Bull and Bear Markets



The principles of financial planning will apply differently to each investor’s situation.

Here is an example:
It is often quoted in mainstream media that a TFSA is better than an RRSP. However, that statement is far too general to have any meaning. Whether or not that statement is true will be different for every investor. That is why you partner with me. I will present relevant information and together we will implement it into a plan that will help you achieve your long term goals,

So let’s discuss the question that is on a many investors’ minds. Will there be a recession?

The short answer is yes. There are 2 reasons why there will be a recession(a bear market). The first is that the long upwards trend of the stock market(the bull) has been going on for a longer than average time. The market has always shown its cyclicality.

The second reason is that there is a lot more uncertainty in the stock market(I will not discuss the reasons why, that’s another blog post). Uncertainty contributes to the up and down movement of the stock market which is called volatility. Volatility will not in itself contribute to a recession.

A recession will occur when 2 events happen. First when there are far more stock sellers than people who want to buy stocks. Yes stock market movement is based on sentiment. Also when corporations and individuals find it difficult to borrow money (when credit is less accessible) then liquidity(money movement) will lessen economic activity. If wage earners are afraid of losing their jobs they will not go to the bank to get preapproved for a mortgage. When corporations can’t sell their bonds to raise capital for expansion economic activity is decreased.

Back to your own situation. Do you need to worry about a recession? The answer depends on where you are in your financial journey. How old are you? How much financial responsibility do you have? How much longer can or do you want to work? How much debt do you have? When do you need your money? Can you financially take advantage of a recession by adding to your portfolio? Yes Cindy always likes to ask questions, how annoying!

By the way investment professionals are well positioned to profit on your behalf when volatility or a recession occurs. In the first 2 and last 2 months of 2018, investment managers were happily buying. For them those months were like a Boxing Day sale.

The best investment professionals also stick to their discipline and build in defences so their portfolios can withstand a market downturn.

The stock market in the last 2 months of 2018 was volatile and ended the year with lower values. As a result your year end statement reflected that. However, in January those losses were erased. So worrying about a recession or volatility may be misplaced mental energy. I am always happy to answer your questions or discuss your concerns.

Prudence or Imprudence?

Last week the Bank of Canada raised their overnight interest rate to 1.75%, an increase of .25%. Several of the big banks immediately followed suit. Borrowing costs will likely increase, for example on variable rate mortgages and lines of credit.

What prompted me to write this blog post were the headlines that implied ‘the sky is falling!’ like Chicken Little said.

FYI: There are 2 sides to every story. Most of you reading this are not old enough to remember Canada Savings Bonds paying 9.75% interest for a year, at the same time that mortgage rates were double digits. In the 1980s a decent savings return was the norm, and at the same time borrowing costs were high. Back then pension plans and insurance companies found it much easier to meet their obligations to their plan holders because getting a good savings return was achievable with little effort. Still no one including the Bank of Canada wants to go back to that era. The Bank of Canada is striving for balance.

Fast forward to the present. In some jurisdictions in the recent past savers were paying a bank to deposit their money because interest rates were negative. A mortgage rate south of 5% is still a good deal. The ultra cheap rates of the past few years were ABNORMAL and more importantly UNSUSTAINABLE and quite possibly encouraged imprudent borrowing. If you want to help a friend or yourself, remember to calculate that housing costs should not be more than 40% of your monthly income. Currently the debt to income ratio for Canadians is for every $1 of income $1.69 is owed in debt.(Statistics Canada)

The Bank of Canada is looking to the future. It needs a tool to be able to wisely handle the next recession. The tool they will use will be to lower interest rates. And it knows that Canadians who are borrowers will fare better in the next recession if rates rise gradually. As I have said before, they are taking the punch bowl away and saying party’s over. Catch a cab and go home.

More careful lending and borrowing is needed. Financial planning involves reviewing all aspects of your financial situation including your borrowing and repayment habits. Our meetings will involve a game plan that included the ‘what ifs’ so you can take any financial event in stride.

Sugar Overload?

You may or may not have noticed that interest rates have been consistently in the news for quite a while. A client suggested I do a blog post on whether we should care about that topic.

The answer is if you are a borrower, or a saver/investor interest rates will impact you although it’s not an in your face effect. Rather it is a slow and subtle effect, something like how you get a cavity in your tooth.

Interest rates have been abnormally low since the financial crisis of 2008. In order to keep world economies afloat, central banks around the globe lowered interest rates so that people and companies would hopefully borrow money, which in turn would create economic activity. That tactic has worked well but if rates were to stay low they would have no tool in their tool box to use when the next recession/correction in the stock market comes. Hence rates have been rising.

Of course borrowers love low rates, especially borrowers who have variable rate mortgages and lines of credit. And used responsibly these 2 loans can help you achieve your financial goals more quickly. However, sometimes they can tempt people to take on too much debt which can be very dangerous when interest rates rise. And make no mistake, interest rates must rise or the next recession or correction will make the last one seem tame in comparison.

If you are a saver or investor or an insurance company or pension plan, low interest rates make you want to pull out your hair. Fixed income investments for example bonds, are negatively affected by low interest rates. If you are a retiree and want minimal risk in your retirement savings and your fixed income is eking out a barely positive rate of return that means your savings are not going to last as long. You might have to adjust your withdrawal rate, because you cannot control how long you will live.

Investors and companies who rely on fixed income investments must make more than inflation rate which has been difficult to do in the last decade.

Pension companies are mandated to have a conservative investment profile so their job is more difficult in a low rate environment. Insurance companies by law must keep a certain amount of reserves for claims and that reserve relies on mostly fixed income investments for their return.

Perhaps unfortunately because of the current low rate scenario the fixed income category has expanded and become a bit more creative. Fixed income investments usually rely on some form of borrowing which of course is affected by interest rates. Bonds are loans, Real Estate Investment Trusts(REIT), mortgage income corporations, for example all rely on favorable interest rates.

The cavity analogy is quite apt. It takes a long time of eating gummy bears, chocolate, milkshakes, pop, and cake to get a cavity. Borrowers have enjoyed a long run of cheap money. But like the vulnerable teeth eventually the party has to end. Let’s hope policy makers allow a graceful exit of the party of easy money.

In Defence of Small Potatoes

Here are some quick afterthoughts from the tax season. Being well organized will ensure the task of doing your return is painless and quick. Another plus of being organized is that you will be able to take advantage of all of the claims you are allowed.

Start gathering your documents at the beginning of the year, especially if you contribute to RRSPs or make charitable donations.

This is what I have noticed from taxpayers’ situations:
1. Medical expenses: Taxpayers often are not aware of all the expenses that qualify as a tax credit. Any expenses that you pay for you, your spouse, and dependents INCLUDING extended health care premiums will qualify. The amount has to exceed 3% of the claimant’s NET income. In the case of a couple the lower income spouse should claim.

2. Donation efficiency. You can carry forward donations for up to 5 years so don’t waste them. Donation amounts over $200 qualify for almost 2 times the credit as donations less than $200.

3. Keep track of capital gains and losses. A loss can be carried back 3 years to offset taxable gains or carried forward indefinitely for the same use. This applies to stocks you might be receiving through your work plan, if you cash them in.

4. Child care expenses and RRSP contributions can only be used as deductions against EARNED income. Be careful here, because earned income for both those deductions is defined differently.

5. If you collected EI or maternity leave benefits, a bonus or severance could result in you having to repay some of the benefits. You will also repay if you had EI benefits within the last 10 years.

6. If you contribute to a pension plan be aware that pension contributions will decrease your RRSP contribution room.

7. If you consistently get a large refund every year then you have basically lent some of your salary to the government for a year. Consider asking to have less tax deducted monthly, so you will have more money in your budget. Ask me for the form.

The auditor general has found that CRA gives wrong replies to taxpayer queries 30% of the time. Also to meet their call quota they will often not even answer calls.

CRA does not like late taxpayers and has become quite aggressive in pursuing taxpayers. Their tactics can be quite harsh and can include informing employers and garnishing wages. You may think that because you are a small potato that they will not bother with you but please don’t take that chance. I am always here to be your advocate and to guide you through the taxpaying process with ease.

Peer Pressure: Not Just For Teens

Sure go head and choose the trending colors on Pinterest or go to the latest blockbuster movie. Even check out the trendiest resto in town. But please don’t apply that popularity concept to your investments.

Further to my last blog post let’s take a deeper dive into the workings of the stock market.

This blog post was prompted by 2 client conversations. The theme of both those chats was the fear of missing out on recent stock market highs. They were asking me to make their portfolios more aggressive.

First of all: Neither you or I can repeatedly be successful in the stock market on our own. We don’t have the time, resources, professional staff, expertise, and inside connections to the knowledge needed. That is why we hire professionals. The media perpetuates the myth that an individual can be successful in the stock market. Maybe only once in awhile. Yes I am part of the financial world but I only get a glimpse of the inner workings.

Secondly don’t equate the stock market and the economy. The 2 are connected but separate. Just because the stock market is doing well doesn’t mean the economy is. Recall I said that part of stock market activity is based on sentiment and beliefs.

Unfortunately stock market cycles are very predictable because participants repeat their mistakes over and over. Last year’s winners are usually the current year’s losers. And I would rather explain to you why your 6-8 % return is sufficient rather than try to console you when your return is negative 20%. Remember the earlier you start investing the better advantage you can take of the ups and downs.

Which brings me to an article I read in one of my professional magazines. Research shows that eliminating the worst AND best days will give the investor a higher return than trying to hit a home run by investing in the hottest stocks.(1) This confirms what very qualified expert investment managers have been practicing for years. Consistency of returns and process is of paramount importance.

The current stock market is overvalued and overheated with speculation built in. Current monetary policy(some experts go so far as to say dishonest monetary policy) is built on a kick the can down the road mentality. Building a’ great’ stock market by mortgaging the future of the upcoming generation is a fragile policy at best.

Remember the higher the potential gain the greater the risk will be. The higher the potential gain the bigger the potential loss. My job is to find that happy medium and to monitor your accounts. Your job is to patiently stay the course and not participate in the herd mentality. As a team we will progress towards achieving your life goals

1. Stacking the Deck: How maintaining consistent risk levels avoid large declines. Advisor’s Edge February 2018

Painting the Tape

When you are as old as I am, the phrase been there done that takes on new meaning in all aspects of life.

The stock market and the activity of its participants follow patterns that hold true no matter the decade. It just blows my mind at the similarity of people’s behavior no matter what is the investing trend of the month, year or century.

The underlying principle is always the same: those particular stock market participants want to get rich quickly and with the least amount of effort. They feel if they don’t get in on the flavor of the month the will miss a golden opportunity.

The stock market’s movement up and down is based in large part on the beliefs and sentiments of the people buying and selling. Remember beliefs and sentiments are not quantifiable and measurable. When participants hear of a popular product they tend to believe that if many people are participating then it is a worthwhile venture. This is crazy because your friend or colleague most likely have zero professional qualifications to be making those suggestions. It both amuses and irritates me because I am highly regulated on what I can and cannot discuss, yet people will often believe the unqualified, unprofessional street and the media to their own detriment. This has held true since the Dutch tulip bulb craze back in the 1600s. Many of you readers may not old enough to remember more recent examples such as the dot com boom and bust or closer to home such examples as Bre X and Nortel. Somehow the similarities of these gone by the wayside stories are lost on the latest invention in fintech(financial technology) Bitcoin and its associated versions.

Bitcoin is a virtual currency that came about as a result of the financial crisis of 2008. The invention of Bitcoin was to create a currency that was not associated or sponsored by any central bank or government, and thus outside of regulation.(can you think of a segment of society that would like that?) Bitcoin has not caught on as a mode of payment, its attraction is more in speculating in it or mining which utilizes the technology associated to bitcoin, blockchain. Blockchain does have legitimate value.

Bitcoin has no inherent value, even though it has gone through very wild swings for the cost of one bitcoin. If you compare it to gold for example gold does have intrinsic value. The only value that bitcoin has is the value that market participants assign it. It doesn’t even physically exist, yet people are willing to pay thousands or tens of thousands for a bitcoin.

It always begins the same way. The interested participant(I can’t even say investor) knows someone who claims to have made a lot of money following bitcoin or fill in the blank of the latest fad. Somehow the fact that the interested participant knows the person touting the investment lends credibility. Does that make any logical sense at all?

Almost every wage earner has earmarked all of their net salary for many purposes from paying bills to ensuring a debt free secure financial future. If you are one of the fortunate few that could speculate you should google “painting the tape” before you want to consider any wildly popular so called financial product.

No it Isn’t Eeny Meey Miney Moe

One of the suggestions for a blog post was: How do I select the companies or investments for you my clients?

Here are the characteristics that must be present in order of importance:
First and foremost is that the company must walk the talk. In other words what is said will be done. IF a business partner is sincere and possesses integrity they will stand out in a crowded field. In my books talk is cheap.

An example of integrity is how the investment company will talk about the stock market. I prefer to work with companies that acknowledge that the present scenario has some pitfalls and fragility, and what their professionals are doing to protect investors’ capital. Over optimism is cheap too. I have been in the business long enough to read between the lines, and interpret industry speak.

Secondly the companies that offer access to the investment professionals that manage your money will be preferred over those that do not. Access can take place through in person presentations, interactive webcasts, or blogs with the ability to leave a question for the blogger. The general investing public does not have access to this information. The idea is to have the ability to ask questions which is important when I evaluate the next desirable traits:

Discipline and depth. The investment manager will stick to his or her process no matter the state of the market or the latest fad in investing.

Any investment I choose almost always will have a proven history. I try to stay away from new investments. I have been in my career long enough to see which professionals have lasted, and who has faded away.

Cost is a factor as well. You want value for you money.

And I know the future of human race is dependent on sustainable and responsible investing, which are the companies that are providing innovative solutions to the challenges of resource management, population growth, energy efficiency, and scarcity.

Will Your Future Self Thank Your Present Self?

Here are 5 questions to ask yourself to reflect on your future financial goals and to hopefully help you to be prepared for whatever the journey may bring:
What are your top 3 financial priorities or concerns?
Who do you care about and/or are financially responsible for?
Where do you want to be 5 years from now?
What do you want your money to do for you?
How old will you be when you are debt free?

It can be helpful to think of life’s milestones as well; when will your children go to junior high, high school, university? How old will my parents be in 5 years 10 years? How old will I be or my spouse?

The pace of our lives has us mostly focused on today. Asking these questions will allow you to have a plan for the future. As always I am happy to discuss the answers to these questions in a meeting.

Borrower’s Remorse

Two recent client situations led me to write this blog. There is a myth that is perpetuated that financial success is achieved by choosing the right investments with a good return.

That is untrue. Your own financial behavior will have a greater effect on your outcome. Nowhere is this more true than in the realm of borrowing and lending.
Canadians are the most indebted citizens of the G7 countries according to the latest Stats Can report. For every dollar of income Canadians have at least $1.60 of debt. We are more indebted than Americans were in 2008 before the start of the financial crisis.

Lenders have made borrowing cheap, easy, and attractive. Along with societal peer pressure to have the newest and best, attitudes towards borrowing and carrying debt, and high prices for any major purchase can have a not so happy ending. Canadians need to learn more about borrowing.

Most people are familiar with how a mortgage works. Within the last decade variable rate mortgages have become popular. However, as interest rates have increased it would be wise to plan further than the next year or 2. Variable rate mortgages work best when you have extra money to pay the principal before or when rates rise.

It is the line of credit(LOC) that can trap borrowers into a never ending cycle of indebtedness. A line of credit is an on demand loan. In theory, the lender can ask you to pay off the entire loan anytime. They would probably never do that as they profit handsomely from collecting the interest on a loan that may never be repaid.

The borrower has options as well, having the right to pay off the entire loan at any time, unlike a mortgage. Lines of credit offer flexibility in payments unlike a mortgage. As long as the borrower pays the minimum interest there is no requirement to pay more. They are often very easy to get especially if the line of credit is unsecured. Unsecured means there is no collateral against the loan. For that privilege your will pay a higher interest rate, and that interest rate is calculated more frequently than a mortgage. This can become a debt trap where a large amount becomes harder to repay. It is called revolving debt for a reason!

The problem with borrowing money is that the borrower only focuses on the monthly payment they can afford and not the total interest cost. Lenders are loath to correct that tendency because if you the borrower knew the total interest cost you would never enter into the agreement. The interest cost can exceed either the amount borrowed, and/or the values of the purchases made with the borrowed money.

Secured lines of credit have higher limits because the collateral is your house. Recently one of my client couples was offered a LOC for $150,000, when they had requested less than a third of that amount. They were smart and used a little 3 word phrase: No thank you. I suggest you go to the mirror and practice that sentence, as good preventative financial planning. They told me the bank was mystified why they didn’t accept: “You can take it you don’t have to use it.” “Precisely why we don’t want it.” they said. I was proud of them that they had remembered and applied the advice from our discussions of the past.

I have seen maxed out LOCs where the only way the borrower will get out of debt is to do something drastic like sell their house, or something even worse. The problem is debt creep, you borrow from the LOC a little at a time until it becomes a huge unmanageable number that you don’t want to look at or deal with.

Remember that only making minimum payments and owing close to, or the maximum you can borrow will hurt your credit score.

Recently I helped a client walk through the process of refinancing a line of credit and her mortgage. She had used the LOC to buy a car. I don’t blame her with the price of car financing. I am sure you have noticed that the most attractive financing is on a new and expensive car. But with a salary that hadn’t risen significantly in 3 years, she had to do something. In the end I got her to negotiate a better deal. That was very gratifying work to me, when I used my extensive experience and knowledge to empower her to get a better outcome.

And here is the second exercise I would strongly suggest you do which will take less than a minute.

Ask yourself; How old will I be when I am debt free? Don’t say something academic like my mortgage/LOC/car loan will be paid off in x years. Nah that is an theoretical number devoid of meaning. If you say I am 48 and my mortgage is going to be a minimum of 21 years I will be 59….

Let’s practice some financial preparedness. Don’t let life just happen to you.

Your Income and Out Go

Happy 2018 everyone! Hope your December was fun and relaxing!

The times I have spent with clients to help them get a handle on their monthly spending has always been very fruitful. At first some are reluctant to put in the effort to track all of the transactions for a month but they are always glad they did. And since most of us pay with a debit or credit card there is always a paper trail.

So far the people that have committed to this exercise have been surprised at how much they spend and always vow to do better.

So let’s begin 2018 with a to do list. The goal of the to do list is to be kind to your future self.
1. Allow yourself to keep a part of all you earn. Put another way don’t spend all that you earn.
2. If you allow yourself to keep a part of all you earn then you will be prepared for a period of less income. This period can happen for a number of reasons, unemployment, disability to name just a couple. Almost every wage earner will have a period of lower income and it often is a complete surprise.
3. Balance the wants and needs of today with your future life and financial goals,
4. Then you will not fall prey to marketing and advertising.
5. Avoid unnecessary debt. Canadians are among the top in the G7 in terms of indebtedness. For every dollar of disposable income, Canadians owe at least 1.60 in debt, according to the latest Statistics Canada figures.

To emphasize that last note, in late 2017 a consumer advocacy agency did secret shopping at car dealerships in Canada. They discovered that car purchasers for the most part were given few choices when it came to financing a new vehicle, nor were they given the details of the loan they did obtain. It is now standard to offer financing for 7 years. At that 7 year mark a car owner will have paid more than the car is probably worth and may not even still own the car. Remember a car is NOT an asset, because it doesn’t appreciate in value. Don’t be swayed by the low interest rate. What is more important is the total interest cost. The total interest cost will not be offered to you, you must ask for it.

The way to achieve your future goals and to weather any storms along the way is to be prepared and have good financial habits. We all know our incomes. We also need to know  where that income is going. I am here to be your coach and accountability partner on that journey.

Next up: Important questions to ask yourself and looking at your financial life in blocks of 5 years.