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      02-06-2008, 04:22 PM   #18
linus's Avatar

Drives: 07 E90 335xi, 08 E92 335i
Join Date: Jun 2006
Location: Toronto

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Originally Posted by john970 View Post
Organizing your finances around the assumption you can't beat 6 or 7 percent is a scary idea. You can get a fixed interest account at 6 percent, most people average well over 10% with conservative investing strategies.
I think you have to be very careful with this logic. There are broadly two types of buyers:

1. Those with ample cash to invest or spend. For them, and assuming they're long-term investors, your logic may be appropriate. Just keep in mind that "conservative investing strategies" often means maintaining a balanced portfolio in terms of asset allocation. With 10-year US Treasuries at a minimal 3.6% and 2-year Treasuries at an even lower 1.9%, your assumptions around asset allocation and equity returns need to be even more aggressive than in previous times. This somewhat negates your argument in terms of conservative investing strategies. With the bond market at cyclical highs, it's very difficult to achieve a very conservative approach while coincidentally achieving a 7% target rate of return. And I haven't even touched on the issue of taxes on earned income.

2. Those who have to effectively borrow one way or another. For such a buyer, the interest rate equation becomes a simple "Can I get a better rate anywhere else". There is no "opportunity cost of capital" such as with the first type of buyer. In Canada, the prime bank rate is 5.75% - this is the same rate that I can get on my secured line of credit. I would definitely borrow from such a line at this rate enough to make a significant enough downpayment to lower my lease interest charges if the lease rate is greater than the 5.75% rate. Additionally, I (and most economists) expect the Bank of Canada to lower its overnight rate by a further 50bps at minimum in the coming year. This will further lower my effective financing rate - whereas the BMW Canada rate is fixed not floating. I'm not as familiar with the US situation as it pertains to what banks are lending out on a secured basis, but the overnight rate set by the FOMC is already 100bps lower than the Canadian rate and is primed to go significantly lower in the coming year.