Retirement savings. The two dreaded words we’re all forced to embrace. No matter where you turn, another article promising the best retirement savings advice stares back at you. Do I invest? How much risk do I take? What if I want to pass on my money? There’s no cookie cutter formula out there that will apply to you, your neighbour, and your boss simultaneously. All you need to know when (and if!) that last day of work rolls around, is that your money will last- no matter what your golden days look like. Whether you plan to live it up, or lay low- remember the 4 L’s:
Lifestyle & Longevity
Before starting off asking how much you need to save, what are you even saving for? Step 1 is to think of your lifestyle goals for your post-work years. Do you plan to travel the world? Would you rather lay low and live simply? All of this, in conjunction with your current resources, has to be considered to determined how long your money will last and where it can take you. Step 2 is to see an advisor so they can help manage the run-up phase (accumulation) and the de-accumulation phase of your money’s life cycle.
If you want your money to last beyond your lifetime, typical low-risk strategy doesn’t apply. You may
look to adapt more aggressive investments that carry higher risk, yet likely greater returns.
With this goal in mind, you have to stop thinking of the money as yours; think of it as theirs and what
you could be doing to maximize it for their future benefit.
Retirement is like a big vacation; you can never know what to fully expect. Liquidity goals are about
maintaining additional assets that can be tapped into quickly no matter what the situation, whether it
be supporting family members, major repairs or unexpected illness. Keeping a nest egg of easy cash is
always a good idea, but there’s also clever ways to create liquidity from “non-liquid” items. For example,
the laddering strategy involves purchasing GICs varying in maturity, which gives you staggered access to
your money every few years.
Do you have an advisor you trust? Learn how to choose the right one.
The Bank of Canada (BOC) has just implemented its first interest rate hike since 2010 which means a lot of investors are grabbing their crystal balls trying to forecast the future course of the stock market. Historically there has been a strong inverse relationship between interest rates and stock prices. Specifically, when interest rates rise stock prices eventually fall. But equity bull markets do not end after the first rate hike. The data confirms that stock markets have continued to appreciate for extended periods after an initial central bank interest rate hike.
When central banks raise rates there is a reduction in the amount of money in circulation which makes borrowing more expensive. The initial result of a higher bank rate is that commercial banks increase their rates for borrowing money. Individuals are affected through mounting credit card and mortgage rates which decreases the amount of money they have to spend. Businesses are affected as they also borrow money to run and expand their operations so they have less to spend which results in less profitability. This of course makes the stock market a less attractive place for investors which will eventually lead to reduced stock prices.
The BOC has kept its benchmark overnight interest rate at 0.5% since it started cutting rates in January 2015 but had been expected to reverse its effort to hold down yields. Investors had become antsy about the timing of the rate hike and the implications for the market even though a BOC rate increase does not have a direct impact on stock prices. No one can accurately predict a market top or correction. There are many reasons for stocks to drop in a rising interest rate environment and many of these factors are interrelated. As the chart below and data to the left shows, markets continued to appreciate after an initial interest rate hike. Looking at nine Canadian stock market recoveries since 1970(with the exception of the recovery from May 1988 to August 1989 which was omitted since the period did not have an interest rate hike) there are two distinct periods, from 1970 to 1989 and from 1990 to 2014, as reflected by two factors; the time interval between the initial rate hike and the next stock market decline, and the amount stocks rose over that interval.
Over the entire 47 year history, stocks continued to gain on average for 16 months after the initial rate hike and gained 26.7%. However these numbers are highly skewed by the 1990 – 2014 period where the average time interval from rate hike to market decline was 26 months and the average gain was 41.4%, compared to 5 months and an 8.2% gain in the 1970 – 1987 period. It is not clear why there is such a pronounced difference but the first interval was subject to high inflation which could be a factor. These distinct periods are emphasized by two different shades of grey in the chart and table.
Interestingly, the Materials sector outperformed all other sectors of the market over the first three months of the last five periods of interest rate hikes, with an average return of 9.7% versus Financials which gained 1.8%, Energy which gained 0.6% and the benchmark which added 2.4%. While a rising interest rate environment may not be detrimental to equity market returns initially, there is no disputing the ultimate outcome. Despite this there are many defensive stocks and measures that can be taken to mitigate a downturn. Though, clearly investors should be hoping that the nearer term history is more likely to repeat itself.
This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.
While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only