Financial Planning

Owing to the overseas real estate revolution, people seem to be keen towards investing overseas rather than in their own countries. This trend has become a popular substitute for the traditional pension scheme for many and casual buyers are eventually transforming into savvy investors, scouring the market for the next big thing. Most overseas property investors believe that the profits in any property investment abroad are made at the purchase. Many investors buy properties at low prices and enjoy the capital gains. A number of buyers investing for the first time in real estate are joining the overseas investment bandwagon. It has led to a rise in demand for properties in several emerging markets like Montenegro and Cape Verde.

Some of the main reasons to buy real estate overseas are as follows:

. Opportunity to be a part of new cultures and history: Buying real estate overseas provides you with an opportunity to understand and respect new culture and history. Besides, you can also enjoy the scenic beauty and geographic delights of your favorite country. Buying a real estate property in your favorite country will enable you to explore the country, people, language and various special features of the place. It will help you satisfy your curiosity about the nation.

. Safety: People with small kids would like to opt for a place which is safer and the environment is appropriate for many outdoor activities, as it will help the children grow without fear and develop, learn and experience a new world altogether.

. Real estate-a great investment: Investment in overseas real estate is considered one of the best options. By combining the ownership of a house overseas, along with the long-term financial plan, you can make an investment in asset that can even set you up for retirement. Besides, if your retirement age is near, you can buy a vacation real estate abroad in a country blessed with beautiful climate and an affordable cost of living.

. Business opportunities: A range of business opportunities in the foreign country can also be one of the main reasons for buying real estate properties. You could easily stay and explore a number of business options that may not be available to you in your own country. Good business options will mean better growth in terms of profit, as well as skills.

. Less Stringent laws: Many countries are popular for less stringent laws to be followed by the non-residents of the country. For instance, in Canada you need not be a citizen of the country to buy a property there. Moreover, they have less stringent laws for people who wish to migrate to Canada.

. Cost of living: Many people wish to migrate to Europe, but owing to their financial constraints they are not able to do so. It is mainly because Europe has a very high cost of living. Generally, people prefer buying real estate properties where they can have a high standard of living, but a low cost of living.

. Property markets: A number of countries in the world are popular for having very attractive markets, where the real estate is completely undervalued.

There are a lot of great reasons for Canadians to buy right now. Low home prices and interest rates are the most obvious ones, but did you know about the First Time Home Buyers tax credit and the increase in the withdrawal ceiling on the RRSP Home Buyers Plan? The 2009 federal budget is making home ownership easier than ever.

Home prices and interest rates are dropping in most Canadian cities, making it a great time to buy from a basic financial standpoint – if you can own instead of rent for a comparable amount of money, why not? Lower home prices mean that you have more options and more buying power.

Interest rates have dropped along with home prices. Interest rates are what really determine what your home payment will be. Right now, you can get an interest rate for below 5%. This can bring your mortgage payment down hundreds of dollars a month.

The 2009 federal budget allows you to make more money tax-free. The tax free amount used to be $9,600; now it’s $10,320. The ceiling on the first two tax brackets has also risen. An income of up to $40,726 is only taxed 15%. The next bracket of 22% income taxation applies to incomes of up to $81,452.

Right now, the government is offering tax credit towards home renovation from $1000-10000, which ends up being around 15% cash back when you tally up your savings. Buy that fixer-upper and put some work into it, knowing that a good chunk will come back to you in tax savings.

The best deals by far come to the first time home buyers. The Canadian government has increased the amount that one can take from their Registered Retirement Savings Plan (RRSP) from $20,000 to $25,000. This is via the RRSP Home Buyers Plan (HBP). The bonus with using your RRSP is that while you have to pay back the money, you have 15 years to do so.

Canadians have a lot of great reasons to buy in the 2009-2010 season. Low rates, low prices and tax breaks are making Canada a great place to invest in real estate. If you’re a first time home buyer, the advantages are increased with the HBP. Prices will eventually start to climb again and those who have bought homes now will benefit from increases to equity as well as any improvements they have made.

If you’re one of the lucky employees who has access to a brokerage account inside your 401k plan, you should consider using it.  Besides offering you a much broader array of investment choices, a brokerage account allows you to take control of your financial future and grow your portfolio, regardless of how badly US and international economies might falter in the future. 

1)More Mutual Fund Choices– A typical 401k plan might have 20 investment options.   At first glance, this seems like a broad menu to choose from.  However, when you consider that there are over 20,000 mutual funds in existence, you’ll realize that the mutual funds in your company’s 401k plan are most likely not the best of the best.  Using a brokerage account allows you to pick and choose the funds with the best long-term track record.  Morningstar’s Analyst Picks (subscription required) is an excellent way to find the highest rated mutual funds in each asset category

2)Lower Expenses – All too often, small and medium sized companies require the employees to pay for the administrative cost of their 401k plan.  This cost is recaptured by offering mutual funds which have either a front-end load or high annual expense ratios.  If this sounds like your plan and you have a brokerage account link, you can get around those high fees.  Once you open a brokerage account, you can choose no load mutual funds with low annual operating expenses.  If you don’t think operating expenses are important, consider this:

If a 40-year-old had $500,000 invested in mutual funds that returned 8% per year but charged 1.3% in fees, those fees would reduce the portfolio’s value by $1.5 million over 30 years. If this same investor reduced the fees to 1%, the portfolio’s loss due to expenses would be reduced to $1.2 million. That’s a savings of $300,000 just by investing in lower cost funds!

3)Greater Investment Flexibility – Most investment professionals have been taught (and teach) that you can build a diversified portfolio within a 401k plan.  The following quote by Joshua Dietch, of Cerullia Associates, is a good summary of the industry’s group think on this subject:  “If the average 401(k) plan has 12 options, within that, you can probably build a pretty diversified portfolio.”  I find this to be not only completely false but also dangerous.  In the recent economic crisis, stocks and bonds ended up with a correlation of almost 1.  That’s the exact opposite of diversification. 

Using a brokerage account allows you to build a properly diversified portfolio by adding asset classes like precious metals, foreign currencies, agricultural commodities, and inflation adjusted bonds.  My favorite diversified portfolio is Harry Browne’s Permanent Portfolio.  An explanation of the Permanent Portfolio can be found in Harry’s short book, Fail-Safe Investing.  Interested readers should be able to find a copy thru Amazon. 

4)Gold, Gold, Gold (and some Silver)– If you’re like me, you’re at least worried about the possibility of hyperinflation, deflation or a complete crash of the US dollar.  You can have the best stock and bond mutual funds in the world and it won’t help protect your nest egg in any of those scenarios.  What can help?  Gold and silver.  These two assets have been used as money for 5,000 years and as recently as 1971, gold still backed the US dollar.  I’ll boldly predict that gold and/or silver will be used as money again,  within the next 30 years.  The point is, if you want to truly protect your nest egg, it’s imperative that at least 10% of your portfolio is in precious metals.  Using the brokerage account in your 401k, you can buy gold thru the Gold ETF, GLD and you can buy silver thru the Silver ETF, SLV.  A one-stop fund I like is the Central Fund of Canada, ticker symbol CEF.  Central Fund‘s assets are about a 50/50 split of gold and silver. 

5)Speculation Opportunities – Investing can be a lot more enjoyable (and profitable) with a bit of speculation added in.  Know of a small bio-technology company with a compelling stem cell drug in the pipeline?  Why not buy a few shares?  With a brokerage account you can buy pretty much anything you want.  Presently, my favorite speculation is a bet that interest rates are headed higher, much higher.  With a 401k brokerage account you could buy a mutual fund like Rydex Juno (RYJUX) which shorts bonds (when interest rates rise, bond prices fall).  Using your brokerage account allows you to buy whatever you think might spice up your portfolio. 

Not all employees with brokerage accounts should use them.  If you’re a novice investor or don’t have the time or inclination to follow the ups and downs of the economy and markets, you’ll probably be better off choosing from your 401k’s investment options.  However, if you have the experience and insight, utilizing your 401k brokerage account can be a very productive and rewarding decision.

There are many dynamics working against the dollar and for the Canadian dollar. I don’t claim that these are the ONLY reasons but I do believe that they are very important dynamics that are all collectively working at the same time to bring down the USD/CAD currency pair.

So let’s take a moment to discuss each of these briefly:

1. The IMF’s first bond sale – The International Monetary Fund is about to have its first bond sale to raise extra cash to the tune of about $150 billion (no small sum). The problem? Other countries like Brazil, China, Russia, etc. are investing some of their capital into them INSTEAD of the U.S. dollar and U.S. Treasuries. These countries are looking for more alternatives to dollar denominated Treasuries and this is ONE MORE venue for them to divert money into. A HUGE dollar negative in general.
2. Commodities in general are strong, but particularly oil! – Oil has rallied in the past few months from a low of $33 to the $70-$73 area recently. Since Canada exports huge sums of oil, as the price rises their profit margins widen.

 Note: Big institutional “buy & sell programs” kick in when these automated programs spot new trends. Many of these trends are defined by when the medium term moving average (the 50 day SMA) crosses the longer term average (the 200 day SMA). When the near term 50 SMA crosses above the 200 SMA, it triggers massive buy orders. When the 50 crosses below the 200 SMA, then it closes those positions and even goes short in many cases. Of late, another institutional buy signal has been instituted! This is bullish for the CAD and bearish for the USD, thus being bearish for the USD/CAD pair!

1. There are signs that point to the “worst being over” for the U.S. economy. Fed Chairman Bernanke has recently stated this by his “Green Shoots” rhetoric. Other central banks have joined in, in stating that the global recession may be past the trough of its recession too. When the U.S. and global recessions make it past the trough and start to head out, global demand starts to pick back up which puts “new demand” upon the oil supplies that wasn’t there as the U.S. and global economy went into a tail spin.
2. Canadian stocks are outperforming U.S. stocks presently. So if you’re a savvy U.S. investor/institution, where are you going to put your money? In Canada where the stocks have fared better. However, this requires that you “sell dollars” and “buy Canadian dollars” in order to buy Canada’s stocks which are denominated in THEIR dollar. That’s bearish for USD/CAD and helps its “short sellers”.
3. Their banks are in better shape than ours. You see, they didn’t go nearly as far out on the risk curve as our banks here in the U.S. did. Therefore, they didn’t need nearly as big of a “bailout” as our banks here in the U.S. The stronger your banks are, the stronger your financial system is. Therefore, Canada shines in this area when compared to that of the U.S.
4. Mutual Fund reports showed that in May, U.S. investors resumed purchases of foreign stocks for the first time since this whole thing “blew up”. That’s bad for the greenback and good for foreign currencies like the Canadian dollar as U.S. investors sell dollars as they switch into foreign stocks bought with their home currency.
5. And finally…the U.S. Dollar Index continues its downtrend! Therefore, for all of these reasons, you can see why the USD/CAD continues to downtrend. In fact, today we’re having a massive sell off right at its downtrend line on Canadian dollar strength EVEN AS their banks are shut for a holiday. Wow! 

Therefore, it’s my opinion that those who are “short sellers” of this pair will prosper in the weeks to months ahead. You do this by initiating your order by clicking on the sell quote. Then when you feel the trend is finally coming to an end, you click on the buy quote to close out the short.

One thing I love about currencies is that they trend for a long time and rarely reverse courses very quickly. Therefore, this trend could continue for quite some time to come.