Tag: economy

Categories
Personal Finance

John Bogle: “The stock market is a giant distraction.”

This guest post is written by Mike from the The Oblivious Investor.   This blog has been around for a few months and is very investment oriented (but not too techy) so I would recommend you check it out (I’m a regular reader).

For me, the above quote was enough to make Bogle’s Little Book of Common Sense Investing worth the read.

In just 7 words, Bogle manages to:

•    Provide an insightful piece of investing wisdom.
•    Make you question your assumptions.
•    Offend an entire industry.

So what is Bogle saying here? I think he’s making two distinct points. First, he’s making a statement about intelligent investing. Second, he’s offering a rather pointed criticism of the financial services industry.

Passive investing is a good thing

As to investment strategy, Bogle (as usual) is suggesting a system of passive investing. We can’t predict whether the market is about to go up or about to go down, and attempting to do so will only harm our performance. Similarly, attempting to pick individual stocks is unlikely to prove successful.

So if we stand to gain nothing by timing the market or picking stocks, what’s the point in watching the market? There is no point. All it can do it tempt us toward poor decisions. Better to ignore it.

Financial service is expensive

Bogle’s second point is one about the financial services industry in general, and it’s a bit less obvious. At their most fundamental level, financial markets exist to connect providers of capital (investors) with users of capital (businesses). Without a doubt, this is a valuable service.

However, in recent decades, the financial services industry has convinced us that it performs another service as well: Enhancement of investment returns. This is, however, impossible by definition.

There’s no way that investors—as a group—can earn more than the total earnings of the businesses in which they invest. The total return earned by investors must be equal to the return earned by the businesses in our economy, minus the costs of investing.

We can therefore conclude that, rather than enhancing investor returns, the financial services industry must in fact be reducing investor returns by the sum total of all the fees that they charge us. Sadly, these costs of investing—mutual fund sales loads, fund operating expenses, brokerage fees, etc.—now total in the hundreds of billions of dollars per year.

Conclusion – ignore the market

I think Bogle’s reference to the stock market as a “giant distraction” is his way of telling the reader precisely how much value he sees in the services offered by most firms in the industry.

Takeaway lessons for us:
1.    Turn off BNN and CNBC, and
2.    Do your best to minimize the investment costs you pay.

About the Author: Mike writes at The Oblivious Investor, where he regularly reminds readers to ignore the noise of the market. If you like this post, subscribe to his blog to read more.

Categories
Money

Will There Be A Second Stimulus Check In 2009?

The question all Americans want to know is whether they will receive a late Christmas present this year in the form of a 2nd economic stimulus check.

In 2008 the government sent out economic stimulus checks to 130 million Americans with the idea that this money would be spent on consumer goods and services thereby stimulating the economy. While the program was considered a success by some – it didn’t prevent the economy from slowing down into a recession with the possibility of a depression.

President-elect Obama has proposed an economic stimulus package for 2009 which will total almost 1 trillion dollars – or about $3300 for every single American.

Second economic stimulus check

So far there has been no mention of any stimulus checks (like in 2008) however that doesn’t mean it won’t happen. Nothing has been approved or finalized so it is still possible. If a second economic stimulus check is going to happen in 2009 it would be more likely to appear later in the year if it looks like the initial stimulus efforts are not doing enough to get the economy going.

Stimulus tax cuts

Obama has proposed stimulus tax cuts of $1,000 for couples and $500 for individuals. If this passes, it might be the closest thing to an actual stimulus check that most Americans will receive in 2009. This kind of stimulus is not as much fun as getting a large check all at once since it would take the form of reduced withholding taxes on regular paychecks. However, in the end – extra money is extra money.

Emergency Energy rebate

One of the more controversial initiatives is an energy relief plan to help Americans pay their energy bills this winter. The $1,000 emergency energy rebate would be given directly to Americans and would be paid for by windfall profit taxes on the large oil companies.
This particular initiative might not have much of a chance given that with the rapidly dropping price of oil, home heating costs are going to be a lot lower than initially predicted as recently as a couple of months ago.

Infrastructure stimulus spending

The Obama stimulus plan is calling for a huge investment in roads and bridges and mass transit improvements. This will total $850 billion over 2 years. This portion of the plan is the main driver behind the goal to create 2.5 million jobs over 2 years.

$250 stimulus check for select groups

There will be a $250 stimulus check for select groups.

Categories
Real Estate

Why The Subprime Crisis Has Not Affected Canada (Yet)

This post is part of a group writing project with the M-Network bloggers and friends. See the list of other posts in this project at the bottom of the post.

There has been a lot publicity around the subprime mortgage situation in the US. There are quite a few homeowners who have been or are about to be evicted from their houses because of a number of different factors. ARMs, NINJA loan, liar loans, fraudulent lending practices and worst of all…easy credit and low interest rates led to a situation where real estate prices went up and up. People who took the plunge five years ago with flipping houses made so much money that everyone wanted to get in on it. Now that the real estate prices are not going up anymore, the gravy train has stopped cold.

In Canada, we haven’t seen this situation (yet) and I think there are several reasons for this:

  1. Real estate prices haven’t gone up as much as in the US.
  2. Lending practices in Canada were stricter than in the US.
  3. Interest rates are stable.
  4. The economy is still going strong.

Real estate prices

Real estate prices did not rise as much in Canada as they have in the US over the last several years which might have helped prevent mass speculation. It’s easier to get excited about property investing/flipping when you see 30% annual returns compared to 10% returns which is roughly what we saw here in Toronto. I believe that people who are flipping properties are more likely to use excessive leverage in order to make more money. This works really well as long as the house goes up in value but if the house goes down (which is happening in the US) then the flipper might be in big trouble.

Stricter Lending Practices

The use of the word “stricter” is this case is a relative one. The last few years have seen changes in the mortgage market in Canada where you can buy a house with zero down, get a no interest mortgage and for those who are inclined to pay a smattering of interest there are 40 year amortization terms available. All of these features allow the Canadian home owner to increase the amount they borrow which will increase the odds of problems if any of the above factors come into play.

In the US it appears that anyone with a pulse and no paperwork or job or money could get a mortgage which obviously increases the odds that some of those borrowers won’t be able to make their payments. The availability of ARMs (Adjustable Rate Mortgages) is another product which can be very useful for some home owners but for some borrowers they were a way to get a house (for a few years at least) that they couldn’t afford. It was just recently that the US government passed legislation that makes lenders consider the payment after the mortgage reset (and not during the teaser rate period) when they look at the repayment ability of the borrower. Hard to believe that sort of common sense rule has to be legislated.

Interest Rates

This is another factor that applies to both Canada and the United States. While interest rates are higher than a couple of years ago, they are still fairly reasonable. If rates were to go up say 2% then I think that this will expose some sub-prime borrowers because they might not have any room to cut back in their budget to pay for a few more hundred dollars of interest each month. A borrower with a better credit rating would also feel the pinch with higher interest rates but they would likely have more flexibility in their budget.

Economy

The economy and job situation is still quite good in Canada which is not really different than the US but if we see a recession in either country and unemployment goes up, then that will certainly put more pressure on highly-leveraged home owners and foreclosure rates will go up.

Summary

Loose lending standards and rapidly increasing real estate values were the main reasons that led to some American borrowers taking out speculative mortgages that they couldn’t afford. Because these factors were not as prevalent in Canada I think that there are a lot less borrowers in Canada who are on the edge as far as being able to afford their mortgages. That said, lenders in Canada will still give borrowers a lot of mortgage which some people have taken advantage of, so if unemployment goes up and/or interest rates go up, we could still see a smaller version of the sub-prime mortgage crisis here in Canada.

The Globe and Mail recently had an excellent article ( free login required ) on subprime lending and some of the fraudulent sales methods used.

Finally I will leave you with link to a sub-prime mortgage discussion written by a senior employee at Pimco – it’s very informative and the format (the economist is talking with his pet rabbit) is very entertaining while at the same time, somewhat disturbing. 🙂

Other posts in this series

My Two Dollars posted My Thoughts On This Whole Mortgage Crisis And Why I Don’t Feel That Bad. This excellent post explains why David is a bit annoyed that people who overbought are getting helped by the government while fiscally responsible people (like him) don’t get anything.

Finance Freelance Life explains how renting a home and buying a home are not as different as they seem in Why renting is right for us right now.

Rocket Finance has a great post about his own real estate mistakes.

My Dollar Plan (yes, the one with 181 financial accounts) tells us a very unusual story of how she has an adjustable rate mortgage (ARM) and not only is she happy with it – she doesn’t blame her mortgage broker, the government or space aliens for the fact that she has one.

Moolanomy explains Debt-To-Income Ratio and Why It Matters. This post covers why you shouldn’t spend too much of your net income on your house.

Millionaire Money Habits tries to decide between investing in stocks or real estate in Catch a Falling Knife – Buying the Housing Slump.

PaidTwice wrote an interesting post on the “Can we afford it” mentality which gets into the problem of people deciding if they can afford something (such as a house) based entirely on the monthly payments.

Debt Free Revolution talks about how maybe it’s not such a good idea to take advantage of increased equity in your house by paying off credits cards with a HELOC. (Home equity line of credit).

Remodeling This Life wrote a post about how she and her husband bought a house and totally gutted it. This post brought bad some unpleasant memories for me because of our own fixer-upper experience. She has a fair bit of advice and warnings for anyone who wants to buy a fixer upper.

Being Frugal wrote Frugal Hacks For Your Home. Still not sure exactly what a “hack” is but maybe this post will tell me….

Plonkee Money asks why anyone outside the US should care about the subprime mortgage crisis.

Cash Money Life explains how mortgage escrow accounts work. These are more common in the US although I have heard of house insurance payments being combined with mortgage payments. In a related article he discusses how his mortgage payment dropped recently because of changes in the escrow liability amounts.

Single Guy Money talks about the real cost of home ownership.