Taking my Medicine!

Financial Choices...

Over the past 13 odd years of working in Canada I've been contributing a chunk of my earnings each year into a tax sheltered account to fund my retirement - whenever and whatever that might be.

Over the last year or so it has increasingly seemed like "retirement" (of a sort) might be now!
Unfortunately, also over the last year or so, the mutual fund investments that the money has been in have been having a really hard time...
And the "down side" has been accelerating rapidly over the last few months!
Unfortunately also, over the last year of my travels, I had not been paying that much attention to this area of my finances - and so it has taken me a while to get a handle on "the big picture" and how it effects me personally.

So, where am I now?

Well, for a start, all these numbers are in a way "fictitious" because I'm not actually using the money at the moment, so it doesn't effect anything in my life at the moment.
However, The money I put into this account was/is indeed "real money" and I foresee that I will truly be using it in the near future.

The current standing of those monies is that I am down about 40% in "value" compared to about a year ago!
Further, if I exclude theoretical gains (growth in fund values) from the equation and just consider the actual value of money that I contributed, then I am down about 20% of the value - That's real money that is "GONE"!

So, whats done is done.... All I can do at present is decide what I will do in the future...
And that depends on what I think will happen with the "economy" in the future...
Big Question!.... and its on many peoples minds at present.

So, I spent a week or so pondering this and while many people would have huge "angst" over the subject, I have suffered relatively little in this decision process. I have just thought about what I think is happening and what likely will happen ... and have made choices accordingly...



So, What were the options?

The choices for action were threefold:
1) Leave the money invested as it was - Do nothing.
2) Cash-out the existing investments and just hold cash - Like a bank account.
3) Cash-out the existing investments and then reinvest into different funds/stocks.
The choice here is of course defined by what I think will happen in the Global, North American, and finally Canadian economies, and perhaps even more importantly...When it happens!.

What do I think is going to happen? ... Well, in a nutshell; I think this:

All those economies I mentioned have taken very large declines in the last two months (precipitous!) . There is no doubt that we are in a very significant recession (Right Now!)

OK, so things are down, but perhaps we are near the bottom and things will come back up from say early next year :)

Sorry to say but I dont think it will be like that. As far as I can tell, there is absolutely no reason why things will get better... In fact I think we have only just started to see the negative effects triggered by the economic down turn. In days of old, the stock market was tied to actual gold bullion being moved around in banks, but they stopped doing that a long time ago, and now there is no "inherent lower limit" on the value of stocks..... There is no known bottom!!!

To date, we have seen a financial crisis. Particularly in North America (Though I understand Europe is bad too) due to foolish lending practices - particularly in the real-estate space.
So, we have seen foreclosures on the "bottom edge" of the mortgage market - These people should never have been given loans in the first place, but we've only seen some of them defaulting ... I believe there are plenty more yet to come!
We've also seen that companies are having a really hard time getting loans and are thus cutting back on everything they can. The western governments are actively trying to help solve this problem but the effect is still there.
We've seen that consumer confidence is plunging and people are not spending money the way they were just a few months ago. We also see that this trend is increasing as we go into Christmas and it appears that it is not being turned around by the government intervention.... very bad sign!
It means that all those companies (basically any company at all) will not only have a hard time getting loans but they wont have the revenues that they used to either!
And that means that they will have to take much more aggressive steps.... Reducing their employee counts!
We are only just starting to see this happen now, but I believe that it will get far worse... The only reliable employer in the near future that I see will be the public service or government contractors as Governments try to "help" the situation by creating jobs and civic projects.

So, as we see unemployment increase (and I think it could get to 10 - 15% here in North America) there are going to be a whole lot more people who had mortgages that they were just able to keep the payments up on who are now suddenly out of work.... and they will have to sell their houses.... but no one will buy... and so foreclosures will get another large increase.... another chunk of the population will stop spending money.... etc.

And we have heard all about the "stupid" levels of credit card debt that people are carrying. But I dont think we have seen this surface yet. I think we wont see it till after Christmas (how long after...who knows?)... and it will be big.... and it will hit the financial sector again!....

On the real-estate front, all these forced sales will I think, really deflate prices. I would not be surprised if prices dropped a third or even a half of their current values (particularly in "hot spots").
So, If money was what I cared about, then I would sell my house right now and take the 10% lower sell price just to get it done fast!
But money is not what my life is about, and I'd rather have a "home" which is what my house represents for me (even though I dont plan to be using it for the next year or two). It may turn out that I dont even feel the need for a home in a year or twos time, (non-attachment being the ultimate goal - or so we are told!) But right now, I still feel like keeping the house is a good thing :)

Then there is the price of Oil. Its plunged recently - which you would think is a good thing since it helps the consumer as well as industry in the short term and should help out the North American car makers (big inefficient cars).
But I had a look at the price of oil over the last several decades, and as far as I can tell, the recent price increases were completely artificial... I dont see the need for the price of oil to go back above $50 a barrel...(Other than the greed of OPEC) I think it could stay low for quite a while...
Note: I have no problem myself with the price being high...in fact I think it should be deliberately held high by governments taxing it - and using the revenue for environmental purposes. But I think the price will stay low, and the down side of this is that the Canadian economy gets a lot of money from oil/gas - so this is a downer for the Canadian economy and thus my money.

And what about the Chinese economy pulling us up....
I really dont think so! In fact, I think it will be even worse there in China... Their sales of goods are to the West. But we have really just "shut off" the spending... This will really hit their manufacturing sector and competition will be incredibly harsh. They already have tight competition because they are in that "bottom end" of the manufacturing market.... I think it will be ugly in China and we have just not seen the effect yet! But then again, the Chinese government have the power to "artificially" hold the value of their currency at what-ever point they want regardless of how it effects their people... Hard to say what will actually happen there!

I'm having a really hard time finding any financial "good news" or bright prospect!
If there is one then it would be that Governments will be spending more to try to help out their populations in hard times.
So, what does this mean for my money?
I was largely holding "Canadian Equity" which is a largely resource based economy that is directly linked to the US economy.
I think the stock market will devalue Canadian equity significantly (possibly as much as half current values) due to the US economy, Oil prices, other Resource devaluation, and overall economic slow down.


I dont think I should hold my investments as they are!
What should I invest in instead? - Right now, I cant tell what is going to happen (like most people).
Although Im sure if you know what you are doing, there are some good possible investments, I think it is dumb for me to speculate at present!
I think I should just hold Cash! (like lots of people)


Thats all just speculation of course;
But its not "Idle Speculation" - Im taking action...
I have acted on my words and Ive liquidated my retirement holdings - Ive taken a big loss in doing so (and consequently given up on regaining my losses), but as I said, I think it will get worse for a while yet... significantly!... But the real trick that I just cant anticipate is how long these "probable" effects will each take to happen... and if they happen fast and close together or slow and spread out??

But if it turns out that Im wrong and things get better, then I can just buy back in later when I feel I can see further ahead...

So for me; Even though the medicine tastes pretty bad and I dont want to swallow it; Im pretty sure that its better than just letting the significant risk of the "sickness" proceed further along its current path.
So, I'll take my medicine now thank you!

Nothing but doom and gloom? ... Not so!
Actually, I am personally feeling fine about it.

I do think there are some very hard financial times for many people in the near future...
But, I dont think finances make people happy - mostly just unhappy!
I think we Canadians on the whole are incredibly spoiled and many of us can make do with far less than we currently have and be very happy. I think we are just heading in to a huge opportunity to reset our personal and social values.

And I think it could be a "step forward" for many... though not one we would take willingly! :)


So now we will wait and see what the future brings :)