Most people are more comfortable with unhappiness than they are with uncertainty. Your attachment to the way you have always done things can hold you back in many ways, and what follows is an attempt to show you a better way to build wealth. Knowing there is a better way is the seed of a brighter future and I’m about to plant it in your financial garden.
We are creatures of habit and many of us are comforted by the status quo even when it fails to serve us. Consider how many people you know who are currently committed to unfulfilling relationships but can’t seem to build the courage to leave, or those around you that lament the negative side of their job every day but continue to show up every Monday. It’s no different when it comes to making financial investment choices. Most Canadians are not getting what they expected from their investments but continue to make the same choices anyways. We tend to do things the way we have always done them, not necessarily because they are working for us, but more-so because we fear the unknown that comes with change.
Mutual funds are a trillion dollar industry in Canada and they are Canadian investors’ most popular choice, especially for RRSP investing. They are unsecured, the average annual return on investment is very low, and Canadian dealers charge some of the highest management fees in the world. Hardly the kind of defining characteristics that seem in line with the objective of investing if you ask me. The only people that are consistently building wealth with them are the dealers and agents selling the funds.
If you are like me, you went through something close to 20 years of schooling (primary, secondary and post secondary) and at no point along the way was it mandatory to engage in a course with a title akin to “How to manage money in the real world”. Most of us learn to manage our money from a parent or other family member and for the most part, we are all just trying to figure it out as we go. It can be overwhelming to try and get ahead financially while dealing with the rigours of the real world and as a result, most people find it easier to simply do what everyone else is doing. The future consequences are far reaching when what everyone else is doing isn’t working, which is the case with mutual fund investing.
When putting money away for retirement the things that matter the most are security, predictability, and consistency. As long as you start putting money away at a reasonable age time is on your side, which means you can employ a “tortoise like” approach to investing and build significant wealth with peace of mind. You also don’t need to make unreachable rates of annual returns to get there. The average Canadian has a net worth of $140k by age 40. With an average annual return on investment of only 8% that money would grow to over $1 million by retirement age (65).
Guess who doesn’t buy mutual funds, but makes a lot of money? Your bank. Mine too.
Banks don’t buy properties, rent properties, or flip properties but they sure do invest heavily in real estate. In 2009 amidst the global financial crisis, Canadian banks made excellent profits across the board and at their core is the practice of lending money, primarily secured against the real estate we own. It’s an incredibly predictable, consistent, safe way to invest. The average default rate in Canada for residential mortgages is less than one half of one percent. Many Canadians choose fixed rates and the norm is to commit to a rate and payment for 5 years at a time. Pretty comfortable deal for the bank, no? Predictable interest payments for 5 years and an asset of greater value than what they lent you protecting their investment “just in case” you don’t fulfill your end of the deal? Outstanding.
If I asked you to lend me $1,000 and I offered to pay you back $1,100 in a year, would you lend me the money? You would be wise not to and the reasons make a lot of sense. There are important questions to be answered first. Despite the rate of return being good (10%), what is your security? What assurances do you have that I would pay you as agreed? Even if I could show you evidence that I have made good on my debts in the past (credit report) and show you proof that I have the ability to pay you back (income), how would you insure my “intent” to pay you back?
To insure my intent to pay, there must be a serious consequence written into our agreement that I would face if I (for any reason) neglect to pay you back. If I offered to give you the keys to my Cadillac Escalade to hold until I made good on my promise to pay you back as agreed, that would likely change things for you right? Not only would it then make sense to lend me the $1,000, but there might even be an evil little voice in the back of your head hoping that I don’t pay you back as agreed in which case you would be the proud owner of a vehicle worth many times more than the amount of money you lent me. Lending money is the most consistent, profitable way to build wealth but security is the key to making it work.
It’s easy to invest in real estate and earn fixed annual returns of at least 8% per year (more often upwards of 10-12%) without taking on the headaches that come with being a landlord. Just like the banks do, you can enjoy predictable returns for terms of up to 5 years and the peace of mind that comes with having collateral of greater value than your investment amount to secure your position. Perhaps the best thing about investing in mortgages is that the borrower pays all of the applicable fees so when your rate of return is written as 8%, you will earn every dime of the 8%. Investing in mortgages is simple and hassle free. It’s a “set it and forget it” proposition and the only thing that stands in the way of you reaping the benefits is your willingness to venture out of unhappiness and into uncertainty for long enough to get all of your questions answered.