Around the time of the stock market lows in March 2009, an acquaintance, who is in his mid-fifties, was chatting about the economy in general and, unsurprisingly, touched upon the market downturn. He asked about my investments and I mentioned that (since I was invested solely in stock index funds) I had a paper loss to report too. I mentioned that I am trying to learn about how the market works and analyze my stocks (not that I will ever become a trader; being an investor suits me just fine!).

His retort? “Oh, the best in business can’t pick winning stocks most of the time”. He paused and then went on “how are we (laypeople) supposed to know?”. His argument was that we should let the financial professionals manage our money and not think that we can do a decent job ourselves.

From our conversation, I learned that most of his retirement money is invested in stocks and mutual funds and so, he must have lost his share in the downturn. I do not know his exact paper loss but it could be substantial. If so, he has been ignorant enough to not have a fair share of his nest egg in conservative investments like bonds. Of course, if he had not sold during those lows, he would have been in safer territory now. In addition, he places too much faith on “the best in business”.

Now, I am not claiming to have unearthed a magical way to beat the market and its experts. The financial wizards of Wall (or Bay) Street maybe trailblazers but I’m not trying to carve a niche for thousands to follow. All I aim to do is to understand my investments. I’d prefer to learn – a little at a time – and be comfortable with my investments than trusting my cash to a mutual fund manager who will beat the market this year and possibly, lose the gains (and maybe, the principal too) in a few years’ time. If I turn out to be a damp squib in investing, I will live with the satisfaction that I tried and found my incompetence. Some people, like my acquaintance, don’t even want to try because, to them, it is a loser’s game.

Finally, it could just be that he was envious that a guy around half his age is making an effort to learn about and understand his investments. The baby boomer probably rues his lost chance and the regret manifests as discouragement to green DIY investors like me.

Make no mistake: I’m not going to understand value investing so well and follow Mr. Buffett into the annals of stock market history. But, is it illogical to trust one’s own judgment after gaining a fair share of knowledge? I’m sure you would have seen the qualities mentioned (in the title of the post) portrayed by people at different points of your life.

Have you had people rebuke your attempt to learn something (not necessarily investing) that most people leave to “expert brains”? Did you pay heed to their words of wisdom? If not, how did your attempt turn out?

Clark is a twenty-something Saskatchewan resident employed in the manufacturing sector. He repaid around $20,000 in student loans and has been working to build his investment portfolio as a DIY investor (not trader) while nurturing plans to retire early. He loves reading (and using the lessons learned) about personal finance, technology and minimalism, when the mood strikes – which happens everyday!

17 Comments

Perhaps there is some truth to the Canadian housing bubble speculation as the Canadian government has made changes to the mortgage rules.  With interest rates at historic lows, home buyers are purchasing homes at a frantic pace.  Most with the smallest possible down payment and the longest possible amortization.  As you can imagine, a portion of these mortgages are variable rates, which could mean trouble when interest rates rise in the near future.

To help nip excessive lending in the bud, the federal government has made slight changes the mortgage lending rules.  In particular:

1. When applying for a mortgage, qualifying payments will be based on the current 5 year fixed rate, even if the variable, or shorter term rates are lower.  I like this as it ensures that borrowers can afford higher rates should it happen.
2. When refinancing, borrowers can only go up to 90% of their equity instead of the previous 95%.  If refinancing, I usually recommend to only borrow up to 80% of the equity as it avoids the CMHC premium anyways, so I don’t see this as a big deal.
3. When purchasing investment properties, the minimum that CMHC will back is a 20% down payment.  This one is by far the biggest shocker of the new rules as it now makes a lot of rental properties “unaffordable” to investors.

Overall, I don’t think that the new rules are overly drastic, with the biggest change being the new investment property borrowing rule.  I’m of the opinion that the borrower should take responsibility for the amount that they borrow on a home, and it shouldn’t be blamed on others (like government) when the payments get too expensive.  Having said that, these new rules by the government should help potential homeowners determine their affordability levels should interest rates go up.

With regards to the investment properties down payment rule, it seems a bit excessive in my opinion.  Now, even if the investor finds a cash flow positive property without a 20% down payment, they will still need to come up with a substantial amount of cash.  However, if I were to buy a rental property today, I would put down at least 20% to avoid the CMHC fees regardless of the new rules.

Could they have done more?  I was expecting a reduced amortization term from 35-30 years, and perhaps an increased down payment requirement.  However, those measures would perhaps cool the real estate market too much, especially when interest rates start to rise in the near future.

What are your thoughts on the new mortgage rules?

35 Comments