July 9th, 2014
The expression “climbing a wall of worry” is an appropriate expression to describe the markets this year.
Stock Markets in Canada and the U.S. are positive in performance, yet all around us are reasons to be concerned, such as:
- The U.S. Fed continues to taper their monthly asset purchases which reduces liquidity.
- The fear of inflation rising above desired levels will bring interest rate increases which will curtail growth.
- Iraq seems to be falling apart.
- Israel and Hamas are bombing each other and the conflict looks set to expand with Israel activating 40,000 reservists.
- European Bonds (including PIGS) have increased significantly in value, and one must ask: Why?
- The Keystone Pipeline isn’t approved yet, and may not be.
The list goes on and on, yet the markets plod upward setting new high levels.
We have seen earnings rise which is one reason why markets are up. Another reasons markets are up is because the P/E multiple has been increasing, as witness the S&P 500 now trading at 17X.
One of the biggest Bears over the past many years has been Economist, David Rosenberg, who now says we are in a Bull Market because there is nowhere else for people to put their money.
If you have cash invested in Money Market or GIC’s you know what Mr. Rosenberg is referring to. There is no joy in earning 1% or less on your cash.
10 year Government Bonds yield in the range of 3%. Considering interest income from Bonds is fully taxable, and inflation is around 2%, the real rate of return from these types of investments is close to zero or negative.
What to do? We remain committed to the investment strategy of getting paid from our investments. To get paid Dividends, and other distributions in the range of 4% to 5% and a modest capital gain annually of 2% to 4% will give us a total return of 6% to 8%.
And we reserve the right to outperform!
In this low interest rate environment there have been some interesting and creative guaranteed investment products introduced by companies such as: TD Asset Management, CI Investments and Sunlife. The essence of the products is to guarantee a certain amount of annual income in your retirement, much like a defined benefit pension plan. If you are interested in how these products may be of benefit to you, give us a call.
Our Investment Lending Strategy continues to make clients happy. The essence of the plan is to borrow money at 4%, and get paid 8% annual income. Use the income from the portfolio to pay the interest and pay down the loan principal. Clients use this strategy to accumulate additional funds for retirement, or to spend the surplus income for personal purposes, or to use the surplus income to pay down a current loan or mortgage where the interest is not tax deductible.
This strategy is not suitable for everyone. If you would like to discuss the risks and possible benefits for you in more detail please give me a call.
On the topic of our Investment Lending Program vs buying a Rental Property, consider this real life example which will demonstrate clearly how expensive Toronto real estate is:
A home can be rented in Unionville, Ontario for $3,300 per month which is $39,600 per year. This house can be purchased for $1.5 Million. The ratio between Purchase Price to annual rent is: 38 to 1
In The West Village on Manhattan Island a condo is rented for $4,400 per month or $52,800 per year. This unit can be purchased for $750,000. The ratio between Purchase Price to annual rent is 14 to 1
This is an example of why the OECD ranks Real Estate in Canada as the most expensive country in the world using the Price to Annual Rent ratio.
Be careful if you are planning to buy a rental property.
Thank you for the privilege of helping you with your Investments and Financial Planning.
If you need or want any additional help we would be delighted to hear from you.
Have a safe, healthy and happy summer.