Perverse Markets Cause Misallocation Of Efforts – Young 31 yr old Couple; Two Kids; Finances Under Pressure; Considering Moving; Higher Risk Investments Become Priority Over Careers

zzz at March 9th, 2011 at 5:09 am– [in response to a comment “wow, renters must be sitting on a giant pile of money waiting to swoop in and cash in”]
“Given up on that. Age 31, married with two kids under 3. Family finances coming under pressure. Expenses rising steadily, no wage improvement, job change imminent. We could be moving. Savings are a huge buffer but they’re losing value. We’re changing our plan and switching to active investment. Long term investment returns are priority #1, careers are #2, and Canadian real estate is off the radar.
Renting something acceptable is less than 30% of the cost of buying somebody’s fucked up reno here in the Fraser Valley. Buying my current rental with cash would yield under 4%, a poor return for an asset that depreciates. Like it or not, houses are an investment and at these prices they are a poor one. They are also illiquid and the risk is extreme given our obscene levels of mortgage debt and leverage.
No real problems here, but maximum uncertainty. It really shouldn’t be this way, but people here are just house crazy. I’ve got a relative with multiple properties holding out for a return to peak prices in the interior, others nearing retirement and 500k in debt, and a young family with 3 properties. They paid off their residence and then bought two in a year.
So yeah, the market is hot. Buy and hold :) People are playing monopoly with free debt. Thanks BoC!”

A couple of thoughts:

1. Note how distracting the current environment is to this young couple:
(a) they may move because of the housing market,
(b) they see ‘long term investment returns’ as higher priority than their careers. (It is likely that the ‘fast-and-loose’ milieu, with individuals around them making unnatural gains in the RE markets, is persuading them they have to take on more risk elsewhere.)
This bodes poorly for our community. We would be far better off if couples in this position were happy with affordable accommodation, and if they could concentrate on using their skills and talents to add to their own wealth by being useful in our society. Misallocation of resources, times two.

2. This is, in our humble opinion, a very poor time for a part-time investor to be shifting to ‘active investment’ (unless ‘zzz’ means considering short positions, which would not be a common idea at this juncture). A two year equity bull is about to turn: it is now sucking in the retail investor during a distribution phase. After retail investors took a record amount out of funds in 2010, a record amount of retail money is coming back in 2011 Q1, just in time for the smart money to sell to the man in the street. The little guy is about to get screwed, AGAIN. This could result in a double (and particularly devastating) blow for ‘zzz’ and their family; we would respectfully urge caution (which is the opposite of the urge they are experiencing, namely, to take on more risk for the promise of higher returns).-vreaa

9 responses to “Perverse Markets Cause Misallocation Of Efforts – Young 31 yr old Couple; Two Kids; Finances Under Pressure; Considering Moving; Higher Risk Investments Become Priority Over Careers

  1. “Long term investment returns are priority #1, careers are #2”

    I find this statement strange as well, unless they have a lot of wealth invested, but it doesn’t sound like it. For the average person, their career is the single biggest payer in their lifetime by far. Nothing comes close. Are you making more money from your salary or your “investments” this year?

    • I see your point, but zzz’s point resonates with me.

      I think their point is: for many careers, putting extra effort/time into your work doesn’t affect your compensation much (e.g., careers with no overtime pay, negligible merit-based bonuses or raises). My career is one of those.

      So, if you have 20 extra hours per month, where should you spend it? On your work, or looking after your investments.

      Actually, I think the correct answer is a mixture of: preparing and monitoring a domestic budget, ensuring that you’re avoiding taxes sensibly, and also watching your investments.

  2. I don’t find it that strange at all. The governments are doing everything to destroy the savers. They are practically forcing people to speculate.

  3. Snats,

    The correct question is ask is “how much money after foods/shelter/transportation/taxes” ie the costs of earning the salary

    The odd is negative, just look at the saving rate in BC. Working doesn’t make much sense, at least in Vancouver.

  4. I think the key to financial success for families is 1) household budgeting, 2) long term investments, 3) career. In that order. We are raising kids and can’t afford to invest 10+ hours a day in the rat race. Careers won’t be neglected, they just offer low rates of return. There are a lot of baby boomers not retiring.

    Savings rate has been 60% of after tax income for 5 years. We saved for a house and got one third of the way on two full time incomes. That’s about half the progress we expected, and now we’re just getting burned over and over again. If we were saving anything that can’t be printed we would be ahead and not behind. I’m sure we will have a debt crisis in this country. I have a very low opinion of the Canadian dollar.

    I’m well aware of equity valuations and have been following and researching markets for 5 years. I am a conservative value investor with a 30 year time horizon. It’s hard to like anything right now, but the long term plan is decided and will in place. One less house buyer.

    • “Sell in May and stay away”….

      And this year, ZZZ – you might want to consider making that March…

      Fasten your seatbelts, passengers – turbulence ahead…

  5. “Savings are a huge buffer but they’re losing value. We’re changing our plan and switching to active investment.”

    Sounds deflationary to me. Imagine how those significantly closer to retirement must be feeling! 😯

    • Taking that thought through… if it does turn out the savings and returns of those near retirement aren’t adequate, they are faced with a few choices:
      1) Work longer
      2) Invest in riskier assets
      3) Sell, refi, or downsize existing assets for funding consumption
      4) Decrease expected standard of living
      5) Live for a shorter period

      How many will be considering downsizing assets (i.e. property) as a way of buttressing their available savings?

      • Work longer will be the “choice” for most, if the companies let them.

        It will lead to pressures on the pay scale though. I already see it in my contracts, I have lost ~20% of my gross billable and it doesn’t look like that’ll change anytime soon.

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