort through your junk and toss 50% of it and then you could have saved $50,000.

More is dangerous because you often don’t see what it is doing to you until after the fact. The SUV looks all shiny and nice until you start paying for the gas bills every week. So next time you go shopping just try and pause for a second and ask, “Why am I buying this? How often will I use it?” If you can’t give yourself a good reason to buy it, other than ‘It’s on sale’ then perhaps you should just put it back.

Reader Question #7

Posted by Tim Stobbs on July 27, 2007

Alex from Montreal is in a bit of housing problem and sent me an email on it.

Q: I read one of your blog posts titled “Living in a hot housing market” and it brought up some questions. I’ll give you a brief resume first:

I currently own a rental property in Montreal that is definitely in a hot sector. I was lucky to purchase it 2 years ago for under 110k even though it’s evaluated at $250k. Add the mortgage cost, condo fees and taxes and it comes up to roughly $800/mo. It is currently being rented
for $1000/mo, which means I actually make profit from this (that’s a good thing, right?).

My questions:
- Would it be a *waste* of money to rent an apartment (for myself) at $650/mo?

I ask this because everyone has to live somewhere. I understand that my *real* cost of owning would actually be $450/mo, but doesn’t that defeat the purpose of having a rental property in the first place? If i’m renting for $650/mo, then i’m not making any profit, anymore.

I hope that makes sense because the $250k evaluation seems rather interesting.

A: Ah yes that wonderful question of should I cash out in a hot house market. It does get bloody tempting to do it. I should know it’s crossed my mind as well recently.

The answer really depends on do you view the condo as an investment or a home. If you think of it as an investment selling it becomes an obvious choice. After all if you sell it at market price of $250,000 less fees (~8%) should easily have $230,000 left over. Assuming you have a 100% mortgage of $110,000, you could clear $230,000-$110,000 = $120,000. If you took that and invested it, you could skim off around 4% a year leaving the capital mostly in tact and you could have an extra $400/month which you could apply against your rent. Leaving you with a $250/month true cost for a place to live. Lets face it you don’t get much cheaper than that and it would be providing more income than your condo currently does.

Yet if you view as the condo as a home, you might want to consider hanging onto it. Since you are going to need a place to live somewhere and if you sell and try to move in somewhere else in the same market you new place is likely to be just as overpriced. Leaving you with no real gain by moving. When looking at your primary residence there is a significant advantage of owning your own home in retirement. Any future house value increases become meaningless beyond your property tax bill, unlike renting where it tends to follow the market a bit closer for costs.

In the end it depends on your viewpoint and personal situation. For example, my wife is currently sick of moving, so regardless of my house value, I’m very unlikely to sell it. So that’s my ideas on the topic, I wish you the best and let me know what you decide.

Have a good weekend,
CD