January housing


Title: Where to invest in 2014?

Subtitle: Paying down debt might not be such as bad idea.


Canadians preparing their 2014 financial plans have a dilemma. The countryís household savings rate was 5.4% in the third quarter of 2013 according to Statistics Canada. If that pace remains constant, a median family, which should about $76,000 next year, will accumulate $4,404. But where should they put that money?


Canadians traditionally invest in three main assets classes: housing, stocks and bonds. (Investments in the latter two categories are typically made through pension and mutual fund vehicles). However all of these classes have issues associated with them.


With interest rates inordinately low right now bonds look like a waste of time. Ten-year treasury issues yielded just 2.79 percent at year end. Three month paper paid out less than one percent. While there is little risk involved, those long bond returns barely enable investors to keep ahead of inflation. Those who buy short issues actually lose buying power.


Stocks have been doing much better. The benchmark S&P/TSX index rose by a solid 9.55 percent last year, even more when dividends are included. The US S&P500 did even better, rising by 29.6 percent during 2013. And thatís before dividends and the foreign exchange gains that Canadian investors would have raked in on their US holdings, due to the rising greenback.


In fact stocks have registered exceptional performances on both sides of the border during the five years since the 2008 financial crisis.  The trouble is that most of the easy money has by now been raked in by the professionals. Only recently have average investors begun selling their bonds to buy stocks. Sadly, this is occurring a little late - just as many stocks are reaching record highs.


Canadians housing sector stakeholders have a similar problem. Home prices here hit all-time highs in December. As many outside observers, such as Deutsche Bank point out, real estate prices here are now in overvalued territory, trading at inordinately high levels relative to incomes and rents. In short, now is unlikely the ideal time to buy a house or a condo if you are looking for a quick gain.


So if you canít invest in stocks, bonds or housing, what should you do with your extra cash? One solution would be to pay down debt. According to Statistics Canada, household debt relative to personal disposable income rose to a near record 1.63 percent in the third quarter of last year.  That means for every $100 they earned last year, Canadians owed $164.


True, the interest payments on much of that debt is fairly low. For example RBC Royal Bankís posted five-year mortgage rate is just 5.34 percent. ( Many places lend for less.


That means if you pay down that Royal Bank debt this year, you will reduce your interest payments by 5.34% of the amount you pay down. In addition, those savings will be risk free and tax free. Those gains rise substantially if you pay down credit card debt, which often comes with interest rates in the double digits, and sometimes higher than 20 percent. You are unlikely to earn that much in stock or housing investments.







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