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Home > News > 2015 12 31 > IS WEALTH ACCUMULATION A MYTH?

 

Mortgage Broker Clarence Hiles looks at the uncertain world of investment and identifies the most straightforward way to accumulate wealth within the reach of everyone…

 

  At the time of writing a lot has been happening in the world. Speculation is rife that stock markets are going to crash, media coverage of the hostile bids for Banks shares has been paranoiac, the Barbados economy and its governance continues to be ridiculed by international agencies, a local investment conference added more doom and gloom for investors, local crime is increasing no matter what the police say, a high-powered CARICOM Committee called for the immediate disbandment of the West Indies Cricket Board, and amidst everything, callous and cowardly ISIS terrorists blew Paris to pieces killing 129 innocent people and injuring hundreds of others. Perhaps we should be motivated by the prospect of a better tourist season and the fun and revelry associated with the Christmas break, but somehow it everything pales into insignificance if we can’t control terrorism and crime.

  It is difficult to put a positive spin on a finance article these days and I’m glad I wasn’t part of the recent Investment conference because I’m not sure how it could be done in the current environment. It’s easy to make money when the economy is buoyant and overseas markets are thriving, but almost impossible these days. Understandably some people left this conference quite depressed, as the assessments presented were so pessimistic.

  At the end of the day Barbados is a small player in world finance and the number of significant investors even smaller in real terms. The accumulation of wealth is largely in the hands of a minority of people within our midst and good luck to them for reaching a level of consummate security, but most people will view wealth accumulation is a myth. And for many of them it will always to be a myth as their confidence in financial integrity has been destroyed by big banks, finance houses and investment companies post the 2008 global crash. After all, why save all your life and invest in what you were told were solid long-term investments and pensions, only to find the figures were fabricated and your hard-earned savings or legacies were gone? How can anyone convince the next generation they should be motivated by wealth accumulation?  

  After a lifetime in banking and investment advisory services I now understand the merit in living life and enjoying it, rather than place your savings and investments in the hands of others. I also understand why more and more young people are empowering themselves and shunning traditional forms of investment like pensions, annuities, bonds, managed funds, endowments etc. and turning to self-management of their affairs. After all, nobody knows their finances and aspirations better than themselves, and if some advice is needed the Internet is bulging at the seams with positive and negative suggestions. This approach has been successful in the UK where ordinary people have built up property portfolios with Buy-to-Let schemes, aided and abetted by lending institutions. I don’t think they are entrepreneurs, but simply realists, who have looked at how traditional companies have invested funds and felt they could do it better?

  Much depends on how you handle risk and your personal outlook in life. If we are prepared to speculate then the ‘higher the risk the higher the return’ is a well-worn cliché in finance speak, and if you are not a risk-taker then a fixed interest rate from a reputable finance house, bank or government bond might be a more comfortable option. If you like a nice car and enjoy overseas holidays there’s nothing wrong with that either, because many philosophers feel you should live in the present and not get too preoccupied by either the past or the future, if you want a better frame of mind and quality of life.

  One way to accumulate wealth and get the best of both worlds is to buy your own home. Everyone has to live somewhere, so the options are straightforward. You can buy, rent or live at home. Setting aside the latter as short-term, the debate on rent versus mortgage repayment is a no-brainer when it comes to wealth accumulation and it doesn’t matter whether you are rich or poor as the principles are common to both ends of the scale. It all boils down to what you can afford to pay and when you compare the numbers you can evaluate what you get for your dollar.

  When you rent you can pick where you want to live and if you don’t like it you can move on. Your landlord should do the repairs and renovations, but very few do, and you still have to pay utilities. In reality you get more freedom to come and go during your life. In comparison, you can buy your own home, improve it, and do anything you want with it. You may also use your equity to borrow against it, and when you have paid it off, it is yours. At this time you have accumulated wealth and enjoyed a similar lifestyle as renting, if the monthly payment is the same. And, at any stage you can sell the house, pocket your profit, and move upmarket or switch to renting!

  If you pay rent of $1,000 a month it equates to a mortgage of approximately $180,000 over 30 years at 5.5% so if you secure a 100% loan your price range is $180,000 plus any savings you may have. That means you will pay $360,000 over 30 years, but you now own property, which should be valued much higher than what you paid for. Your repayments are finished.

  In this comparison the renter will also pay $360,000, but have nothing after 30 years and will still be paying rent for the rest of his/her life. The challenge might be finding a property in this price range, but you have to cut your suit according to the cloth. However, the same principle applies at every level of outlay. Age is not a factor although the younger you get on the property ladder, the higher the rewards.  

  For example a couple paying $2,500 in monthly rent will lay out a whopping $1,170,000 over 30 years and still have nothing to show. If they had taken out a mortgage using the same terms as above they could buy a property at $450,000, own it after 30 years, and have nothing more to pay for the rest of their life. It doesn’t matter whether property values go up or down over the course of those 30 years as this is your home, and you are always going to live in it. The risk of financial loss is negligible set against a rental, which is a lost leader from Day 1.

  Perhaps wealth accumulation is not a myth after all?

  If you want to find out more about buying a property email me at Clarence@caribbeanmortgages.com or telephone 230 9215.

 In the meantime Merry Christmas and a Happy New Year to all our readers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IS WEALTH ACCUMULATION A MYTH?

Mortgage Broker Clarence Hiles looks at the uncertain world of investment and identifies the most straightforward way to accumulate wealth within the reach of everyone…

 

  At the time of writing a lot has been happening in the world. Speculation is rife that stock markets are going to crash, media coverage of the hostile bids for Banks shares has been paranoiac, the Barbados economy and its governance continues to be ridiculed by international agencies, a local investment conference added more doom and gloom for investors, local crime is increasing no matter what the police say, a high-powered CARICOM Committee called for the immediate disbandment of the West Indies Cricket Board, and amidst everything, callous and cowardly ISIS terrorists blew Paris to pieces killing 129 innocent people and injuring hundreds of others. Perhaps we should be motivated by the prospect of a better tourist season and the fun and revelry associated with the Christmas break, but somehow it everything pales into insignificance if we can’t control terrorism and crime.

  It is difficult to put a positive spin on a finance article these days and I’m glad I wasn’t part of the recent Investment conference because I’m not sure how it could be done in the current environment. It’s easy to make money when the economy is buoyant and overseas markets are thriving, but almost impossible these days. Understandably some people left this conference quite depressed, as the assessments presented were so pessimistic.

  At the end of the day Barbados is a small player in world finance and the number of significant investors even smaller in real terms. The accumulation of wealth is largely in the hands of a minority of people within our midst and good luck to them for reaching a level of consummate security, but most people will view wealth accumulation is a myth. And for many of them it will always to be a myth as their confidence in financial integrity has been destroyed by big banks, finance houses and investment companies post the 2008 global crash. After all, why save all your life and invest in what you were told were solid long-term investments and pensions, only to find the figures were fabricated and your hard-earned savings or legacies were gone? How can anyone convince the next generation they should be motivated by wealth accumulation?  

  After a lifetime in banking and investment advisory services I now understand the merit in living life and enjoying it, rather than place your savings and investments in the hands of others. I also understand why more and more young people are empowering themselves and shunning traditional forms of investment like pensions, annuities, bonds, managed funds, endowments etc. and turning to self-management of their affairs. After all, nobody knows their finances and aspirations better than themselves, and if some advice is needed the Internet is bulging at the seams with positive and negative suggestions. This approach has been successful in the UK where ordinary people have built up property portfolios with Buy-to-Let schemes, aided and abetted by lending institutions. I don’t think they are entrepreneurs, but simply realists, who have looked at how traditional companies have invested funds and felt they could do it better?

  Much depends on how you handle risk and your personal outlook in life. If we are prepared to speculate then the ‘higher the risk the higher the return’ is a well-worn cliché in finance speak, and if you are not a risk-taker then a fixed interest rate from a reputable finance house, bank or government bond might be a more comfortable option. If you like a nice car and enjoy overseas holidays there’s nothing wrong with that either, because many philosophers feel you should live in the present and not get too preoccupied by either the past or the future, if you want a better frame of mind and quality of life.

  One way to accumulate wealth and get the best of both worlds is to buy your own home. Everyone has to live somewhere, so the options are straightforward. You can buy, rent or live at home. Setting aside the latter as short-term, the debate on rent versus mortgage repayment is a no-brainer when it comes to wealth accumulation and it doesn’t matter whether you are rich or poor as the principles are common to both ends of the scale. It all boils down to what you can afford to pay and when you compare the numbers you can evaluate what you get for your dollar.

  When you rent you can pick where you want to live and if you don’t like it you can move on. Your landlord should do the repairs and renovations, but very few do, and you still have to pay utilities. In reality you get more freedom to come and go during your life. In comparison, you can buy your own home, improve it, and do anything you want with it. You may also use your equity to borrow against it, and when you have paid it off, it is yours. At this time you have accumulated wealth and enjoyed a similar lifestyle as renting, if the monthly payment is the same. And, at any stage you can sell the house, pocket your profit, and move upmarket or switch to renting!

  If you pay rent of $1,000 a month it equates to a mortgage of approximately $180,000 over 30 years at 5.5% so if you secure a 100% loan your price range is $180,000 plus any savings you may have. That means you will pay $360,000 over 30 years, but you now own property, which should be valued much higher than what you paid for. Your repayments are finished.

  In this comparison the renter will also pay $360,000, but have nothing after 30 years and will still be paying rent for the rest of his/her life. The challenge might be finding a property in this price range, but you have to cut your suit according to the cloth. However, the same principle applies at every level of outlay. Age is not a factor although the younger you get on the property ladder, the higher the rewards.  

  For example a couple paying $2,500 in monthly rent will lay out a whopping $1,170,000 over 30 years and still have nothing to show. If they had taken out a mortgage using the same terms as above they could buy a property at $450,000, own it after 30 years, and have nothing more to pay for the rest of their life. It doesn’t matter whether property values go up or down over the course of those 30 years as this is your home, and you are always going to live in it. The risk of financial loss is negligible set against a rental, which is a lost leader from Day 1.

  Perhaps wealth accumulation is not a myth after all?

  If you want to find out more about buying a property email me at Clarence@caribbeanmortgages.com or telephone 230 9215.

 In the meantime Merry Christmas and a Happy New Year to all our readers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

 

    

 

 

 

 

     

 

 

    

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