Categories
Life

How to Prepare for the Coronavirus

Consider this a public service announcement for those who want to prepare for the coronavirus.

Please share this with friends and coworkers.

Covid-19 (coronavirus) is quickly becoming a global pandemic. It has now gained a solid foothold in Iran, South Korea, Italy and Japan. The virus is likely currently incubating in many other countries around the world.

While the case fatality rate is lower than SARS, it is still far higher than the common flu. Covid-19 appears HIGHLY contagious. Therefore the quantity of deaths could reach overwhelming levels far greater than any regular flu.

No healthcare system is prepared. The CDC yesterday called this coronavirus a “tremendous public health threat” in the United States.

The even bigger challenge with Covid-19 is the tidal-wave of sick patients overwhelming a country’s healthcare system. No healthcare system is prepared. The CDC yesterday called this coronavirus a “tremendous public health threat” in the United States. China is building 19 new ‘hospitals’ to manage patients. Expect the worst – these ‘hospitals’ are basically places to die in isolation with little real treatment.

Most who are infected will survive. However, there is some anecdotal evidence that re-infection is possible. There is also evidence that covid-19 damages the heart, potentially leading to long-term health issues, even if cured of the virus itself.

We cannot rely on the government. This is war and we all have to do our part. You have to prepare for the possibility that every single person in your household is ill at the same time. You also have to prepare for the possibility that you will be stuck at home to care for yourself and your loved ones.

We all have a personal responsibility to stay as healthy as possible. If I stay healthy, you have a greater chance of avoiding the coronavirus (and other illnesses). The virus needs us to spread it. So don’t do the virus any favours. There are things you can do to slow its spread.

The following guidelines are created to help you and your family prepare for the coronavirus and provided by Dr. John Campbell:

How to Prepare for the Coronavirus:

1. Stay home when possible, avoid planes, buses, trains, queues, busy areas.

We cannot rely on the government. This is war and we all have to do our part.

2. No visitors, avoid close contact with symptomatic people or potential carriers, don’t share cups.

3. No handshakes, kisses, hugs. Don’t kiss babies. All outside surfaces, money.

4. Gloves and meticulous hand hygiene, don’t touch eyes, nose mouth.

5. Wash hands, warm water and soap or hand sanitizers.

6. Catch it – bin it – kill it.

7. Coughs and sneezes spread diseases.

8. Faecal contamination, meticulous hand and surface hygiene.

9. Wear a quality medical mask or n95.

10. Wrap around glasses.

11. Avoid hospitals, limited visiting.

12. Good nutrition, vitamin D.

13. Keep warm, sleep, family life.

14. Thoroughly cook meat and eggs.

15. Avoid public spaces and wear a mask at home if you start to feel ill with fever

Subscribe to DumbWealth.com:

Categories
Investing

Why Gold is Declining

The number one question I’ve received this week: why is gold down with the stock market?

Fair question. Gold is sold as a form of protection against calamity. Were we really sold ‘fools gold’?

Probably not.

    Gold has a tendency to decline during crises. One only has to look at 2008 for a recent example.

    In 2008, gold prices declined along with everything else. However, after the immediate crisis ended gold prices started a dramatic rise, reaching a record high (around $1900) in 2011.

    So why does gold fall during severe market stress? There are a few possibilities:

    1. Forced selling to cover margin calls.

    As markets collapse, anyone who bought stocks on margin (i.e. borrowed from their broker) will need to put up additional collateral or sell their holdings. Those who don’t want to sell need to add cash to their accounts. On way to do this is to sell holdings that have performed well. Up until last week, gold was performing exceptionally well.

    2. Sell winners.

    Investors sell their winners not only to fund margin calls. They might sell winners so they have cash to redeploy into cheaper stocks. Or they may simply want to increase their cash buffer. Investors tend to sell winners because it is psychologically easier to lock in a gain than a loss.

    3. Rising dollar.

    Most financial crises are accompanied by a dollar shortage. One reason is because investors are reallocating to US Treasuries (which require dollars to buy). The US dollar (and the dollar-denominated Treasury market) is viewed as a safe haven in times of crisis. This causes the value of the dollar to rise. When the value of the dollar rises, the number of dollars required to purchase any asset priced in dollars declines. Gold is priced in US dollars.

    What’s next?

    If this crisis plays out like the last one, central banks will eventually inject massive liquidity into the financial system, which is ultimately good for gold.

    Subscribe (Free) to Get the Latest from DumbWealth:

    Categories
    Investing

    Could Covid-19 Trigger a 2008-Style Financial Crisis?

    I created dumbwealth.com to help you take small actions to make big improvements in your life. Dumbwealth is about life balance and truth. It’s not about market timing or the latest FOMC meeting.

    With that said, there will be economic or social issues so big they are critical to understand if you are to avoid plunging into a financial hole. Now is one of those times. The issue is Covid-19.

    ***

    As much as I don’t want to get sick, my biggest fear at the moment is not catching the Covid-19 coronavirus. My biggest fear is the economic and social shocks created by the virus.

    I don’t know whether or not Covid-19 becomes a pandemic. Let’s just say it will. To be clear, that doesn’t mean everyone will get sick. And the vast majority of those who do get sick will recover. Indeed, many of the infected will simply experience a moderate inconvenience. I suppose that’s the good news.

    While not everyone will get sick, if this virus continues to spread we will all feel the economic and social shocks created by the world’s reaction to the virus.

    To understand the economic and social implications of Covid-19, look at China. Since it was the origin of the outbreak and worst hit so far, China serves as a great test model for the rest of the world.

    Here’s what the model tells us.

    During the early moments of outbreak, with relatively few cases, uncertainty rules. As with any form of uncertainty people spend less. Slowly, businesses begin to feel the rising pressure on cash flows as sales falter. During the early stages – in an attempt to save face and avoid panic – the authorities downplay the risks. This is the smoke before the economic dumpster fire.

    I expect borders and cities worldwide to shut down on a rolling basis as the virus spreads around the world.

    Eventually the virus starts spreading rapidly, case numbers rise and deaths occur. This is when panic sets in. Grocery store shelves are quickly emptied as people hoard supplies. Sick patients flock to hospitals, which are quickly overwhelmed. Medical staff start getting sick too. This is when the healthcare system fails and the government cracks down fast and hard.

    We saw this in China. Once they saw they were losing control the Chinese authorities quickly changed their plan of attack. To avoid overwhelming the hospital system with sick patients, China shut down businesses and forced people to remain at home. The transition from smoke to blazing dumpster fire took just days.

    As the virus spreads outside of China, other governments have used these early lessons to their advantage. Over the past few days, Covid-19 cases in Italy have gone from 0 to 374. Seeing how things played out in China, the Italian government quickly shut a number of cities.

    While quarantine sounds unthinkable for democracies around the world, the alternative is potential collapse of the healthcare system. This pattern is repeating as the virus becomes endemic and self-sustaining in many parts of the world – borders are closed, travel is restricted and people are quarantined.

    I could see borders and cities shut down on a rolling basis as the virus spreads around the world. The specific experiences within countries will still vary. Some countries will be more restrictive than others, depending on the type of government. However, whether voluntary or compulsory, activity will most certainly decline.

    What happens when masses of people are sick or not permitted to leave their homes?

    What I described above is the local impact – the impact on the individual’s pattern of daily behaviour. What few are discussing is the potential macro consequences. This is where it gets really dangerous.

    During an epidemic or pandemic, people stop going to work and stop going to stores. Factories stop producing and people stop buying things. The result is a shock to both aggregate demand and supply. The larger the shut down of activity, the larger the shock.

    Like past shocks, the virus is temporary. Don’t equate ‘temporary’ with ‘insignificant’. Black Death was temporary. WWII was temporary. These are extreme references, but you get my point.

    Still, a temporary shock of large magnitude could become a permanent drag on the economy, due to damaged collective psychology. People are irrational and may be very slow to return to normality even after the virus has passed. Nobody is going to spend money while the business environment is uncertain. Business uncertainty will persist as long as nobody spends money. To break this self-reinforcing cycle the collective spirit must shift. As witnessed during the Great Depression and 2010s, it is very difficult to alter mass psychology.

    This risks a permanent lower economic equilibrium that requires massive fiscal and monetary stimulus to return to true economic potential.

    While this sounds dire, the immediate risks are even more dangerous. Namely, a simultaneous worldwide shock to both supply and demand could create a calamity rivaling that of the great financial crisis of 2008.

    Everything is interconnected.

    Picture this: you own a small restaurant in Guelph, Ontario when your city gets shut down due to a big spike in Covid-19 cases. Businesses are told to close and employees stay home. With no cash flow coming in you now need to figure out which bills don’t get paid. Your staff (assuming they’re not salaried) now have no income and must figure out how they will afford their next mortgage payment. Few have adequate emergency savings or are prepared.

    Multiply this by thousands of businesses and hundreds of thousands of employees across Guelph. Even for this relatively small city, the scale of unpaid bills is massive. Big and small companies across Canada are impacted through the interconnected nature of economies. When bills stop getting paid, loans go bad, collateral is called, businesses go bankrupt. Layoffs occur as executives scramble to save their businesses, creating a vicious cycle.

    Now imagine this happened in New York or London – two major, globally-interconnected financial centres. The effects would seem unreal.

    In such a scenario, capital markets dry up as investors desperately unwind positions. Banks with the wrong exposures risk a liquidity crunch and possible insolvency. If this process happens quickly and indiscriminately – like it did in 2008 – the financial system could head for collapse.

    What does that really mean? Financial collapse hits Main Street as hard as it hits Wall Street. It means businesses can no longer meet payroll. It means pensions implode. It means families lose their savings.

    So far I have only discussed half of the issue – demand. At the same time, because workers are no longer producing, supply chains globally also break.

    Numerous major companies (e.g. Apple, Microsoft, Hyundai) have already announced parts shortages. There are also countless anecdotes of creeping supply chain issues for businesses of all sorts. And personally I saw my first sign at a local retailer warning about supply problems. Everything from microchips to pharmaceuticals could be affected. This could drag on for months.

    The speed and uncertainty of it all could easily result in mass liquidation of assets as investors shoot first and ask questions later.

    It is possible that once the virus passes, production will ramp up quickly. However, the lost output is not recoverable. The bigger challenge, however, is for businesses around the world to survive this dual shock to demand and supply. The interconnected nature of global supply chains and financial systems is extremely complex, and the outcome from such a sudden and extraordinary one-two punch is highly unpredictable.

    It is quite possible that the negative consequences take on a life of their own even before the virus arrives, as companies and staff anticipate the next shut down. This is how recessions typically start, except this would be much faster. The speed and uncertainty of it all could easily result in mass liquidation of assets as investors shoot first and ask questions later. Consequently, any lingering liquidity concerns of assets on bank balance sheets would quickly surface. Any bank with significant exposure to illiquid assets could risk collapse.

    This probably all sounds somewhat familiar to anyone who experienced the great financial crisis of 2008. It wasn’t the slowdown in economic activity that almost destroyed the financial system in 2008. It was the sudden separation of complex networks in the face of generalized uncertainty that brought the system to its knees.

    Prepare for the worst, hope for the best.

    This is not a prediction. It is a warning. I don’t know what’s going to happen. Hopefully we muddle through this without major problems. But when highly complex systems are tested to this degree, it’s best to have a back-up plan.

    Put it this way, I wear my seatbelt not because I expect to crash, but because I want to protect myslf in case I do.

    Personally, over the course of the past few weeks I’ve de-risked my portfolio. I’m still appropriately balanced and diversified but I removed any uncomfortable equity positions. Overall, I’m not positioned massively in any direction in particular. Just appropriately diversified with enough dry powder to take advantage of any major corrections.

    I’ll leave you with the following important considerations:

    1. Would you be able to stomach the equity portion of your portfolio dropping by 50%? If not, you might want to re-think your exposures.
    2. Do you have what you need if you were to get stuck in your house for a month? Food, toilet paper, medicine, etc.
    3. Do you have what you need if everyone in your household were to get sick at the same time? This could include simple meals that don’t require much effort, tea, etc.

    I’m quite sure some people think I’m nuts. Maybe I am. It is in my nature to be conservative. If I’m wrong, then you’ve got a well-stocked house. If I’m right, you can comfortably binge on Netflix while you ride this out.

    If any of this resonates with you, my recommendation is to get ahead of this in case people panic, tanking markets and clearing grocery shelves. Because once the panic starts, it’s too late to act.

    Categories
    Work

    Corporate Scapegoat: The Mid Level Executive

    This is a warning to those looking to climb the corporate ladder: I’ve seen a disturbing trend in the corporate world.

    Talented people start at the bottom and build their corporate careers from there. Some rise to management or mid level executive levels and take responsibility for elements of a business. If the corporation is large enough, many of these managers or mid level executives will always remain below several more layers of hierarchy. Those above them, obviously, have ultimately increasing levels of responsibility and oversight.

    Many of these leaders at the top got there because they have charisma and know to keep their bosses happy. They’re also skilled at staying close to successes and distancing themselves from failures. Essentially, they’re masterful bullshitters.

    As hard knowledge and intelligence are sometimes lacking, these senior executives surround themselves with smart people who help elevate them to the top. These senior executives ultimately make the big decisions and build the framework within which everyone else works.

    However, charisma alone cannot run a business. Because these senior executives are frequently inept, they often create an organizational structure that makes it near-impossible to get anything of significant value done. The thick layers of bureaucracy create a stifling environment in which it’s difficult (and usually unnecessary if the ultimate goal is career preservation) to take calculated risks because every action is diluted by group think. For fear of taking accountability, bold corporate decisions are watered down and approved by committee and made comfortable by precedent.

    Ultimately, because of the grinding gears of corporate bureaucracy most employees within the organization fail to get anything of real value done. The business ends up falling behind competitors.

    While the leaders at the top ultimately should take the blame for material failures within their organization – after all, they built the framework, hired the personnel and set the strategy – they usually have the political clout to shift blame to a corporate scapegoat.

    Enter the mid level executive.

    The career mid level executive is senior enough to have significant responsibility, but not senior enough to actually drive the future of the organization. The career mid level executive never gained entry to the senior executive club. More-or-less, the mid level executive follows orders and makes the most of a shitty hand. The mid level executive sounds like he’s in charge, but he’s really a helpful pawn trying to do the right thing for the business and its customers.

    I’ve seen this happen over and over again. It’s an unfortunate reality they don’t teach you about in business school.

    Don’t get me wrong, these can be fantastic, hard working, smart people. They just haven’t cracked the ceiling to reach the top 1% of an org chart, in which the real decisions – and real money – are made. As a consequence, they are disposable. In contrast, senior executives are a protected class, insulated from their own inadequacy because they are expensive to fire (in terms of money and reputation) and especially skilled at shifting blame.

    So when things go tits up in an organization, what happens? Mid level executives who have worked their asses off – sacrificing family and social life for their company – get fired. They become corporate scapegoats. I’ve seen this happen over and over again. It’s an unfortunate reality they don’t teach you about in business school.

    Unlike other lifetime careers – like teachers, doctors or electricians – the corporate career can hit a brick wall at any time. And often, those mid-level executives who hit a brick wall in their 50s never find another job. Forcibly retired 10+ years ahead of schedule. In fact, over my career I’ve seen more older mid level executives get fired than I’ve seen voluntarily retire.

    People starting a career in a corporation need to understand that these organizations are politically motivated and that career lifespans are often only 20-30 years long. If this is the track you are on, plan your life as if your career won’t last forever. Use your earnings to build net wealth and avoid lifestyle creep as you rise through the ranks. When your time comes, the right preparation will prevent you from falling into a financial black hole.

    Subscribe to DumbWealth:

    Categories
    Real Estate

    6 Reasons to be Bullish about Toronto Real Estate

    Anyone who knows me and reads this is going to think I’ve lost the plot. Stay with me. I have good reason for writing this article.

    Let’s ignore the craziness for a minute and explore the long-term fundamental support for Toronto real estate.

    Before I start, let me first get this out of the way: I (still) think Toronto real estate is outrageously priced. According to Zolo, the average warm pile of bricks in TO sold for $982,189. This is 18.6% higher than last year! The market is tight and homes are on the market for an average of 16 days.

    Over the decade ending 2018, the performance of the Canadian housing market was a rarity across the world (chart below). It’s only fair to question whether buying now is a stupid idea.


    The market is hot and the current pace of price increases seems unsustainable. Everyone knows how ridiculous TO housing prices are, yet they continue to buy. The market stinks like speculative frenzy. It has for years – but this is the bubble that refuses to pop.

    It is quite possible that Toronto real estate experiences a serious correction. It has happened before. There was a moderate correction starting April 2017, with prices recovering since. There was also a deep housing recession in Toronto throughout the 1990s. As you can see in the chart below, Toronto real estate prices took about a decade to break even after 1989. Many people have been waiting years for a ’90s-like correction, missing out on thousands of dollars of upside. Some day, right? Right???

    Is a 1990s-style correction imminent?

    According to the chart below, mortgage lending standards in Canada are strong. High quality lending standards means fewer defaults, fewer forced sales and less supply. Of course, there is some pro-cyclicality to it all, as economic strength supports incomes – the foundation underpinning lending standards. What happens to lending standards when the economy weakens?

    Will there be a correction in the near future, perhaps triggered by a recession? There are smart people on either side of the argument. Let’s put the debate about a near term correction to the side for now. That’s not the point of this article.


    The long view

    If you’re a 30 year old buyer, maybe you shouldn’t be overly concerned with what happens in 2, 5…even 10 years. After all, a 30 year old buyer is looking to own for the next 30-50+ years. That’s plenty of time to ride out a correction. Even a correction that takes a decade to recover – like during the 1990s – is manageable with a 50 year time horizon, assuming you can keep up with the payments and aren’t forced to sell in a liquidation scenario.

    Is Toronto a good place to buy if you have a long-enough time horizon?

    For this article, let’s ignore the craziness for a minute and explore the long-term fundamental support for Toronto real estate.

    1) Young(ish) people buy homes as they establish careers and start families. Canada’s demographic trends suggest the home-buying group should grow at a solid rate during the ’20s. This provides a tailwind for Canadian housing demand.


    2) Canada remains one of the most attractive destinations for immigrants. Migration coupled with organic population growth makes Canada the fastest growing country in the OECD. New immigrants account for the vast majority of this growth.

    This is very supportive to the housing market. Many immigrant populations see home ownership as essential to personal freedom and security. They work hard and do whatever it takes to buy and keep a home. Therefore, Canada’s population growth trend is bullish for real estate.

    3) The immigrants coming to Canada are highly educated and ready to work. Most require little government assistance and arrive ready to spend and invest. What’s one of the first things they invest in? A place to raise their families.

    4) Everyone that comes to Canada wants to live in Toronto, Montreal or Vancouver. Not all end up in these places – as they discover many opportunities outside of these cities – but the concentration is significant. Toronto in particular contributes almost 20% to Canada’s GDP, so you can see why it is a magnet for immigration. Moreover, Toronto is very ethnically diverse and has built in multi-cultural support..

    5) With all this fresh, hungry talent Toronto will soon be second only to San Francisco as a North American technology hub. This trend is self reinforcing, as talent attracts employers and vice versa. Toronto is also Canada’s finance hub. The finance and technology industries will drive Toronto’s economic prospects for decades, supporting Toronto house prices.

    6) Finally, although Toronto residents might not see this, the cost to live downtown is still cheaper than many other places around the world. Is Toronto equivalent to London or Hong Kong? Of course not. Not yet. But with ample economic opportunities and solid prospects, comparatively lower cost of living should continue to attract highly educated, workforce ready immigrants from around the world. This again supports Toronto’s real estate market.

    Subscribe to get more insights on wealth creation and investing:

    #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. */
    * indicates required
    Email Address *
    First Name
    Last Name
    Categories
    Investing Wealth Work

    Markets Hit Highs: So Why Are You Broke?

    Mainstream media reports:

    The stock markets are breaking through new highs.

    The economy is ‘booming’.

    Unemployment is at a record low.

    Jobs numbers are ‘blockbuster’.

    So why does it feel like you’ve fallen behind in life? Because you have.

    According to one economist, the United States (and much of the Western world, for that matter) has been going through a ‘silent depression’ since 2007.

    The following charts illustrate this perfectly.

    1. The chart below compares employment growth across time. Instead of simply looking at the number of new hires, this chart illustrates new hires as a percent of the workforce. (1000 new hires means a lot less when the workforce includes 1,000,000 people than 10,000 people.) According to the chart, workforce growth significantly declined after the early 2000s recession and has remained historically low since.

    Chart depicting US Employees on Nonfarm Payrolls

    2. The chart below compares per capita GDP growth since 2007 against the last two economic depressions. It turns out that the silent depression has been worse than the previous two depressions. (Source: The Silent Depression, by Emil Kalinowski.)

    Chart Depicting US GDP Per Capita

    3. The next chart shows real median income (‘real’ accounts for the effects of inflation) in the US. Since January 1, 2007 real median incomes have only grown by 3.6% (total, not annualized!). So where did all the economic ‘gains’ reported by the media go?

    4. The chart below tells the same story as the previous chart, except using average hourly wages going back 40 years. Again, real incomes have not budged.

    Americans' paychecks are bigger than 40 years ago, but their purchasing power has hardly budged

    5. Here’s where the gains have gone! The chart below breaks out real income growth by categories of earners. The top 10% of earners have experienced substantial growth while everyone else has remained flat. The gains have all gone to the rich.

    Wage increases in the U.S. rise to the top earners

    6. The following chart shows the same information as the previous chart, except in a longer timeline. Again, the top earners (especially those in the top 1%) have hoarded all the gains.

    There you have it. The economy has grown. But on an individual level overall growth has not been as strong as the headlines imply. And unless you are in the upper echelon of society, none of those limited gains went to you.

    Subscribe (free) for more updates from DumbWealth:

    #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. */
    * indicates required
    Email Address *
    First Name
    Last Name
    Categories
    Wealth

    Should You Pay Down Your Mortgage or Invest?

    Note: this article was written with a Canadian audience in mind. In Canada, mortgage interest isn’t tax deductible but the appreciation of your personal residence is tax-free. If you’re from a country where mortgage interest is tax-deductible, you should adjust the mortgage rate accordingly. Also note that the comparison assumes a taxable investment account. Some tax deferred accounts (e.g. RESP) come with additional incentives (e.g. grants) that must also be considered.

    Let’s say you’re a family man or woman with $100,000 in cash, an outstanding mortgage balance of $100,000 at an interest rate of 3.5%. Amortized over 25 years, you’re paying $499 per month.

      Debt costs money. In this scenario, you’d be forking out $49,781.05 in interest payments over the life of the loan – almost 50% of what you borrowed!

      Let’s also say you have already maxed out your registered accounts (in Canada: RRSP, TFSA, RESP).

      So does it make sense to pay down your mortgage or invest that cash in a taxable non-registered investment account?

      (Note: the mortgage actually spills into one extra month, but that’s only a $0.05 payment to close off the mortgage).

      Should you pay off your mortgage or invest the money?

      This is not an easy question to answer. While this is a math question, the real answer comes down to psychology.

      Can you imagine the regret if – instead of paying off your debt – you invested the $100,000 only to lose 10 or 20% in the first two years?

      Many will simply point to the interest rate on the mortgage and say if your portfolio can beat it you should invest. For many this makes intuitive sense. In this example, you’d need a 3.5% after-tax return to break even.

      One of the problems with this comparison is that it doesn’t incorporate risk. The 3.5% return gained by paying down the mortgage is a known. The after-tax 3.5% return from an investment portfolio is an estimate based on historical precedent for a given asset allocation. Moreover, the estimate is an average of returns calculated over many years, some of which were higher and others lower. Indeed, actual returns can remain below expectations for many years. Can you imagine the regret if – instead of paying off your debt – you invested the $100,000 only to lose 10 or 20% in the first two years?

      The inherent volatility plus uncertainty means that you should expect greater compensation from your investment than from your ‘guaranteed’ mortgage investment. In other words, the estimated return for the investment opportunity should be significantly above 3.5% after-tax to account for additional risk-return ratio.

      There is also a psychological aspect not captured by the risk-return ratio that deserves a premium. For many, debt is an albatross around their neck. They live at the mercy of their creditors, who can choose to call their loans at any time. They remain in jobs they hate because they can’t miss a payment. They worry about losing income in the next recession while their debt payments persist.

      Thoughts of bankruptcy, liquidation and repossession force them to lead a less-risky lifestyle, barring them from entrepreneurial and meaningful career shifts. For someone with a family, defaulting on a mortgage simply isn’t an option.

      Big debts mean relentless payments, requiring steady income. Not fun.

      After tax payment vs. after tax return

      You’ve probably noticed I’ve specified ‘after-tax’ returns a few times. This is an important distinction.

      For someone with a family, defaulting on a mortgage simply isn’t an option.

      You are paying your mortgage with cash that has been already taxed. So your mortgage ‘return’ of 3.5% is effectively an after-tax return. When comparing against portfolio returns you must also consider tax. For example, if your tax rate on your investments was 30%, you’d have to earn 5% to come out mathematically even. Of course, you’d actually need more once you factor in additional risk of investing vs paying down a mortgage. Loosely, you could be looking at a 6-8% portfolio return requirement.

      From a cash flow perspective it looks worse

      The mortgage example above requires a $499 monthly payment. That equates to $5,988 per year.

      Could you find an investment to adequately cover your $5,988 annual net-of-tax mortgage payments? Some will argue that this overstates the true requirement, as this amount includes both interest and principal. I agree the principal portion isn’t a true cost, but it is still part of the repayment you must provide the bank whether you want to or not. So from that perspective, it’s still a fixed cash outflow that must be made (even if a portion of it is technically going from one hand to the other).

      Assuming a 30% tax rate on investments that’s equivalent to $8554 or an 8.6% annual return on the $100,000 portfolio. Possible, but doesn’t sound like a slam dunk.

      My conclusion

      Over the long run the math often works in favour of investing extra cash in a taxable non-registered account. However, in my opinion, there is quite a high psychological hurdle to justify not paying down your mortgage. Humans evaluate gains and losses in ways that can’t be captured in a spreadsheet. Right or wrong, this is a fact that must be accepted by the personal finance community. After all, many people seek happiness, comfort and security as primary life goals.

      If you’re like me the thought of debt keeps you up at night. Especially when that debt is financing the roof you keep over your family’s heads. The downside of defaulting on that debt is simply too great.

      If I were in this situation, I think the ideal compromise would be to pay off the $100,000 mortgage and then divert the canceled monthly $499 mortgage payments into an investment account.

      Subscribe (free) to get more wealth insights from DumbWealth:
      #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. */
      * indicates required
      Email Address *
      First Name
      Last Name
      Categories
      Investing

      4 Charts: China Coronavirus Collapse

      By now the number of coronavirus cases in China is approaching 70,000. Reportedly, about 400 million people are under some form of lock-down, if not outright quarantine.

        As a result, activity in China has ground to a halt. People are stuck at home, streets are empty, travel is limited. I wouldn’t be surprised to see negative GDP figures for Q1 coming out of China. That’s huge, given trend growth is closer to 6%. This is especially worrisome for the Chinese government trying to maintain order and control throughout the crisis.

        Preliminary data is suggesting I’m right about the severity of the slowdown. The four charts below show just how dramatically activity – such as travel – in China has slowed. When activity slows, commerce slows.

        These charts come from Mark Williams, Chief Asia Economist, Capital Economics.

        Average Road Congestion across 100 Cities in China

        Daily Passenger Traffic

        Coal Consumption at Power Plants

        Daily Property Sales in 30 Major Cities (Thousand Units)

        So how does this affect your investments and the economy outside of China? Common sense says there will be knock-on implications. However, the markets continue to tease new all-time highs.

        To be frank, the future is opaque. If there is a market and economic impact, it is probably transitory. Possibly, markets are already looking through the potential short-term impacts of the coronavirus. Or maybe markets are being complacent and totally underestimating the risks. Hard to say which. Regardless, it seems reasonable to reduce exposure to risk assets if your time horizon is under 2 years.

        Get the latest from DumbWealth:
        #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. */
        * indicates required
        Email Address *
        First Name
        Last Name
        Categories
        Investing

        Bob Farrell’s 10 Rules for Investing in 2020

        Bob Farrell is a Wall Street legend.

        He spent decades working for Merrill Lynch as the chief stock market analyst and senior investment advisor. He is widely recognized for his acumen as a trader and technical analyst. He is best known for understanding the patterns of investing and some might say he indirectly helped pave the way for the formal study of behavioural finance.

        Like all good traders, Bob Farrell knew people and the emotions of investing.

        Based on his seminal work, Bob Farrell created 10 rules for investing. These rules are still passed around by investment professionals today.

        One look at the world and it’s obvious why Bob Farrell’s rules are especially important for today’s investor.

        It’s only February, 2020 and so far we’ve witnessed wildfires in Australia, a brush with WWIII, risk of a global coronavirus pandemic, Presidential impeachment and a growing battle between the left and right wing political parties in America and worldwide. Meanwhile, the S&P 500 keeps pushing up against all-time highs, Tesla just went parabolic and cannabis stocks have cratered. Are we risk on or risk off? What gives?

        May 28, 2020 Update: Well, we had a pandemic, markets crashed and have since recovered in a v-shape, unemployment has skyrocketed to Great Depression levels and the economy has collapsed. The political divide widens and inequality expands. And we’re not even half way done!

        Who could be blamed for not knowing what to do. In 2020, it seems like Bob Farrell’s 10 rules for investing area as relevant than ever.

        Here are his rules:

        1. Markets tend to return to the mean over time
        2. Excesses in one direction will lead to an opposite excess in the other direction
        3. There are no new eras — excesses are never permanent
        4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
        5. The public buys the most at the top and the least at the bottom
        6. Fear and greed are stronger than long-term resolve
        7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
        8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
        9. When all the experts and forecasts agree — something else is going to happen
        10. Bull markets are more fun than bear markets
        Get the latest investing insights from DumbWealth:
        #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. */
        * indicates required
        Email Address *
        First Name
        Last Name
        Categories
        Work

        Worked to Death

        I know a man – let’s call him Henry – who was a fresh b-school graduate in the mid 1990s. Henry was young, smart and he wanted to make a lot of money. So he committed his life to a career in finance.

          To succeed at a singular pursuit one must be smarter and harder working than the competition. So Henry chose a well worn path that included evenings and weekends at the office. Nobody faulted him for doing so. In fact, his dedication earned him respect from friends, family and colleagues. This is a cultural phenomenon.

          His dedication earned him respect from friends, family and colleagues.

          What do courtroom, cop, political and hospital TV dramas all have in common? The glamorization of work!

          The competence of characters in these shows is frequently hoisted to heights unattainable to the average human. Normal people must split mental and physical capacity between kids, in-laws, leaky roofs and work. Clearly these characters have nothing else happening in their lives to distract from marathon research and preparatory sessions. Unrealistic, but this model is presented as an example to live by.

          For the average person, characters in these dramas might be admirable, but not feasibly aspirational. If you’re like me, you show up to work Monday morning and spend 20 minutes trying to remember what it is you do all day. In between meetings and endless impromptu distractions I’m lucky if I can focus for more than 30 minutes in a row. Because of this, if I truly wanted to get ahead in the corporate world I’d need to work outside of regular business hours, when distractions are reduced.

          Luckily, I’m over the corporate world. I paid my dues long ago. I don’t aspire to rise in the ranks any further so I get my shit done and leave. This is not to say I don’t create value. I create immense value by working hard and fast within standard business hours.

          I worked evenings and weekends in the early years of my career. I studied, got several degrees and accreditations and worked my ass off to grow my career. I was young and new so I had to prove myself. Of course, at that time I had no kids to come home to.

          My wake up call.

          After my first child was born I was still working crazy hours. One night my wife reminded me that my child was only going to be young once and that I’d regret missing her milestones. That really shook me up. I suddenly realized that I had to purposefully make time for the other parts if my life if I wanted to truly flourish as a human being.

          A rich life is made up of several parts that aren’t necessarily always operating at peak levels. I still work hard – I dedicate extra time to DumbWealth.com – but work is no longer my priority. Balance is my priority.

          Balance is my priority.

          If I wanted to keep growing my career like my buddy Henry, I’d have to dedicate another 10 or 20 hours a week to my corporate overlords. This would require sacrifice. Henry learned this the hard way.

          Throughout his life, Henry’s days and weeks consisted of breakfast meetings, working lunches, golfing, business travel and long days at the office. Even when he made it home to his wife and two children, he was preoccupied and distracted, slipping into his study to get ahead for the next day. Weekends and vacations were spent on the phone or laptop. Over a couple decades his status grew immensely and he earned a lot of money.

          Henry was like a character out of a TV drama. The clothes, the cars, the vacations. His family had everything HE thought they could possibly want.

          However, over the course of almost 30 years, Henry repeatedly missed birthday parties, recitals, anniversaries. More importantly, he missed the small things that don’t get Hallmark cards – homework, doctors appointments, family dinners.

          While he told himself he was working 80 hour weeks for his family, this wasn’t actually true.

          I once read that time is the most valuable gift you can give your children. Not iPads, not extravagant vacations, not Nike Air Force One shoes. Kids might not be able to articulate it, but the time you invest in them will build a lasting and caring relationship. As kids they will say they want the Nikes, but as adults they will remember the time spent together.

          Henry’s career eventually hit a brick wall, and like many executives he was packaged out of his company. He was financially fine. Emotionally, however, he was broken. His career had steadily progressed for almost 30 years and suddenly fell off a cliff. His entire identity evaporated and Henry desperately searched for meaning.

          He met with former work colleagues a couple times, but the distance between them widened as threads of connection frayed. He quickly discovered most work ‘friendships’ are built on nothing more than convenience and quid pro quo.

          So he leaned on his adult children instead. However, his kids barely knew the man and dismissed him like he once did to them.

          Unfortunately it gets worse.

          Neglected for many years – many of which included suspected affairs – Henry’s wife finally ended the marriage. The marriage wasn’t terrible, so she waited until the kids were grown. They had always lived separate lives and didn’t really know each other the way a married couple should. She couldn’t envision Henry as part of her life because he never was.

          Photo by Sven Mieke on Unsplash

          The divorce hit Henry hard.

          He felt betrayed, as he was still convinced everything he had sacrificed was for his and their children.

          In the end, Henry lost half the assets he had worked so hard for. All those late nights dedicated to a job, only for half of what he earned to be ripped away. Worse, Henry finally realized that his true loss was not financial. It was the friendship with his children, the experiences of family life and the companionship of someone who truly has your back. Hours at the office were no substitute. And most work colleagues were not true friends.

          Coworkers aren’t family and they barely qualify as friends. Who will be at Henry’s death bed? Who will still miss him 20 years after he’s dead? Definitely not Brian from accounting.

          A life worth living is diverse in experience and filled with connections to people who care about your well being. Work is important. But it can’t be everything.

          It’s a tough lesson for someone who made his career his entire identity and reason for living. The truth is, corporate entities don’t care. They can’t care. Public companies exist for a single immutable purpose: the shareholder. They’ll trick you into believing they care about you, but the second you’re not part of the plan you become persona non grata and you might as well have never existed.

          If it weren’t for labour laws and the bad publicity, many employers would work their employees to death. Indeed, many already do in a perfectly legal way: stress. Stress has huge consequences on a person’s physical and mental health.

          A life worth living is diverse in experience and filled with connections to people who care about your well being. Work is important. But it can’t be everything.

          Henry is now unrecognizable, his former self destroyed by his career. He is now working to build a relationship with his children and has developed new healthy relationships. He can’t make up for what was lost, but he is making the most of what remains.

          Get the latest career, money and investing insights from DumbWealth:
          #mc_embed_signup{background:#fff; clear:left; font:14px Helvetica,Arial,sans-serif; } /* Add your own Mailchimp form style overrides in your site stylesheet or in this style block. We recommend moving this block and the preceding CSS link to the HEAD of your HTML file. */
          * indicates required
          Email Address *
          First Name
          Last Name