At an Investment Forum I attended in October, several speakers commented on the need for people to temper their expectations as to the investment returns we will receive in the near future. My job is not to sugar-coat but to advise on realistic expectations.
Today’s global economy is impacted by 3 themes: 1) on-going low interest rates, 2) slow global growth and 3) uncertainty. Low interest rates are forcing investors to look for yield globally. But complicating this, global growth is tied to investor uncertainty over all of the geopolitical unrest. Another factor is the aging populations and declining birth rates in many countries.
Another issue is ever increasing debt loads around the globe at all levels of government and society. Add to this today’s benign inflation pressure and central bankers reluctant to boost interest rates. The result of this is relatively cheap borrowing for the foreseeable future, which then fuels even more debt. Consider that now Canadian households have a debt to income ratio of $1.68 for every dollar of income they earn.
Some economists fear that if interest rates were to rise it would likely dampen the current strong consumer spending spree and could trip up some borrowers. Others fear a more dire situation if borrowing continues to outpace wage growth, as some Canadians continue to ‘tread water’ and are at risk of reaching the tipping point where they could no longer manage their debt payments.
So looking ahead, the US economy has been on fire, but now may be the time to move some money out and look at Europe, Japan, selected emerging markets while still investing in Canada. For small investors, asset allocation funds can be a good fit and require little advisor input into rebalancing. For those who have $200,000 or more there’s a range of discretionary funds out there investing in “Blue Chip” dividend stocks, offering low fees and a long term track record of very good rates of return.
To sum up, there is a consensus that global interest rates will remain low, but there will still be a place for bonds in the portfolios of older or more conservative investors. For retirees, investing in an annuity may make sense for a portion of their retirement savings to provide lifetime income at a lower tax rate than interest income would.
Today’s reality is that no one can live on the current interest from a five year GIC at around the 2.5% rate, so seniors will need to look to having a balanced portfolio to provide income with minimal volatility. For many retirees today, the equity in their home may represent 50% or more of their net worth, so tapping into this equity may be a way to live independently in their own homes for as long as possible.
Remember, this has all happened before. Investors will have to adjust to these new realities. Take the time to sit down with a trusted financial professional to help design your customized retirement savings or income plan.
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