I had recently presented the RKG Investment Solution to the President of a wealth management firm in the Greater Toronto Area and I had mentioned that, in my view, there is a shortage of investment options. As I see it, there’s mostly just paper investment – stocks, bonds, mutual funds, GIC’s, etc. Commodities such as gold, silver, platinum, wheat, cattle, grain, etc., exist, but are difficult to store and manage, so the natural progression for these has also been towards paper investment – ETF’s (exchange-traded funds). And then there’s Real Estate; this is the playground I’m in.
Now the President of this wealth management firm listened patiently and then stated that he disagreed with my view on the shortage of investments. In his eyes, there are many investment options (mind you, they’re all paper based) however he did point out that an investment in Real Estate is one of the few secured investment vehicles out there. And on that note, I decided to point out the difference between Safe and Secured.
I had previously come across an article on Yahoo! Canada Finance dated Friday, August 27, 2010 with the title: “Safe investments with reasonable returns”. Naturally this piqued my interest because I am always interested to see if anybody mentions Real Estate. With a hefty lack of surprise, I found out that this article, like millions of articles on personal finance, talk about investing in the stock market via large funds. It certainly would be valuable to readers and action-takers to have guest columnists exposing the opportunities of various investment vehicles, not just the stock market. In the mean time however, I’ll go over it a little.
According to the article, Canadians have approximately $1 trillion dollars mostly in bank accounts and GIC, and through 2010 so far, we’ve squirreled away another $100 billion into our bank accounts. It seems we’re cash heavy, why aren’t we doing much with it? Security – one word that defines why many of us, as Canadians, take a back seat, shy away from risk, and are comfortable with lower returns. However, due to lack of financial education in our schooling systems, what you don’t know in this case is really hurting your financial future.
So, hypothetically speaking, if you had $100 in your bank account, what could happen to it? Here are some ideas:
– Taxes will eat a big chunk
– Inflation will also eat a big chunk
Everybody, it seems, has heard of inflation; these days the word is tossed around just as much as an erupting volcano: inflation everywhere! However, the true impact of inflation on your hard earned money is a very important point to consider. Inflation is a rise in the general level of prices of goods and services; the corollary is the devaluation of the money you have with you right now. Inflation has everything to do with price, and nothing to do with value. The price for the latest generation car may go up every year, however, that is not because the car may be any more valuable, rather, the price increase merely reflects that the cost of other items to make the car have also gone up.
So the price for everyday items is going up slowly, but is your salary going up at the same rate? The Bank of Canada provides a unique service with the Inflation Calculator. In the screenshot, you can see how a basket of foods that might have cost your parents 30 years ago $100,000, that same basket of goods is now costing you $232,007.97. That’s a 132% change over 30 years. Have you seen the majority of salaries rise at that same percentage? Can you see now why everyday items seem to get more and more expensive in ‘price’, yet their intrinsic ‘value’ remains the same?
It’s a game of numbers. And whether you are playing the stock market, commodities, or real estate, you’re playing a game of numbers and percentages. Regardless of where you put your money, the quintessential question to ask yourself is this: “Will the returns put me ahead of taxes and inflation?” Taxes can be mitigated through the use of corporations, yes even for personal asset protection (speak with a good accountant). And you can hedge yourself against Inflation by purchasing assets that go up at the same rate as inflation or greater.
Find out how you can protect yourself against inflation here.