December 2008


For some time I’ve been watching mortgage rates at several places online. I noticed that the spread between different terms tells an interesting story that changes fast (in normal times it probably doesn’t change quite as much). A couple of months ago the premium for getting a 7-year fixed rate instead of 5 years was very small – if you were happy with the rate it would be cheap to get a similar rate for a longer time. That’s changed now to a big gap between 5 years and 7-10 years.

This seems to indicate how lenders perceive risk over different time periods. If the spread is small they might expect most of the interest rate increases near the start of the term, with more stability farther out. On the other hand, if there’s a large spread they might expect lower costs at the start with more potential for increases after a few years.

I wouldn’t read too much into this though – if there’s one thing we learned this year it’s that sometimes lenders’ risk predictions are outside even their own comfort zones.

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While reading Canoe today, I found this quote from CIBC economist Benjamin Tal (full article) that’s a nice counterpoint to people who want to blame everything on executives at big companies:

“We were shifting from a society of passive savers to a society of active savers,” CIBC World Markets economist Benjamin Tal said

“People didn’t bother with old fashioned saving because if you doubled the value of your real estate during the course of breakfast – that was your savings.”

This is sadly amusing in light of what’s happening now – at first I thought that being an “active saver” sounded like a good thing, but relying on speculation and unrealistic price bubbles (in an illiquid market that you can’t participate in without moving into a cardboard box) is less than passive saving.

Real passive saving implies something like an automatic transfer to a savings account – the old-fashioned kind where you actually end up with something that has real value.

A recent Edmonton Journal story says that choosing a fixed-rate mortgage was one of the author’s worst mistakes. This is an old debate that will keep going for a long time, but suggesting that variable rates are best for every situation is going too far.

If interest rates are over 10% there’s no question that you want to follow them down, especially when you’re looking at a longer term. But when they’re at 3-5%, it’s pretty easy to guess the chances that they’ll drop by 6%.

Most people are bad at predicting economic trends and don’t know how bad they are, but everyone can believe that rates won’t go below 0%. If they’re very low by historical standards, it might be worth staying at that level for 5-10 years instead of risking a large increase for some small potential savings. At this point there’s probably more room for decreases in Canada than in the US, but with every rate cut the possibility of seeing a variable rate go down by half or three quarters decreases. I always like buying insurance when it’s cheap!

Of course there’s also risk tolerance (which is almost too obvious to mention). There was a time recently when I considered a fixed rate mortgage because I wouldn’t want to see the payments increasing. Fortunately that didn’t go through, and by the time I face the choice again I’ll have a much higher risk tolerance. Anyone who’s close to the limits of what they can afford should avoid variable rates even if it could save them a bit of money.

What would make you consider a fixed rate mortgage over a variable rate? Does anyone think interest rates will decrease for the next 5 years?

Almost a year ago I started this blog – the second one I attempted – to track the progress of my business and financial goals. It turned out that that didn’t inspire me as much as actually doing things so I turned all my attention to my business. Now I’m back to blogging with a better focus.

Although I’m always looking at what’s ahead of me, I am starting from a very different place than I was a year ago. My income has increased quite a bit and my target that I had trouble reaching a year ago is now a bad month; I’m quickly building up capital for the next steps (more on that soon); and this has allowed me to retire all my debts and optimize my monthly cashflow with under $1000 in required payments every month. I have experienced small portfolio declines as I built up my investments, but I hope to have a lot more time to buy before prices go up again.

However, my biggest successes this year have had nothing to do with my finances. This year I learned from people who are (currently) more successful than me that I already have many of the things that make them feel wealthy. While it’s true that I would have more time to focus on other things if I could go months at a time without doing anything to maintain my income, there is no better time than now to enjoy life with the people I care about. If I wasn’t thinking about anything but financial success now, I would reach it only to find that I still had a lot of work left to do!

I hope you have many successes to remember in 2009. As Steve Pavlina says in his new book, make sure you set goals that inspire you to take action today, not in November!

This post on AllFinancialMatters was brought to my attention recently. It brings up two interesting viewpoints. The first one is in the main post, which is about a young employee who thinks he has lived through a second Great Depression and will never touch stocks again (this could be good news for those who stay in the market but it’s just one person). It’s easy to spot the flawed reasoning there, but one of the comments makes a more subtle error – claiming, like many people, that the market will decline further in the coming year and investors should wait until 2010 to get back in.

Even many personal finance blogs that recommend good investing appproaches are now taking this tone, starting many posts by saying “the market will probably decline a lot more in the next year, but…” (at least when they make this prediction they remember that it doesn’t matter as much with a long-term view). This is a good reminder that investment success isn’t found by looking behind you. It’s all too easy to forget that future performance is determined as much by the price you paid for a stock as it is by the performance of the company you invest in.

Even though there’s always a lot of potential for hidden trouble, the current market is too good to resist for me. It may be in part because I just started investing in stocks a little over a year ago, and having seen prices drop so much since then has increased my excitement correspondingly. Anyone investing for the long term should be making regular investments in this market, with extra cash ready to put in when they feel safe (I check my cash balance with every big drop). What many people are forgetting while looking at the recent past is that it just might be a long time before stocks are this cheap again!

As a result of my attempts to educate myself on investing two things are clear: if the market does decline further that’s not likely to have a big effect on my long-term performance (which is what I invest for), and even so it’s not guaranteed to keep going down. If the S&P will sell for 700 next week why would anyone buy it for 800 this week? Those are two good reasons to throw off the fear that’s spreading to more and more people and invest consistently – I’ll keep buying from people who give up on stocks for as long as I can.

It’s been a while since I’ve posted here, but I’ve decided to re-open this blog with a slightly different focus. Although there are many bloggers (and journalists) covering finance and business already, I’ll be posting my thoughts and responses to things I read elsewhere here. I hope they can entertain or even inform you – let me know if you agree or if you think I’m about to lose everything!