Author: Henley Financial and Wealth Management

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Stay The Course or Sell?

FeaturedStay The Course or Sell?

Keep Calm and Carry On: is a popular slogan calling for persistence in the face of challenge. It was first used on a British propaganda poster during World War II but now enjoys general currency as an expression of resilience. It seems fitting at this time for the Stock Market

As of October 30, 2023, there is no specific information available on what is happening in the stock market today. However, it’s important to note that market volatility is due to a variety of factors, which is subject to fluctuations, including economic conditions, geopolitical events, and investor sentiment. Interest rates have been rising, which can have an impact on the stock market. Historically, specific sectors of the economy tend to perform well in a rising interest rate environment. For example, financial institutions can charge higher rates on loans, which can mean billions of dollars in interest income. The market has been recently been reacting to treasury yields and inflation which have moved sharply higher putting downward pressure on stock and bond returns. Whereas parts of the market, including technology and the growth sectors, have underperformed till now in the stock market. Market corrections are not uncommon, and they have historically been followed by rebounds. Since 1974, the S&P 500 has risen an average of more than 8% one month after a market correction bottom and more than 24% one year later.

While market downturns can be unsettling and cause investors to panic, history has shown that the market has always eventually recovered from downturns and continued to climb to new highs in the long run. For example, after the Wall Street Crash of 1929, which was the most significant stock market crash in U.S. history, the market eventually rebounded and continued to climb to new highs in the following years. Similarly, after the COVID-19 Crash of 2020, the stock market rebounded to its pre-pandemic peak by May 2020. Although past performance is not indicative of future results, and market downturns are an inherent risk of investing. However, staying invested through volatile episodes and maintaining a long-term investment strategy can help investors benefit from a rebound.

Here is a list of the last 10 stock market downturns and how the following rebound prevailed:

  1. 2020 COVID-19 Crash: The Dow Jones and S&P 500 tumbled 11% and 12%, respectively, during the week of Feb. 24, marking the biggest weekly declines since the financial crisis of 2008. The Dow would go on to decline by 9.99% on March 12, followed by an even deeper plunge of 12.9% on March 16. However, unlike previous crashes whose recoveries required years, the stock market rebounded to its pre-pandemic peak by May 2020.
  2. 2018 Stock Market Correction: The Dow Jones Industrial Average and S&P 500 both fell by more than 10% from their all-time highs in January 2018. However, the market rebounded and continued to climb to new highs in the following years.
  3. 2015-2016 China Stock Market Crash: The Shanghai Composite Index fell by 32% from its peak in June 2015 to its low in January 2016. However, the Chinese government intervened and implemented measures to stabilize the market, and it eventually recovered.
  4. 2011 European Debt Crisis: The Dow Jones Industrial Average fell by 16% from its high in April 2011 to its low in October 2011. However, the market rebounded and continued to climb to new highs in the following years.
  5. 2008 Financial Crisis: The stock market fell dramatically in 2008 due to the subprime mortgage crisis and the failure of several large financial institutions. The Dow Jones Industrial Average fell by 33.8% in 2008, but it rebounded in the following years.
  6. 2002 Stock Market Downturn: Beginning in March of 2002, a downturn in stock prices was observed across the U.S., Canada, Asia, and Europe. Indices started steadily sliding downward, leading to dramatic declines in July and September, with the latter month experiencing values below those reached in the immediate aftermath of 9/11. However, the market eventually recovered.
  7. 1998 Russian Financial Crisis: The Dow Jones Industrial Average fell by 19% from its high in July 1998 to its low in October 1998. However, the market rebounded and continued to climb to new highs in the following years.
  8. 1997 Asian Financial Crisis: The Dow Jones Industrial Average fell by 7.2% in October 1997 due to the Asian financial crisis. However, the market rebounded and continued to climb to new highs in the following years.
  9. 1987 Black Monday: On October 19, 1987, the Dow Jones Industrial Average fell by 22.6%, the largest one-day percentage drop in history. However, the market rebounded and continued to climb to new highs in the following years.
  10. 1973-1974 Stock Market Crash: The Dow Jones Industrial Average fell by 45% from its high in January 1973 to its low in December 1974. However, the market eventually recovered and continued to climb to new highs in the following years.

It’s important to note that past performance is not indicative of future results, and market downturns are an inherent risk of investing. However, history has shown that the market has always eventually recovered from downturns and continued to climb to new highs in the long run.

Global events can have a significant impact on the stock market. Here are some ways in which global events can affect the stock market:

FeaturedGlobal events can have a significant impact on the stock market. Here are some ways in which global events can affect the stock market:

Economic growth or decline:

Changes in the economy, such as an economic slowdown or recession, can send ripples through the global economy and stock markets. Investors may become more risk-averse, causing stock prices to fall.

For example, the 2008 financial crisis, which was triggered by the subprime mortgage crisis in the United States, had a significant impact on global stock markets. it took two years for the markets to settle down and then go on the biggest bull run in stock market history.

Geopolitical events: Political events with global ramifications;

For example Brexit, impacted the stock market. The Brexit referendum in 2016 caused volatility in financial markets as investors grappled with the uncertainty surrounding the UK’s withdrawal from the European Union. Similarly, Russia’s 2022 invasion of Ukraine dramatically affected global markets and caused energy prices to spike, thereby hurting industries and consumers with energy-intensive costs. Now surely the rise of the Israeli -Palestine conflict one of the world’s longest continuing conflicts will create an unwarranted effect on the already unstable stock markets as we proceed forward.

Natural disasters and health crises:

Pandemics and other health crises can significantly affect the stock market. These things can make it hard for businesses to run, cause problems in the supply chain, and make people more risk-averse, leading to a decline in stock prices. For example, the COVID-19 pandemic in 2020 caused a significant decline in global stock markets. As we started to recover from this event geopolitical events started happening one on top of another, thus stalling the recovery of our biggest health crisis in 100 years.

Trade wars:

Trade wars occur when countries impose tariffs or other trade barriers on each other, leading to a decline in international trade. This can impact companies that rely on international trade, leading to a decline in the value of their stocks. We have witnessed this with sanctions being imposed on Russia for their invasion of the Ukraine. This has created an unstable Russian Ruble leading to a collapse in their Oil industry, creating a ripple effect world wide.

Interest rates:

Periodic adjustments of interest rates by the Bank of Canada or the Federal Reserve in the US to combat inflation can affect the stock market. When interest rates are raised, many investors sell or trade their higher risk stocks for safe investments such as bonds/cash if they believe that the market will run through a recession.

Social movements:

Social movements can also exert considerable influence on financial markets, especially in an era of heightened social awareness. Companies aligned with popular social causes, such as environmental movements and social justice, gain support and investment. Conversely, controversies and ethical concerns can lead to backlash, which affects stock prices and growth.

Therefore it’s important to note that global events can have both positive and negative impacts on the stock market. It just seems like this has become a monthly event for the world vs the stock market or is there now a more heightened awareness of world events around us. For those invested for the long term, the value of your assets will increase because a bear market is always followed by Bull – and for those looking for short-term gains in an ever fluctuating market it could be as easy as finding a needle in a haystack.

What You Need to Know About Bonds

What You Need to Know About Bonds

Bonds can create a more balanced portfolio by adding diversification and calming volatility. But the bond market may seem unfamiliar even to the most experienced investors.

Many investors make only passing ventures into bonds because they are confused by the apparent complexity of the bond market and the terminology. In reality, bonds are very simple debt instruments. 

Key Takeaways

  • The bond market can help investors diversify beyond stocks.
  • Some of the characteristics of bonds include their maturity, their coupon (interest) rate, their tax status, and their callability.
  • Several types of risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk.
  • Most bonds come with ratings that describe their investment grade.

Basic Bond Characteristics 

A bond is simply a loan taken out by a company. Instead of going to a bank, the company gets the money from investors who buy its bonds. In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value. The company pays the interest at predetermined intervals (usually annually or semi-annually) and returns the principal on the maturity date, ending the loan.

Unlike stocks, bonds can vary significantly based on the terms of their indenture, a legal document outlining the characteristics of the bond. Because each bond issue is different, it is important to understand the precise terms before investing. In particular, there are six important features to look for when considering a bond. Bonds are a form of IOU between the lender and the borrower.

There Are Three Types of Bonds: 

Corporate Bonds 

Corporate bonds refer to the debt securities that companies issue to pay their expenses and raise capital. The yield of these bonds depends on the creditworthiness of the company that issues them. The riskiest bonds are known as “junk bonds,” but they also offer the highest returns. Interest from corporate bonds is subject to both federal and local income taxes.

Sovereign Bonds 

Sovereign bonds, or sovereign debt, are debt securities issued by national governments to defray their expenses. Because the issuing governments are very unlikely to default, these bonds typically have a very high credit rating and a relatively low yield.

Municipal Bonds 

Municipal bonds, are bonds issued by local governments. Contrary to what the name suggests, this can refer to state and county debt, not just municipal debt. Municipal bond income is not subject to most taxes, making them an attractive investment for investors in higher tax brackets.

Key Terms:

Maturity 

This is the date when the principal of the bond is paid to investors and the company’s bond obligation ends. Therefore, it defines the lifetime of the bond. A bond’s maturity is one of the primary considerations an investor weighs against their investment goals and horizon.

Maturity is often classified in three ways:

  • Short-term: Bonds that fall into this category tend to mature within one to three years
  • Medium-term: Maturity dates for these types of bonds are normally over 10 years
  • Long-term: These bonds generally mature over longer periods of time

Secured/Unsecured 

A bond can be secured or unsecured. A secured bond pledges specific assets to bondholders if the company cannot repay the obligation. This asset is also called collateral on the loan. So, if the bond issuer defaults, the asset is then transferred to the investor. A mortgage-backed security (you may remember 2008 housing crisis – these were packaged as good investments on bad loans/mortgages by the big banks) is a type of secured bond backed by titles to the homes of the borrowers.

Unsecured bonds, on the other hand, are not backed by any collateral. That means the interest and principal are only guaranteed by the issuing company. Also called debentures, these bonds return little of your investment if the company fails. As such, they are much riskier than secured bonds.

Liquidation Preference 

When a firm goes bankrupt, it repays investors in a particular order as it liquidates. After a firm sells off all its assets, it begins to pay out its investors. Senior debt is debt that must be paid first, followed by junior (subordinated) debt. Stockholders get whatever is left.

Tax Status 

While the majority of corporate bonds are taxable investments, some government and municipal bonds are tax-exempt, so income and capital gains are not subject to taxation. Tax-exempt bonds normally have lower interest than equivalent taxable bonds. An investor must calculate the tax-equivalent yield to compare the return with that of taxable instruments.

Risks of Bonds 

Bonds are a great way to earn income because they tend to be relatively safe investments. But, just like any other investment, they do come with certain risks. Here are some of the most common risks with these investments.

Interest Rate Risk 

Interest rates share an inverse relationship with bonds, so when rates rise, bonds tend to fall and vice versa. Interest rate risk comes when rates change significantly from what the investor expected. If interest rates decline significantly, the investor faces the possibility of prepayment. If interest rates rise, the investor will be stuck with an instrument yielding below market rates. The greater the time to maturity, the greater the interest rate risk an investor bears, because it is harder to predict market developments farther out into the future.

Credit/Default Risk 

Credit or default risk is the risk that interest and principal payments due on the obligation will not be made as required. When an investor buys a bond, they expect that the issuer will make good on the interest and principal payments—just like any other creditor.

When an investor looks into corporate bonds, they should weigh out the possibility that the company may default on the debt. Safety usually means the company has greater operating income and cash flow compared to its debt. If the inverse is true and the debt outweighs available cash, the investor may want to stay away.

So, Are Bonds Risky Investments?

Bonds have historically been more conservative and less volatile than stocks, but there are still risks. For instance, there is a credit risk that the bond issuer will default. There is also interest rate fluctuations. 

Changes in the bond market can have significant impacts on the economy:

  • Bond prices and interest rates have an inverse relationship when bond prices fall, interest rates rise, and vice versa. This relationship affects borrowing costs for businesses and individuals. When bond yields rise, it becomes more expensive for companies to borrow money, which can slow down business expansion and economic growth. Conversely, when bond yields fall, borrowing costs decrease, which can stimulate economic activity.
  • Inflation expectations: Bond prices are sensitive to changes in inflation and inflation forecasts. If market participants believe that there is higher inflation on the horizon, interest rates and bond yields will rise to compensate for the loss of the purchasing power of future cash flow. This can impact the economy by affecting consumer spending, business investment, and overall economic growth.
  • Investor confidence and risk appetite: Bond yields can be an indicator of investor confidence and risk appetite. During “boom” times, investors require less incentive to hold risky assets, so the spread between the yields of risky bonds and Treasuries declines. Conversely, when investors’ confidence level is low, the demand for Treasuries will increase, hiking up Treasuries’ prices and lowering their yields. These changes in investor sentiment can impact the availability of credit and the overall functioning of the financial system.
  • Wealth effect: Changes in bond prices can also impact consumer wealth and spending. When bond prices rise, the value of existing bonds held by investors increases, which can lead to a wealth effect and increased consumer spending. Conversely, when bond prices fall, the value of existing bonds decreases, which can reduce consumer wealth and spending.
  • Impact on financial institutions: Changes in bond prices can have a significant impact on financial institutions, particularly those that hold a large amount of bonds in their trading books. A rise in government bond yields can lead to unrealized losses for banks, which can affect their balance sheets and lending capacity. This, in turn, can impact the availability of credit and the overall functioning of the economy.

In summary, changes in the bond market can have far-reaching effects on the economy, including interest rates, borrowing costs, inflation expectations, investor confidence, consumer spending, and the financial health of institutions. Which is what we have experienced in the last couple of months with the markets. 

So, what does it mean?

Only Time Will Tell… Some believe this is where we begin a run others predict doom and gloom… Which ever way you look at it there is always something else on the horizon.

Time Tested Strategies for Long Term Success In Todays Market!

Time Tested Strategies for Long Term Success In Todays Market!

At any stage of your life, a well-constructed financial plan can help you enjoy today, while also preparing for tomorrow. Use these time-tested investment strategies as part of your financial plan to make the most of your investments and reach your long-term goals.

Time-tested strategy 1 Keep emotions in check, stay the course:

How do you handle market volatility? Like many Canadians, you might feel a little anxious. But reining in emotions and making decisions calmly helps your portfolio weather market turbulence. It’s easy for emotions t

  • The largest equity inflows happened during the first quarter of 2000, the time
    when the market peaked. This caused a trend for investors to “buy high.
  • One of the largest equity outflows happened between December 2002 and February 2003, a period when the market bottomed. This caused a trend for investors to “sell low.”
  • In the second half of 2008, the largest equity outflows happened just before the market reached a low in March 2009. This caused a trend for investors to “sell low.”

Time-tested strategy 2 Invest for the long term:

Market fluctuations are a normal part of investing. Investments don’t perform in a straight line—they will have periods of gains and losses. Historically, markets tend to rebound from short-term losses, offering gains from rallies when they recover and move higher. By staying fully invested, you can take advantage of all periods of positive market performance.
Resist impulses to “buy high” and “sell low”

Time-tested strategy 3 Diversify and consider asset allocation:

As an asset class, you can expect that equities will sometimes experience short-term fluctuations. However, equities can provide great growth opportunities over the long term.The saying “don’t put all your eggs in one basket” is appropriate when thinking about investing. By diversifying your investments, you benefit from periods when different asset classes are performing better than others. Also, by choosing the right asset mix for your portfolio, you can make sure your investments meet your risk tolerance, goals and investment timelines. Diversify, Historically, asset classes have performed differently from year to year. For example, the emerging market investments underperformed in 2011, 2013 and 2019 but were top performers in 2012 and 2017. The markets lost three years with Covid-19 but agin the markets jumped back across all asset classes, unfortunately we are still in the hangover from that period. As we start to see the light at the end if the tunnel and the market correcting itself diversifying across asset classes frees you from trying to invest in the right asset class, at the right time.

And Finally… Offset inflation:

Inflation is the impact of rising prices, which cuts into people’s buying power. If inflation catches up with your investments, it can significantly impact your long-term life goals.
Different asset classes from 1925 to 2023 have outpaced inflation. If you had stayed invested, particularly in equities, your assets would have grown, helping you to offset inflation. Inflation has impacted the long-term growth of non-equity assets, such as GICs and bonds, and risk-free investments, like T-bills. Ensuring an asset mix that protects against the effects of inflation is an important consideration for long-term investing success.

So what should you do – Keep Calm and Carry On! We shall see many more fluctuations in our lifetime.

The Runner’s Choice for Financial Advice

Winston Cook September 6, 2023

Long distance runners know all about maintaining a steady pace. As we run, it’s about consistency and endurance. Achieving your financial goals is exactly the same thing—very much like running a marathon. It requires the same dedication, patience and commitment as a marathon. Some of your goals are short-term and others medium and long-term. So the whole process of investing for goals is an ongoing and continuous journey—not just a few transactions.

What you need to remember is that your objective is not about being the fastest runner over one race, but to maintain a steady pace for your entire journey—the marathon of life.

Set your goals, prioritise them to develop a strategy so you can start investing your money in six steps.

  1. Start with a plan – (no different than training for a 5km, 10km, or Marathon)

The plan starts with a distance goal in mind—5km, 10km or 42km. Any one of those goals start with a single step.

Sometimes the hardest part of the workout is deciding to start. But by putting on your shoes and lacing them up you have a call to action for a run. Similarly, investing can be overwhelming for investors as they often suffer because they tend to worry about the unknown. If you are an investor (or are thinking about investing), the best advice you can get is to start with a single step towards your financial journey.

Now that we have a plan…we are going to run! 

  1. Create a training log – (financial training is the exact same thing!)

Not all runners are the same so the same training log cannot be used for all investors. If you are a natural runner and have a running base then you can jump into training in full force. But if you are less experienced in your training and running you will need time to progress. This is very much like investing. If you are experienced and have knowledgeable understanding of investing you can jump right into the process of investing. But if you are like most and do not have the understanding of investing then getting started will require the knowledge of your limitations. Once that information is in place it’s like a training log – the correct amount of investing can be done to start you down the path of creating a solid financial base thus creating the foundations of a solid financial plan.

  • Run your own race (invest in a way that works for your future goals)

On race day, you never know what the other people’s goals are around you. Some are trying to set a new personal best time, while others are just trying to finish. You don’t compete with other runners. Ultimately, you’re only competing with yourself to have your best race. The same is true with investing. If your best friend putting all their money into Amazon, Google, or Gaming stocks—that may not be the best approach for you.

Investments are based on your personalized future plan, which you create for your financial success and it probably will not look like the investing plan of the person next to you.

  • Your training discipline determines how you feel on race day (disciplined investing is always a great strategy)

Running various amounts of kilometres week after week can be gruelling, but the discipline can provide you the result you want on race day. The same can be said for investing: you have to be disciplined in your approach to your investing goals. Understanding that your current plan of investments is all about building a future and sticking to the plan with discipline. There will be setbacks (as there are always), peaks and valleys, but the long-term goal must remain the same.

  • Pace yourself (investing for the long term always leads to your financial success)

When you finally reach your running goals after all the training is done you learn it’s all about pacing. In investing, you are in this race for a long time so stay true to your goals to reach financial success. Add to your portfolio in a measured ways, you may never land the hot tip that leads to instant financial success just as sprinting the first two kilometre in your race will only lead to suffering down the road.

Use the wisdom you’ve accrued in your running life to guide your financial steps to reaching your goals.

Finally…

  • Plan for the unexpected (The market is volatile your reaction does not have to be the same)

A stress fractures or other injury’s during training, race day weather—too hot, too cold, too windy—cramping at the halfway mark and having to walk, running out of fuel. . . these are all real obstacles that all runners face. Similarly, during your investment journey there will potentially be recessions, bear markets, countless liquidity crises, bank failures, rate hikes, inflation, and even deflation—just to name a few events that can trip up an investor. You can’t control the volatility of the markets, but you can control your reaction to it. Your portfolio is based on your assessment and personal needs to stay invested for the long run. 

Ultimately, it’s your choice—so choose the winning formula that you’ve already learned in the practice of the sport we love. 

Henley Financial & Wealth Management Inc.

Are we going to be OK?

Are we going to be OK?

What is Inflation?

Inflation – is a term used to describe the rate at which prices for goods and services rise over time. It is a reduction in the value of your buying power, which means that a dollar effectively buys less than it did in prior periods. Inflation aims to measure the overall impact of price changes for a set of products and services, allowing for the increase in the price level of goods and services in an economy over a period of time. Inflation can be calculated by determining the current value of various goods and services consumed by households, this is referred to as a price index. This compares the value of the index over one period to another, such as month to month or year to year.

There are two main types of inflation: demand-pull inflation (when growing demand for goods or services meets insufficient supply, which drives prices higher), and cost-push inflation (demand for goods hasn’t changed, the price increases from production are passed onto consumers). Inflation is natural, and the Canadian government targets an annual inflation rate of 2%. However, inflation can be dangerous when it increases too much, too fast. Inflation makes items more expensive, especially if wages do not rise by the same amount, which will lead to a decline in purchasing power over time.

How does raising interest rates curb inflation?

When interest rates are raised, it can have several effects on the economy and personal finances. Here are some of the things that can happen

Positive effects:

  • Higher interest rates can lead to higher returns on

savings accounts and other interest-bearing accounts

  • Rising interest rates can make it more attractive for foreign investors to invest in the country, which can strengthen the value of the currency

 

Negative effects:

  • Higher interest rates can make borrowing money more expensive, which can lead to lower demand for goods and services.
  • When the cost of borrowing money increases, it can lead to a decrease in consumer demand, which can cause prices to fall.

Higher interest rates can lead to a decrease in the stock market, as returns are lower based in the interest on the rate of the investment through increased rates.

When interest rates rise, it also makes it more expensive for businesses to raise capital. Meaning they will have to pay higher interest rates on the bonds they issue. Making it more costly to raise capital which slows future growth on long term projects. 

Rising interest rates can make all debt more expensive, including mortgages, credit cards, and personal loans. 

When interest rates are raised. This will have a severe effects on personal finances and the of course the national debt. The federal government’s borrowing costs will also increase when interest rates rise. So, it is not in their best interest to raise the rates, this is done as a stop gap to slow things down and create a recession to lower the want for the public to spend. Which decreases demand and lowers inflation.

Higher interest rates will make it more expensive for individuals and businesses to borrow money for mortgages, personal loans. 

Credit card debt becomes increasing harder to pay off as there is not enough money left over from consumer goods costing more to pay down the debt effectively.

Overall, raising interest rates can make debt more expensive, which will have severe effects on personal finances. It leads to higher interest costs on the national debt, and make it more expensive for individuals and businesses to borrow money, which discourages borrowing and spending. This decrease in demand will cause prices to fall, which will help to reduce inflation.

What will be the result of a recession?

A recession is a significant, widespread, and prolonged downturn in economic activity. It will have several effects on the economy and personal finances.

  • A recession is usually is associated with a decline of 2 percent in the countries economic output. 
  • Recessions result in higher unemployment, lower incomes, and lost opportunities more generally.  Education, private capital investments, and economic opportunity are all likely to suffer in a recession.
  • Economic output, employment, and consumer spending drop in a recession. Interest rates are also likely to decline as the Bank of Canada will cut rates to support the economy.
  • Recessions can lead to reduced investment by companies, which will lead to slower economic growth and fewer job opportunities.
  • Recessions can involve, a reduction in prices, especially of discretionary items and real estate. Liquidity will dry up, banks become less motivated to lend in recessions for fear of not being repaid.
  • Interest rates tend to fall which creates the spend cycle once again.

Overall, a recession will lower the consumer spending rate and allow for inflation to lower to point where the interest rates can be lowered to keep the economy moving at a rate of growth which it can sustain. This is a very cyclical process but because there is so much time between these events that creates this imbalance, we tend to forget the process.

When will the Stock Market rebound?

The Canadian stock market has been experiencing some fluctuations recently, and it is difficult to predict when it will rebound. 

The break down…

The Toronto stock market rallied on May 26, 2023, helped by gains for financial and technology shares as well as signs of progress in U.S. debt ceiling debate.

The Canadian housing market appears to be on the road to recovery, but sales activity is expected to gradually grind lower through 2023 before rebounding.

The real estate market has experienced a downturn since March 2022, but it is expected to recover but higher interest rates will slow this down at this time. Once the interest rates start to come down the housing market will show a steady rebound.

The Canada Stock Market Index (TSX) is around the 20,450 mark on May 30, 2023 as the dollar eased from its sharp rebound and supported Canadian heavyweight resource-backed companies.

The Canadian stock market has been experiencing some fluctuations, and it is difficult to predict its future. Canadian small-cap (small companies equity positions but volatile because of their size – non blue chip) stocks should start to see a bid in late 2023, and many trade with very attractive valuations

The strength in the Canadian market will be driven by the financials and energy sectors as they stand to benefit the most from the coming economic environment, The TSX will enter bull market in the last half of 2023

The Canadian economy has been more resilient than feared in the wake of aggressive interest rate increases last year

Overall, the Canadian markets have experienced periods of economic uncertainty in the past, but the Canadian economy has been more resilient than feared. The Canadian stock market has experienced fluctuations in recent months, and it is difficult to predict its future. However, the Canadian markets have historically shown resilience and have the potential to recover from periods of economic uncertainty.

Debt Ceiling’s Irrelevance

Debt Ceiling’s Irrelevance

The Debt Ceiling, established in 1917 during WW1 as a limit to the amount of bonds a government could issue, it was changed in 1939 to reflect the maximum amount of debt that could be incurred. At the time, this threshold was largely irrelevant given that it would never have been reached in a million years. However, 84 years later, much has changed. The world’s powers are all interconnected through common debts, and while markets may react to something seemingly so insignificant as the Debt Ceiling, it is not without its political implications. 

It is important to note however that regardless of how these debates play out on the political platform, ultimately an agreement is always reached and the Debt Ceiling will be raised at the eleventh hour. This action serves to underscore the fact that the Debt Ceiling is no longer relevant, but rather a political tool used as leverage by both sides. It is essential to understand the implications of this maneuver in order to ensure the proper utilization of resources and budgetary measures are taken. Ultimately, it all comes down to understanding how the debt ceiling works and its significance in our current world economy. Despite how the debates play out, the Debt Ceiling will always be raised as the biggest global economy cannot go without paying it’s debt as it would up end the world economics as we know it today. It is up to the policy makers to ensure they make the most responsible decision possible when it comes to managing the US debt and economic resources. Understanding the Debt Ceiling’s history and its current role in the world economy are two essential steps in setting ourselves up for success. With this knowledge, we can move forward responsibly with our fiscal decisions despite whatever politics may come our way. After all, the Debt Ceiling’s limits may no longer be applicable to our current world economy but that doesn’t mean we shouldn’t still exercise caution and good judgement when it comes to managing debt. The economic repercussions of this could have a lasting impact for generations to come if not managed appropriately. When it comes down to it, whether or not the Debt Ceiling is relevant is less important than making sure our fiscal decision is in the best interest of current and future generations. We owe this much to ourselves and those who will follow us. It’s important to not get too caught up in the politics of it all and instead focus on what is truly in the nation’s best interest. After all, that is why this was put into place 84 years ago. To ensure our debt remains manageable and does not become a larger burden than we can bear. We must be careful to stay vigilant so that it stays just that – manageable. Only then can we continue to thrive as a nation. 

Therefore, whether or not the Debt Ceiling has become irrelevant over time, it still remains an important part of our fiscal responsibility and should not be overlooked when making economic decisions for our nation’s future. The long-term effects of mismanaging. Don’t let the media or politicians fool you, they need better standards in place to control this debt but to politicizes this for each party’s own resolve does not help the fundamental problem that needs to be solved. Stop holding the markets hostage because of the choices each party makes on election promises.

DO YOU UNDERSTAND?

DO YOU UNDERSTAND?

Are we putting enough money aside and hoping that the money will be there when we need it?

Is there an art/science behind the investment world?

Hopefully the information below helps you understand what each of the areas discussed are and how they work. If you have an investment portfolio then you most likely fall under the following categories below.

If you don’t have an investment portfolio as of yet then what are you waiting for?

You will find having an investment in your own financial future makes perfect wealth sense

When advisors discuss investing with clients, they are primarily talking about using the different markets to invest surplus cash for long-term growth of wealth. There are three areas of investment that most individual investors will fall under when investing for the future. 

The trading of stocks, bonds, and mutual funds, impacts the financial wealth of the world economy.

Examples of how capital markets work can be traced back to early hierarchy of our civilization. The capital markets were developed as a way for buyers to buy liquidity. In Western Europe, where many of our ideas of modern finance began, those early buyers were usually monarchs or members of the nobility, raising capital to finance armies and navies to conquer or defend territories of their own. Many devices and markets were used to raise capital, but the two primary methods that have evolved into modern times are the bond and stock markets. 

So, what are stocks and bonds?

Bonds

Bonds are considered debt. The bond issuer borrows by selling a bond, promising the buyer regular interest payments and then repayment of the principal (amount paid) at maturity (a set date in the future). If a company wants to borrow money, it could just go to one lender and borrow the money. But if the company wants to borrow a large sum, it may be difficult to find any one investor with enough capital and the inclination to make such a large loan, thus taking all the risk as the only lender. In this case the company may need to find a lot of small lenders who will each lend a little money, and this can be done through selling of bonds.

A bond is a formal contract to repay borrowed money with interest (often referred to as the coupon) at fixed intervals. Corporations and (e.g., federal, municipal, and foreign) governments borrow by issuing bonds. The interest rate on the bond may be a fixed interest rate or a floating interest rate that changes as underlying interest rates, rates on debt of comparable companies continually change. (Underlying interest rates include the prime rate that banks charge their most trustworthy borrowers and the target rates set by the Governments Financial Benchmark or The Federal Bank.)

There are many features of bonds other than principal and interest, but this is the easiest explanation that at least shows how they work. Because of the diversity and flexibility of bond features, the bond markets are not as transparent as the stock markets; that is, the relationship between the bond and its price is harder to determine

Stocks

Stocks are shares of ownership. When you buy a share of stock, you buy a share of the corporation. The size of your share of the corporation is proportional to the size of your stock holding. Since corporations exist to create profit for the owners, when you buy a share of the corporation, you buy a share of its future profits. You are sharing in the fortunes of the company.

Unlike bonds, however, shares do not promise you any returns at all. If the company does create a profit, some of that profit may be paid out to owners as a dividend, usually in cash but sometimes in additional shares of stock. The company may pay no dividend at all, however, in which case the value of your shares should rise as the company’s profits rise. But even if the company is profitable, the value of its shares may not rise, for a variety of reasons having to do more with the markets or the larger economy than with the company itself. Likewise, when you invest in stocks, you share the company’s losses, which may decrease the value of your shares.

Corporations issue shares to raise capital. When shares are issued and traded on a public market such as a stock exchange, the corporation is “publicly traded.” 

Only members of an exchange may trade on the exchange, so to buy or sell stocks you must go through a broker who is a member of the exchange. Money Managers – who work for big conglomerates brokers will manage your account and will offer varying levels of advice and access to research for a commissionable fee. Most members of the exchange have Web-based trading systems which can be easily accessed by the public so that you can buy and sell at a fraction of the cost of working with a Money Manager these discount brokers offer minimal to no advice or research which creates the platform for minimal trading fees. 

What are Mutual Funds?

Mutual Funds, and Index Funds

A mutual fund is an investment portfolio consisting of securities that an individual investor can invest in all at once without having to buy each investment individually. The fund thus allows you to own the performance of many investments while actually buying and paying for the transaction cost of buying only one investment. Mutual funds have become popular because they can provide diverse investments with a minimum of transaction costs. In theory, they also provide good returns through the performance of professional portfolio managers.

An index fund is a mutual fund designed to mimic the performance of an index, a particular collection of stocks or bonds whose performance is tracked as an indicator of the performance of an entire class or type of security. 

Mutual funds are created and managed by mutual fund companies, by brokerages or even banks. To trade shares of a mutual fund you must have an account with the company, brokerage, or bank. Mutual funds are a large component of individual retirement accounts and of defined contribution plans.

When corporations or governments need financing, they invent ways to entice investors and promise them a return. The last thirty years has seen an explosion in financial engineering, the innovation of new financial instruments through mathematical pricing models. This explosion has coincided with the ever-expanding powers of the computer, allowing professional investors to run the millions of calculations involved in sophisticated pricing models. 

The Internet also gives amateur investors instantaneous access to information and accounts.

So, in conclusion the ways that capital can be bought and sold is limited only by the imagination below you will find a brief recap of how each investment works in its simplest form. We hope this has made investing easier to understand. Again, this is the very basic understanding of investing as there are more complex explanations to each of the following.

  • Bonds are
    • a way to raise capital through borrowing, used by corporations and governments;
    • an investment for the bondholder that creates return through regular, fixed or floating interest payments on the debt and the repayment of principal at maturity;
  • Stocks are
    • a way to raise capital through selling ownership or equity;
    • an investment for shareholders that creates return through the distribution of corporate profits as dividends or through gains (losses) in corporate value;
    • traded on stock exchanges through member brokers.
  • Mutual funds are portfolios of investments designed to achieve maximum diversification with minimal cost.
    • An index fund is a mutual fund designed to replicate the performance of an asset class or selection of investments listed on an index.
    • An exchange-traded fund is a mutual fund whose shares are traded on an exchange.

HOW IS THIS POSSIBLE?

HOW IS THIS POSSIBLE?

Life insurance can be a core strategy for retirement savings…

Did you know if you are legally blind in the USofA you can carry a concealed weapon?  Apparently in 2001, a legally blind man obtained a permit in North Dakota to carry a concealed weapon. He has managed to satisfy the state’s shooting test by hitting a human-sized target 10 times out of 10 from a distance of 21 feet, or 6.4 metres. Even though this man is legally blind, he hits the target every time – once someone points him in the right direction.

Retirement planning can be like this if you don’t have a plan. Many people can’t see how much income or savings they’ll need to make ends meet in retirement, but if someone points them in the right direction, they might just have enough wealth sense to hit the target.

The talk about life insurance as one of those core strategies in retirement is something that has been met with a lot of resistance in the past. I truly believe this is more of not understanding the process than not believing this additional asset can be of value in the future. 

BEHIND THE SCENES

A little while ago, a client of mine, was concerned about how he was going to generate enough income in retirement. He is 46 years old, and is behind in his target goal in saving for retirement. He’s a business owner and had been putting most of his savings into his business to expand it (which is a common business scenario). He has a small retirement portfolio but because of the way he has invested in his business over the last few years he has not been able to reap the benefits of this current market run for his retirement. He is now in a position where he feels comfortable with where the business is and wants to focus on his future retirement needs. He has decided it is time to put a plan in motion that will help him meet his retirement goals.

…So, as we started to create a succession/retirement plan we discovered there was a need for insurance. While we talked about adding insurance to his portfolio, we also discussed the advantage of the investment vehicle within the insurance policy that would help him create some of the cash flow he and his wife will need in the future – a figure which they believe to be about $100,000 annually after taxes. By implementing an insurance policy as one of the core funding strategy some of the needed funds each year could be provided for them as part of their retirement plan on a tax-free basis. Because he is behind in his retirement planning portfolio, we wanted to create an accelerated plan for retirement that is a reasonably safe platform and not subject to market volatility.  As an added bonus this plan also covers off an insurance shortfall which was discovered in our initial review, should he pre decease his wife.

THE UNDERSTANDING

How does this actually work? 

We talked about the life insurance product and it’s features and set out some projections. Since it was determined there was an insurance need and at the age of 46, he purchased a whole life insurance policy with an initial face amount of $2,000,000. The premiums will be paid on a monthly basis and he wanted the policy to be fully paid up in 10 years. 

Each dollar of premium that he pays is used in two ways: Covering the Cost of insurance itself and making a deposit into a dividend fund inside the policy. That accumulating fund is known as the “cash value” of policy.

Starting at 65, he is going to receive $50,000 annually from this policy. 

How? 

He’s going to borrow $4167 from his policy each month tax-free ($50,000 annually) to use in retirement, by using the policy as collateral (which many banks are glad to do; they’ll typically lend up to 90 per cent of the cash value). This is not considered taxable income because loan proceeds are considered tax-free. There will be an annual interest charge on the borrowing of the money, which he plans to capitalize and will be paid out in full upon death (meaning – he won’t pay the interest annually, but the interest will be added to the loan balance from his policy over the years).

If he passes away at age 90 LE (life expectancy), the total insurance benefit to be paid out is projected to be $3,801,847. This money will be used to pay off the capitalized loan to the bank via his policy which is projected to be $2,032,295 at age 90. There will still be about $575,998 left over in his estate for his heirs and he and his wife would have received $1,250,000 tax-free during his retirement.

He plans to meet the balance of his cash needs in retirement using other strategies that were presented. You don’t have to structure your insurance plan exactly like he has. You could borrow less, or not borrow at all. You could reduce your premiums by stretching them out over a period longer than 10 years, or borrow money to pay your premiums (which is another strategy for another discussion). You can choose to cover whatever portion of your cash needs in retirement that suits you. 

The end result of this is the client now has a plan in place that will help him achieve his retirement goal.

As always speak to an adviser about your various options and create a plan that works to suit your needs.

HOW MUCH?

HOW MUCH?

“How much money do I need for retirement?”

A simple question asked by many clients of their advisors. The response should be… “What life style do you want to lead in retirement?” 

The answer from said client… should be…

“I want to live in the lifestyle that I have become accustomed in my present state.”

One could say that is completely dependent on what your wants and needs are. If your wants out weigh your needs then you will need a lot of money to retire on. If your needs are more important than wants you will need less retirement income. How much money you need to save for retirement is in part a function of how much money you will spend – and for how long.

So, what are the parameters for determining your retirement budget and the lifestyle you plan to lead.

Well according to Statistics Canada, the average Canadian household spent $68,980 in 2019 on consumer goods, an increase of 9.5% from 2016. Since nobody really lives in an “average” Canadian household and retirees have unique spending differences from the general population. Then let’s look at those numbers, the average household spending for the retirement population would then change to between $45,725 and $87,459, although spending net of income tax, insurance and pension contributions was only $36,339 and $65,086. These latter figures may be a better gauge of average spending on goods and services for the retired population.

Do we believe these numbers? 

Not Really!

Since Statistics Canada relies on the population to report their numbers so they can be compiled and published, I would suggest on that the average spending on goods and services for the retired population is likely on the low side. It’s no doubt though that many of Canada’s retired population will be well above these averages. As many have now entered retirement with a mortgages and other big-ticket expenses that were not of past retirees.

Trends during retirement

We will get to life expectancy shortly but let’s say you retire at age 65 and life expectancy is 90… then you have 9125 days to play with. 

What will you do with them?

Let’s see… I want to see the world, I want to golf more, I will volunteer, I will spend time with friends, look after grandchildren, go fishing, hiking, gardening, play cards with friends, join fitness groups, etc. These are things we hear all the time. They are things that generally happen.

So, let’s do the math… 

If you go away for one month a year travelling for five years that equals 180 days. If you look after the grandkids one day a week five years that equals 260 days and so on. With all the other activities our wish list we could keep yourselves very busy for 1825 days or five years. Yes, you will be very busy for the first five years guaranteed. You will also spend more money during that time because every day is like a weekend. Since you don’t have to work during the week you can spend money every day other than your days off. All of a sudden, this retirement business is expensive. You have to understand that you are living on a fixed income moving forward as the money you have saved is all you will have.

But not to worry at some point during retirement you start to slow down and move a lot slower. You realize that you are busier now in retirement than you were when you were part of the work force. So, you give up the volunteer work, the grand kids tend not to need us as much as they age, and travel becomes a permanent residence in a warmer climate for half the year. The next 1825 days we see the need to rest and this is when the savings begin. We have done it all… 

We made it! Age 75 – 3650 days (10 years) into retirement we figured out that it’s time to rest – now what.

Time will tell and that will be based on health.

Things to consider…

Real estate

Real estate is a huge consideration when it comes to retirement spending planning. There are a couple of reasons.

If you own an older home, obviously part of your budgeting needs to include ongoing repairs and possibly renovations. Whether you like it or not, large capital costs will factor into your retirement spending particularly when you own an older home.

If you own a vacation property like a cottage or a place down south, hopefully retirement means you can spend more time enjoying these properties – if you so choose. But if you spend less time, either because the cottage is tougher to get to or maintain or you’re travelling instead of wintering in Florida, a point comes where the financial cost of maintaining a valuable, though mostly empty piece of real estate needs to be weighed against the usage. Renting a cottage or vacation home may be better financially, although capital gains tax implications and family attachment to a secondary home need to be considered before selling.

Obviously, a home downsize or a sale of a second property can also inject capital into your retirement assets and potentially allow you to scale up retirement spending.

And if you rent instead of owning your home during retirement, that makes a big difference in terms of your long-term retirement spending. Owning a home can create a safety net for funding expensive long-term care costs in your 80s and 90s that doesn’t exist if you’re a renter.

Life expectancy

We often hear about the average Canadian life expectancy, currently 79 for men and 83 for women in Canada as of 2017 according to Statistics Canada. But these ages are simply representative of the average age at death across the Canadian population. This means Canadians who die at a younger age skew life expectancy downwards as compared to the age to which a retiree is expected to live. Also, that is an old number we do know that people are living longer now than they have in the past.

For perspective in 2021, a retired husband and wife, both aged 65, have a 50% chance that at least one of the two will live to age 94 and a 25% chance that at least one will live to age 97. The life expectancy of a 65-year-old man is 89 and of a 65-year-old woman is 91.

It’s not only how much you’re going to spend in retirement that matters for retirement planning purposes, but also, for how long. An earlier retirement or a longer life expectancy will both increase how much money you need to retire and be financially independent.

Summary

Nobody is average, but everyone is looking for some perspective. Take the above with a grain of salt.

Statistics Canada data suggests that spending on goods and services was $65,086 for couples without children and $36,339 for one-person households in 2016, but this includes Canadians across all age groups. Studies suggests average retirees in 2016 spent $31,332 per year on good and services, though this excludes any housing costs beyond utilities and property taxes. It’s also a consolidation of married and single retirees, suggesting the figures should be higher for couples and lower for singles, while adjusted by both to reflect additional home ownership costs or rent.

Studies found a 16% reduction in spending as workers moved into retirement, but other global studies have been found to show more modest declines in spending.

Spending may increase in the early years of retirement, but those who live a long life may not only have more years of retirement to fund, but are also exposed to the risk of incurring long-term care costs as they age.

Retirement planning is more art than science, but at least with some reasonable sense of what to expect with your retirement spending, you can develop a long-term retirement plan. I feel it’s prudent to budget to replace 85% of your pre-retirement basic living expenses, but some people will spend more or less depending on their personalized retirement and financial goals.