The 'worst year ever' was pretty good for investors

Amid the negativity, there are steps young people can take to prepare their finances for 2017.

Andrew Hepburn 16 December, 2016 | 6:00PM
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Millennials dominate social media, and a popular theme, particularly on Twitter, is that 2016 has been the worst year ever. At first blush, it's easy to be sympathetic to this notion. David Bowie died, followed by Prince and myriad other beloved celebrities. The Jays once again fell short, while no Canadian teams made the NHL playoffs. Taken together, it's all enough to make even the most optimistic feel down.

So, has 2016 really been the worst year ever? No, not even close. Catchy as it is, the theme of a disastrous year is a social media phenomenon with little basis in reality (more on this later). Rather than dwelling on the entertainment and sports headlines, millennials would be better off putting 2016 into historical perspective and focusing on their real problems. We'll give some suggestions for the coming year, but first, a quick look at how 2016 unfolded on the investing and economic fronts.

Stocks: The year started out gloomy, and then the sun came out. Barely three weeks into 2016, the TSX fell under the 12,000 mark as commodity prices continued to collapse. Just over eleven months later, the market has staged an impressive rebound. Alongside surging oil prices, the TSX currently stands at just over 15,400, putting its year-to-date total return at 22% (as of Dec. 13).

Housing: Many young people know buying a place of their own is a pricey endeavour. The average Canadian home price in October was $481,994, a jump of 5.9% year-over-year. After years of soaring prices, it now takes Canadians an average of 102 weeks to save for a down payment of 20%, double the time it took 15 years ago, according to a study by Mortgage Professionals Canada.

Employment: Nationwide, the unemployment rate has fallen from 7.2% at the end of 2015 to 6.8% as of November. However, context is key here: part of this improvement is really the result of discouraged workers dropping out of the workforce. Furthermore, all 213,700 new jobs created in the past 12 months have been part-time; a net 30,500 full-time jobs have actually been lost in the same period. In the process, wage growth has not kept pace with inflation: recently, Statistics Canada reported average weekly earnings for September rising by 0.4%, compared with consumer price inflation of 1.30%.

That said, the national unemployment rate obscures some of the challenges of navigating the job market. Arguably the greatest issue facing younger workers is the rise of so-called precarious employment. Whether it's working contract to contract or juggling multiple jobs, many individuals cannot land the full-time jobs their parents held.

Luckily, there are some strategies you can use to put yourself in a better financial position for 2017:

1. Build and maintain an emergency fund
Hope for the best but plan for the worst. Whether it's the loss of a job or the need for a new home furnace, you want to have funds set aside to take care pressing situations. Unfortunately, many Canadians seem to be woefully unprepared for a personal financial emergency. According to a recent poll by Manulife, the average millennial homeowner only has $3,500 in emergency savings. Many are even more unprepared: 25% of Canadian homeowners were reported to have $1,000 or less in reserve for an emergency.

Experts typically recommend keeping three to six months' worth of living expenses in an emergency fund. You'll want the money to be liquid, safe and tax-free (i.e. don't use your RRSP for this purpose). If you don't have an emergency fund, now's the time to start. You'll be glad you did if an emergency hits, and you'll have peace of mind if it doesn't.

2. Pay off your credit card balance
Millennials should learn from their elders when it comes to paying off credit card balances. The survey by Manulife found that 31% of millennial respondents don't think it's a “big deal” if they carry a balance on their credit cards. Only 21% of Baby Boomers shared this sentiment. Given that credit card interest rates often push 20%, failing to pay off your balance in full every month comes with a significant cost.

3. Contribute to RRSPs and TFSAs
RRSPs and TFSAs are your friends, allowing you to build up savings in a tax-efficient manner and plan for retirement. Millennials who haven't set these up should do so if possible in 2017. Of note, for those who were 18 years or older when TFSAs were introduced in 2009, there is cumulative contribution room of $46,500.

4. Tread carefully with homebuying and mortgage debt
Virtually every day, Canadians encounter yet another cautionary news item about the high level of household debt, of which mortgages are by far the largest component. There's good reason for these warnings. If interest rates spike or the economy falls into a recession, the ability of many people to service their mortgages could be severely challenged. And if house prices take a tumble, recent buyers could find themselves with negative equity in their homes.

What's a millennial to do? First, consider renting until house prices correct. Second, if you are planning on buying a place, do a personal financial “stress test” to ensure you can still make your mortgage payments if either interest rates rise or you lose your job.

5. Don't despair
As we mentioned at the outset, a prevalent notion on social media is that 2016 has not just been bad, but indeed the worst year ever. Sure, it's had its low points, but other years have actually been far worse. Slate asked historians to name the worst year in history, and the experts responded with 10 different years that make 2016 look like a walk in the park; among other calamities, 1968 saw the assassinations of Martin Luther King Jr. and Robert Kennedy, plus the Soviet invasion of Czechoslovakia and some of the worst events related to the Vietnam War.

Granted, the stock market isn't everything, but 2016 has been nowhere near the worst in this regard. The years of 1929, 1987 and 2008 were far more harmful to investors' portfolios than the one we're about to close out. (This is a huge understatement, to be clear. There have been many years the market has declined and 2016 just isn't one of them).

Amid all the pessimism, the world has made great strides. Worldwide child mortality rates, for instance, are down more than 50% since 1990, according to the World Health Organization. Global levels of extreme poverty have also declined precipitously. In 1991, 37% of the world's population lived on US$1.90 a day or less. By 2015, less than 10% of the globe's citizens fell into that category. Long-term, humanity is making some solid progress. That's something to keep in mind as 2016 comes to a close.

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About Author

Andrew Hepburn

Andrew Hepburn  Andrew Hepburn is a freelance financial writer based in Toronto. He writes about investments, market trends and personal finance. He has written for Maclean's, the Globe and Mail, and Canadian MoneySaver.

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