First things first, what is inflation? Inflation is when too much money is competing for a finite number of goods. This causes a general increase in prices and a fall in the purchasing value of money.
The US Real-Estate market is a prime example, and we have all witnessed the rising home values. Translate this to food and energy, and this is the effect we are feeling today.
Current inflation numbers
Recent inflation numbers came in at 8.5% year-over-year. The producer price index (PPI) came in higher at 11.2% which means it is costing more for the producers to manufacture products.
These increases get passed on to you and me, the consumers, and we are going to be feeling these increases now and on into the future.
How can you protect yourselves in retirement?
Perhaps you are living on a fixed income such as Social Security. [or in Canada: CPP and Old Age Security.] Your annual Social Security adjustment doesn’t keep up with grocery and fuel costs; thus, you are slipping backwards.
In a recent Questrade research study conducted by Leger¹, more than 8 in 10 Canadians (84%) expressed worry about the rising costs of inflation; two in five (39%) said they were very worried.
Rising inflation and the impact on mortgage costs have many worried, especially the younger demographic: approximately 45% of those polled.
The survey also found that Canadians aged 18 – 34 understand the importance of investing early and are much more likely to be investing more in their RRSPs to buy a home. Happily, this generation is committed to planning ahead, and will benefit from programs like the Home Buyer’s Plan when the opportunity is right.
Rebuilding the home ownership experience from the ground up
To ease current consumer anxiety, address pain points associated with home buying and mortgages, and help Canadians on their journey to financial independence, QuestMortgage®has been introduced as a direct-to- consumer mortgage offering to help make home ownership easy and affordable.
Designed as a simple, digital service for those looking to buy a first home or renew their mortgage, it is an alternative to traditional mortgages: available online 24/7, without the need to ever visit a branch. A QuestMortgage BetterRate™ offers low rates at the outset, with a team of dedicated mortgage advisors accessible to guide clients through the entire application process. The new service aims to change the status quo, making the process of home ownership straightforward, transparent and stress-free for Canadians of every age. Continue Reading…
Real-return bonds pay a return adjusted for inflation. But when you buy a real-return bond, you are only protecting yourself against unanticipated rises in inflation.
Real-return bonds pay you a rate of return that’s adjusted for inflation, but that’s not always as promising as it seems.
When a real-return bond is issued, the level of the consumer price index (CPI) on that date is applied to the bond. After that, both the principal and interest payments are typically adjusted every six months, upwards or downwards from that base level, to compensate for a rise or fall in the CPI.
Look at this theoretical example to understand how a real-return bond works
The Bank of Canada issues $400 million of 30-year bonds maturing on December 1, 2049. The bonds have a coupon, or interest rate, of 2%.
If after six months from the date of issue, the new CPI level is, say, 1% above the level of the CPI on the issue date, then each $1,000 of bond principal is adjusted to $1,010 of bond principal ($1,000 x 1.01). The semi-annual interest payment is then $10.10 ($1,010 x 2% / 2).
If after 12 months, the level is 2% higher, then the bond principal is adjusted to $1,020 ($1,000 x 1.02), and the interest payment rises to $10.20 ($1,020 x 2% / 2).
Consider these three important factors to realize benefits with real-return bonds
The price you pay for real-return bonds reflects the anticipated rate of inflation. In other words, if investors feel that inflation will rise 2% over the long term, the price of the bond will reflect that future inflation increase and its effect on the bond’s principal and interest payments. So, when you buy a real-return bond, you are only protecting yourself against unanticipated rises in inflation.
When the inflation rate falls over a six-month period, the principal and interest payments of a real-return bond fall. In times of deflation, the inflation rate turns negative. In a prolonged period of deflation, the principal of a real-return bond could fall below the purchase price. Interest payments would fall, as well.
As with regular bonds, holders of real-return bonds must pay tax on interest payments at the same rate as ordinary income. That income gets taxed at the investor’s marginal rate. In addition, holders of real-return bonds must also report the amount by which the inflation-adjusted principal rises each year, as interest income, even though you won’t receive that amount until the bond matures. That amount is added to the bond’s adjusted cost base.
If the CPI level falls, that reduces the inflation-adjusted principal. You deduct the amount of that reduction from your taxable interest income that year, and also subtract it from the adjusted cost base.
Find out how real-return bonds compare to regular bonds and if they make better additions to your portfolio
In simple terms, a bond is a form of lending whereby you lend money to a corporation or government. In return, a bond pays a fixed rate of interest during its life. Eventually, a bond matures, and holders get the bond’s face value—but nothing more. Receiving the fixed interest and face value at maturity is the best that can happen. Note, though, that in some cases, corporate bonds can go into default. As well, inflation can devastate the purchasing power of bonds and other fixed-return investments.
Furthermore, bonds also generate more commission fees and income for your broker, compared to stocks, especially if you buy them via bond funds and other investment products. Continue Reading…
Over time, most investment dealers have implemented misguided policies that will negatively affect their clients’ investment portfolios and their ability to achieve a secure retirement.
There are two main policies that have negative impacts on investors’ portfolios. One is restricting investments to a client’s original Risk Tolerance in the Know Your Client application form (KYC). When opening an account, the client will advise the dealer of their Risk Tolerance. Most clients will indicate that they are medium risk. On March 8, 2017, the Ontario Securities Commission (OSC) implemented risk rating rules that require all mutual funds to rate their fund according to 10-year standard deviation. In 2018, I published an article entitled New Mandatory Risk Rating is Misleading Canadian investors.
Prior to the OSC’s implementation of the risk rating rules, on December 13, 2013, the OSC issued CSA Notice 81-324 and Request to Comment – Proposed CSA Mutual Fund Risk Classification Methodologyfor Use in Fund Facts. My comments on this policy were submitted to the OSC on March 12, 2014, along with comments from 50 other industry experts.
A better, more accurate methodology would have used downside standard deviation or the Sharpe or Sortino ratios which measure risk adjusted returns. Nevertheless, the OSC implemented risk rating rules requiring all mutual funds to rate the risk of their funds according to 10 year standard deviation.
As a result, if investments in a client’s portfolio exceeded the risk tolerance as indicated in the original KYC, the client was forced to redeem those investments, by the advisor’s compliance department. A number of BMG’s clients were forced to redeem their positions since our funds had a medium-high risk rating according to the OSC formula, and the clients’ KYC indicated medium-risk tolerance. A number of clients wanted to change the KYC in order to allow them to maintain ownership of our funds but were advised that, unless there was a significant change in their financial circumstances, they could not change their KYC.Continue Reading…
Markets are down. The Nasdaq is in bear territory and the S&P500 is in correction territory (at the time of writing).
This is the direct result of the Russian invasion of Ukraine. Not surprisingly, investors are nervous about what will happen to their wealth. I’ve certainly been getting calls from clients unsure about what to do.
Here’s what I’ve been telling them: Don’t panic. This too shall pass. The world has weathered terrible events in the past and come out the other side. We will again.
In my 25-year career as an investment advisor, investors faced Y2K, a worldwide financial collapse, and a global pandemic. In each case, downturns were followed by rebounds and even better returns.
This is temporary and stability will return
Russia’s war against the Ukraine is wrong and creating a tragic humanitarian crisis, but in terms of the markets, investors should view it as a temporary event: because it is. Yes, markets are down – for now – but they are not going to collapse. You are not going to lose all your money. Your wealth may drop for a period of time, but once the war is over, regardless of the outcome, stability will be restored and returns will tick up, in my opinion. For those fearing a global nuclear war, then market performance won’t matter.
Uncertainty causes markets to fall. Even before Russia invaded Ukraine, the markets were experiencing volatility because the central banks in Canada and the U.S. announced they would be increasing interest rates and reducing stimulus support. Higher interest rates are the primary tool to curb inflation, which is at record highs in both countries. While this made some investors nervous, it’s important to understand that the fact the Bank of Canada and the Federal Reserve are raising interest rates means the economies in both countries are strong.
Statistics Canada’s labour report for February showed just how strong. Unemployment had fallen below pre-Covid 19 levels for the first time since the start of the pandemic, down to 5.5%.[1] The Office of the Parliamentary Budget Officer projects an economic rebound and robust performance in the second half of 2022.[2] All of this is good for the markets and those benefits will be realized once the war and geopolitical tensions end.
Energy self-sufficiency will be a positive
Energy prices are high now because demand is greater than supply. Worldwide sanctions against Russia, a major global producer of oil and natural gas, mean Canada, the U.S. and Europe are looking for other suppliers and working to become more energy self-sufficient: a positive going forward. When the Russia-Ukraine situation becomes more stable, those prices, which are also driving up inflation, will drop, in my opinion. Continue Reading…
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By Billy Kaderli, RetireEarlyLifestyle.com
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