July 5th, 2016

 

Although Brexit has come and gone, rest assured there will be another crisis in the near future that will grip our attention and cause stock markets to gyrate wildly for a short period of time.

Warren Buffet has said that in the short term the stock market is like a voting machine that is ruled by emotion, while in the long run it is a weighing machine that reflects value.

We build strong, stable, predictable, income producing investment portfolios that we are confident to own for a very long time, and in fact a lifetime.  We own banks, railways, insurance, industrial manufacturing, consumer retail and similar, that we know will be in the same business 25 years from now

We don’t own fly by night companies that are speculative and grasping for capital, and uncertain about what business they will be in 5 years from now, if in fact they are even still in business.

In my 25 year career in the investment industry, I remember the Asian crisis in the late 1990’s, the technology crash of 2000, 911 terror attack, 2008 and 2009 global financial meltdown, 2011 and 2015 bear markets, and most recently Brexit.

The next crisis, remember it too shall pass.

Our goal is to provide you with an annual rate of return in the range of 6% to 8% per year over the long term which let’s say is 5 years.

There will be periods of time during the 5 year window when our portfolios exceed our return expectation, and similarly, periods when they underperform our target.

It takes discipline and resolve, and confidence in our portfolios to stay the course during all periods.  It is easy to become aggressive when returns are outpacing our target, and also, easy to become despondent when returns disappoint.

Returns are not obtained like a smooth straight line on a graph, which of courses is what we would prefer. Offer the return in a given year happens in a matter of weeks or months.

I think we are in a great period to be investors, given the record low interest rates we now have and are likely to persist for a long period of time according to some economists.

For example, we can lend Royal Bank of Canada money at less than 1% per year in the form of GICs or bonds, and in turn they can use that money to build their business and give shareholders a 15% to 20% Return on Equity.

Alternately, we can become a shareholder of RBC by investing in their shares. We expect to receive dividends which means we are sharing in their annual profits, and the value of our shares should go up over time as the bank continues to increase their annual dividends which has historically given shareholders a double digit return on equity.

The price that an investor pays for the increase in rate of return of being a shareholder versus and Bond or GIC investor is the total return is not achieved on a smooth even daily basis, and there will be periods when the share price goes down in value because of some crisis happening in the world.

Enduring price volatility is a real cost as it can be painful.

Record low interest rates allow companies to borrow money and expand their enterprises, build more capacity, acquire complimentary businesses and even buy back their own shares.

As investors we can also use these record low interest rates to implement wealth building strategies.  Recently we have had clients borrow money at 2.10% on a fixed 2 year term, and buy a mutual fund that pays 8% annual income.

We have also had clients borrow money to buy larger homes, and income producing properties.

I personally remember having a mortgage at 19%.  In my opinion, this is a great period we are in to be investors, and I urge you to take advantage of it.  There are many ways to do so, and I invite you to call me to discuss this in more detail.

The rules concerning Life Insurance Policies are changing at the end of 2016, and not to the investor’s benefit!  The essence of the change is the government is decreasing the amount of money you can invest in a Universal Life policy.  As the investment portion of this type of life insurance policy grows tax free, this change is significant and detrimental to building wealth.

We have Life Insurance Professionals at Richardson GMP who can help guide you through this process.  If you would like to schedule an appointment to review your existing policies and to determine what you may be able to do before the rules change, please give me a call and I will coordinate it.

Contact me if you would like to discuss any of these topics in further detail.

Enjoy your summer!

Best Regards,

Fred Banwell

 

 

 

 

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.  The material provided in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal or tax advice. This material does not take into account your particular situation and is not intended as a recommendation. It is for general purposes only and you should seek advice regarding your particular circumstance from your personal tax and/or legal advisors. This material is based upon information considered to be reliable, but neither Richardson GMP Limited nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Insurance services are offered through Richardson GMP Insurance Services Limited in BC, AB, SK, MB, NWT, ON, QC, NB, NL, NS and PEI. Additional administrative support and policy management are provided by PPI Partners.

This publication is intended for informational purposes only and is not intended to constitute investment, financial, legal or tax advice. It does not take into account your particular situation and is not intended as a recommendation. You should seek advice regarding your particular circumstance from your personal tax and/or legal advisors. This publication is based upon information considered to be reliable, but neither Richardson GMP Limited nor its affiliates warrants its completeness or accuracy, and it should not be relied upon as such.

 

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