Too low to buy, too high to buy
In March of this year just as the stock market was reaching its low, investors were bombarded by financial columnists and TV news networks screaming to get out of the markets.
And many investors did precisely that.
Where did all the money go? According to the Globe and Mail newspaper1, up to a trillion dollars are now idling in Canadian bank accounts and in cash equivalents. Most of it earning pretty much nothing.
As the last of the money was flooding out of the markets, the markets made a “V” shape recovery in record time, amazing just about everyone.
As mentioned in my 2nd quarter report in June, I thought the recession would end sometime in late summer. It may have turned out to be the case but the statisticians are still crunching the numbers.
The Fed in the U.S. and the Bank of Canada are sounding like a broken record as both countries have vowed once again to keep interest rates at historic lows for an extended amount of time.
The stock markets continue to do well setting a number of recent 52 week highs. Certainly, a remarkable turnaround in such a short time.
Time to move out
I see rekindled interest in the newly launched TFSA (Tax-Free Savings Account) launched earlier this year. With interest rates at historic lows, having a TFSA invested in a daily interest account makes little sense. Having too much money in ordinary chequing and savings accounts doesn’t make much sense either.
I am recommending cashing out these daily interest accounts (typically set up at banks) and explore other alternatives. I am recommending two very conservative alternatives to increase interest income or yields. One is a short term bond fund and the other is a Canadian mortgage fund. Please contact me in order to determine if this investment is appropriate for your circumstances.
1Globe & Mail – Sept 29, 2009, “Families sitting on up to $1-trillion”
What we did for Bob
Bob and his wife, Jennifer have just retired. Both have small company pensions, are collecting CPP but need to supplement their income by drawing from their savings. The kids are long gone out of the house and have kids of their own.
Our newly retired couple is thinking about downsizing.
Jennifer has come into an unexpected, but considerable inheritance from her Aunt. Both Bob and Jennifer don’t know what to do with the money.
Before even starting to discuss product solutions, it is very important that Bob and Jennifer have a written plan because there can be no discussion about investing without a plan. I arranged for the fine folks at United Financial to create a formal financial plan to see if Bob and his spouse will have sufficient funds available to maintain their desired lifestyle and not outlive their money. Our primary goal here is to ensure the couple keeps their financial independence and dignity as they grow older.
Both Bob and his spouse are 62 which mean one of them is likely to reach the age of 92! Unlike just a few generations ago, we are now planning for a 30 year retirement time horizon.
Next, we talk about equity investing and fixed income investments. We can either own the great dividend paying companies of Canada and the world or look at other investments like bonds. Bonds generally pay interest at a fixed interest rate. Bonds are generally referred to as a type of fixed income investment.
In a 30 year time horizon, inflation erodes the value of fixed income investments over a long period of time. How much? In 30 years it will take about $2.42 in future dollars to be equivalent to $1.00 in today’s dollars. So, if your fixed bond is still producing $1.00 in 30 years, you may be headed for trouble.
In other words, Bob’s future investments better be producing $2.42 in income rather than $1.00 in income. What we need is rising income in retirement rather than fixed income eroded by inflation and the loss of purchasing power.
Rising income: good
Fixed income: not so good.
To be continued….
