How Young Adults Can Still Thrive Financially

Much has been written recently about the financial state of young Canadians.  The Globe and Mail’s Rob Carrick thinks today’s young adults have it tougher than ever, and financial expert Kurt Rosentreter thinks Canadian 30 year olds are screwed because we spend too much time on the internet. I get it.  We’ve just experience a...

Source: http://www.boomerandecho.com/how-young-adults-can-still-thrive-financially/

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A Choice of Capitalisms

E.J. Dionne, Washington Post
WASHINGTON -- In this election, we're not having an argument that pits capitalism against socialism. We are trying to decide what kind of capitalism we want. It is a debate as American as Alexander Hamilton, Andrew Jackson, and Henry Clay -- which is to say that we have always done this. In light of the rise of inequality and the financial mess we just went through, it's a discussion we very much need to have now.The back-and-forth about Bain Capital, Mitt Romney's old company, is part of something larger. So is the inquest into the implications of multibillion-dollar trading...

Source: http://www.realclearpolitics.com/articles/2012/05/21/a_choice_of_capitalisms_114206.html

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Housing Affordability, Mortgage Rates at New Records

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Mortgage rates set a new record low for the fourth consecMorutive week, after falling for seven out of the past eight weeks, according to a weekly national survey released yesterday by Bankrate.com.

The average rate for a 30-year, fixed-rate mortgage was 3.97 percent, while the average 15-year fixed-rate mortgage held at 3.2 percent and the average rate for a jumbo 30-year fixed mortgage sank to a record low of 4.52 percent, according to the Bankrate survey, compiled from data provided by the top 10 banks and thrifts in the top 10 markets.

Prospective borrowers are benefitting from another “flight to quality” inspired by the European debt crisis, said Bankate. The economic uncertainty in Europe increases the appeal of safe-haven products, such as U.S. Treasuries, and the increased demand for Treasuries drives down yields. Closely related, mortgage rates follow yields.

“As long as uncertainty prevails, mortgage rates are likely to remain at these ultra-low levels,” Bankrate said in a statement. Mortgage rates have not exceeded 6 percent since November of 2008, according to Bankrate, when 30-year, fixed-rate mortgages averaged 6.33 percent.

The current ultra-low rates are contributing to record high housing affordability, according to the National Association of Realtors, which reports a “new milestone” for the housing market. The association’s Housing Affordability Index rose to a new peak of more than 205 in the first quarter of 2012 – the first time the quarterly index broke 200 since recordkeeping began in 1970.

The index is based on the relationship between median home price, median family income and average mortgage rates, and provides a measure of a prospective homebuyer’s purchasing power.  An index of 100 represents the point at which a median-income family can qualify for an existing, median-priced, single-family home.

The index assumes that the family makes a 20 percent down payment and devotes 25 percent of gross income to mortgage principal and interest payments.  Within these parameters, the median-income family is now able to purchase a $325,000 home.

“For those with good credit, we’ve never seen better housing affordability conditions or market opportunities than we see at present,” said Moe Veissi, the association’s president, but tight lending standards continue to restrain sales.

“Although home prices are stabilizing and sales are rising, some buyers still have to jump through a lot of hoops to convince a lender that they are creditworthy, even for a mortgage that would be well within their means,” said Veissi, in a statement.

With increased housing affordability, an index measuring the purchasing power of first-time buyers also set a record, reaching 135.8 in the first quarter, according to the association. A first-time buyer is assumed to have a lower income, purchase a starter home below the median price and make a down payment of 10 percent. According to Veissi, housing affordability conditions for first-time buyers have never been better.

Housing affordability is expected to decline slightly from current highs are home prices and mortgage interest rates edge up modestly over the year, according to the association.

Source: http://www.millionairecorner.com/article/housing-affordability-mortgage-rates-new-records

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Young Newlyweds $0 Cash,No Food…Our Most Humbling Story

Photo: Our Very First Condo Town-home We All Have To Start From Somewhere: Our Most Humbling Story…. My husband Johnny and I (Zayba) were only 24 years old when we got married in Mississauga,Ontario.  In both of our cultures, it is customary for the newly married couple to live with the husband’s family. My husband’s family [...]

Source: http://canadianbudgetbinder.com/2012/05/11/young-newlyweds-0-cashno-food-our-most-humbling-story/

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Investing Error: Don't Use Stocks as an Inflation Hedge

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Hedge fund errorYou've heard it so often you can probably repeat it in your sleep: Equities are the best protection against inflation.

Financial planners say it. Money managers say it. Pundits and gurus say it. Without a nice chunk of equities in our portfolio, we are told, inflation will ravage our net worth, and we may not have anything left for our very old age.

That's why some experts have even recommended that retirees or near-retirees hold 60% or more of their assets in stocks -- terrible advice, and it destroyed many people's finances and peace of mind during the crash a couple of years ago.

The market has come back since then -- without the participation of those who sold at the bottom in despair -- so maybe some advisors believe it was sound thinking after all.

But academic research, old and new, completely flies in the face of this conventional "wisdom." It establishes clearly that stocks are not a very good hedge at all against inflation, particularly high inflation. Even Stocks for the Long Run himself, Jeremy Siegel, acknowledges that.

"Historically, that's been the case," said John Tatom, a finance professor at Indiana State University." I claim that's one of the most well-established tenets in financial economics."


Also on MoneyShow.com

In a 2011 paper, Tatom wrote: "There is a strong negative correlation between inflation and real and nominal stock prices. Contrary to opinion, equities are not a good hedge against inflation."

Some new research by three noted experts on asset prices confirms this. Elroy Dimson, Paul Marsh, and Mike Staunton of the London Business School have one of the world's deepest databases on the performance of stocks, bonds, bills, and currencies, as well as inflation. It covers 19 different markets and goes all the way back to 1900.

In an article in the 2012 Credit Suisse Global Investment Returns Yearbook, they found that during periods of "marked" inflation, equities easily outperform bonds, probably the worst investment to own during inflationary episodes. Yet equities gave a real return of -12% during those periods, while bonds lost 23.2%. Double ouch.

"When inflation has been moderate and stable,...equities have performed relatively well," the three professors concluded. "When there has been a leap in inflation, equities have performed less well in real terms. These sharp jumps in inflation are dangerous for investors."

"High inflation reduces equity values," they summed up.


Confusing ROI with Inflation Protection

So why have so many experts embraced equities as an inflation hedge? Because they're confusing the large total returns investors may have earned from equities over long periods of time with an actual "hedge" against inflation.

Because of their greater risk, equities tend to produce bigger rewards over the long run -- say, 20 years or more.

But that's not quite in the bag, either.

Exhibit A: the lost decade. The average annual total return for the S&P 500 index from 1999 to 2011 was -0.4%. So, we're going to need a hell of a good next eight years to reach the S&P's long-term averages of just under 10% a year in this 20-year period. Dow 36,000 anyone?

Of course, if you invested in certain types of stocks -- small-cap value, real estate investment trusts, and emerging markets -- you would have done well. But who knew that in 1999?

And when it comes to inflation, even the esteemed Jeremy Siegel of The Wharton School of the University of Pennsylvania hedges his bets, so to speak.

"Over 30-year periods, the return on stocks after inflation is virtually unaffected by the inflation rate," he wrote in Kiplinger's last year. "Although stocks do well when annual inflation is in the range of 2% to 5%, their performance begins to falter when inflation exceeds 5%."

Why? Because "companies can't always pass along increased costs, especially in the case of an important raw material, such as oil. As a result, many companies will see their profits squeezed," he wrote.

Siegel's conclusion: "Stocks are not good short-term hedges against rapidly increasing inflation, but bonds are worse."

What You Should Actually Buy

So, what does that mean? If you own a lot of stock because you want to protect your portfolio against inflation, you probably should sell some.

For instance, if you're five to ten years from retirement and you have 50% to 60% of your assets in stocks, you should reduce those holdings to 40 to 50% of your portfolio.

And if you're worried about inflation, you should take some of that money -- and sell some of your bond holdings, too-- to buy some asset classes that have better track records as inflation hedges.


Such as? "In periods of high and increasing inflation, gold and commodities are definitely something you want in your portfolio," said Mark Johannessen, managing director of Harris SBSB in McLean, Va., and former president of the Financial Planning Association.

Dimson, Marsh, and Staunton's research backs him up. "Gold is the only asset that does not have its real value reduced by inflation," they write. "Gold has on average been resistant to the impact of inflation. However, investment in gold has generated volatile price fluctuations...There have been long periods when the gold investor was 'underwater' in real terms."

Not for the last decade, of course, when gold rose more than sevenfold before stalling below $1,900 per ounce. But the researchers are talking about the very long run.

Another good hedge: housing. Don't everyone all groan at once. According to Dimson, Marsh, and Staunton, "real house-price changes ... seem relatively insensitive to inflation ... Housing has provided a long-term capital appreciation that is similar in magnitude to gold."

Unfortunately, U.S. housing has produced the weakest returns of major markets over the last century, so if you'd like to hedge against inflation with your home, pack up and move to Australia.

Real estate investment trusts (REITs) may be a decent substitute, but there aren't as much data on their performance over many, many years -- and they've had a big run.

Finally, there are TIPs (Treasury inflation-protected securities), inflation-linked bonds issued by the US and other governments. Smart people like David Swensen, Yale's chief investment officer, recommend them for individual investors as good protection against inflation. But they're very expensive now.

So, what should you do? I'd take some profits in your stock and bond holdings and buy small positions (maybe 5% of your portfolio each) in gold, commodities, REITs, and TIPs ETFs, preferably when they've sold off a bit, too.

Then, I'd keep 40% to 50% in stock, 20% to 30% in bonds, and another 10% in cash. That way, you'll have some protection against inflation, deflation, and just normal life.

And if your financial advisor tells you to buy more stock to keep from outliving your money, tell him or her that in the long run, we're all dead.

Howard R. Gold is editor at large for MoneyShow.com and columnist for MarketWatch. You can follow him on Twitter @howardrgold and read why Republicans need to stop pining for a white knight at The Independent.

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Source: http://www.dailyfinance.com/2012/03/09/investing-error-stocks-not-inflation-hedge/

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Monthly Report – April 2012

Not too much to say about April. I have been away from home so my spending as been considerably less. My net worth is finally starting to move upwards. At the end of this month I will be putting whatever cash that is left in my checking account on to my line of credit, minus a $100 [...]

Source: http://feedproxy.google.com/~r/MyCanadianFinances/~3/H75IEOID9LY/

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Well...he's gone

We dropped him off yesterday morning at the airport with his group.  He seemed rather indifferent to the fact that his mother was slightly traumatized at sending her baby off to Europe without her.  Darn 17 year old boys LOL. While his excitement level was hard to detect around family, it was clear when he got with his friends that he really was pumped up for this once in a lifetime adventure. Once in a lifetime...cuz his mama ain't footing the bill again for a trip for him :-) We saw him through customs (no beeps!!!) and then left him in the capable hands of his teacher and vice principal. The first leg of their journey was on a small plane. 50 seats. Their group took up 28 of them. I pity the regular folk on the plane LOL

I gave him a book to record events happening (as suggested by his teacher) and advised him to record his expenses as well. I offered him the reward of keeping half of the spending money he returns home with, IF he returns home with money and IF he records his expenses. We shall see how this goes.

As a farewell, we went to the Hunger games Friday night. After three weekends of playing with multiple shows per day, the 6 PM was sold out before we got there. We got some of the last seats for the 7 PM. While they did not remain true to the novel (what movie does), I thought they did a good job of the movie. I'd go see it again :-) DS1 hadn't read the book so DS2 and I had a great discussion on the novel/movie contrast and comparison.

Happy Easter everyone.

Source: http://shakingthemoneytree.blogspot.com/2012/04/wellhes-gone.html

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