A new perspective

It is safe to say that the past year was difficult for equity investors and bond investors alike. It is rare for both stocks and bonds to lose money in the same year.

In fact, people with balanced portfolios were affected on both sides of their investments for the first time since the 1980s.  This is new territory for most investors.

The losses people experienced in bonds are due to the soaring interest rates. In 2022, bonds were repriced in anticipation of a significant rate hike by the Bank of Canada. The Bank of Canada raised its benchmark overnight rate 7 times in 2022. Those seven hikes translated into a total increase for the year of 4%, which is significant to say the least.

As inflation persists, there is a chance that the Bank will raise rates again, but many analysts are predicting that the central bank will hold rates at the current level for most of 2023. In other words, we may be close to the worst that it is going to get.

Rates may come down once inflation is brought under control. At the same time, the Bank must be careful not to push the economy into recession by leaving rates high for too long.

This is all to say that we are not out of the woods just yet, but there is still room for optimism.

Normally when a market rebounds, the gains are typically on the equity side. Fixed income (bonds) traditionally acts as the stable safeguard meant to protect your capital.

As financial markets gain confidence that inflation is coming under control, the markets will rebound. If interest rates remain unchanged, bonds will continue to collect interest payments.  If interest rates come down, bonds will appreciate in addition to collecting those regular interest payments. When this rebound happens the gains should come from both equity and bonds.

What keeps me up at night?

Renewing your mortgage may affect your cash flow

For many of you, the looming concern is the need to renegotiate your mortgage in the coming years. If you currently have a fixed mortgage rate at 1.5 or 2% and your term is coming to end, your new payment could be as much as double.

This will have a significant impact on your cash flow. It is a good idea to change your habits and redirect some funds now to start preparing and easing into that reality.

If you do not already have 3-6 months of income saved for emergencies and opportunities, now is a good time to start saving.

If you have contingency savings in place, consider putting more towards your mortgage so you can get used to not having the cash. This will also bring down the amount you will need to refinance when it comes time to renew your mortgage.

If you would like to speak with me about cash flow strategies, please contact me and we can set up a time to meet.

The importance of diversification

While 2022 was a tough year for investors, Canada led global equity markets for the first calendar year since 2016. Have a look at this chart from Burgundy Asset Management that illustrates why staying diversified is important.

Fine-tuning your financial plan

A new year is a great time to review your financial plan and make sure you are still on track.

I am here to work with you to review your goals, gain some new perspective and make sure you are on par to reach your set target in the future.

Together, we can create a projection of your plan that accounts for all the variables. We can match up your willingness to take risk and balance that out with the realities of your own financial situation.

The process to gain perspective

We can look at the parameters related to meeting your target. Defining those parameters are quite straightforward and they can help guide decisions (and reactions to what is happening in the markets day-to-day).

It is a calculation based on:

1. How much you currently have saved?
2. How much you will need in the future?
3. How much more you can save on a regular basis?
4. How much time you have to reach your target?
5. How much can we assume your portfolio will grow over time?

The last piece of the calculation is determining what rate of return you need to reach your target.

This simple process will help us confirm that you are saving the right amount of money and taking the right amount of risk to reach your goal.

This makes it easier to know that you are on track to have what you need when you need it. It allows you to ignore the ups and downs of the markets and sleep well knowing that you are still on the right path to meet your ultimate target.

It makes it easier to stick to your plan.

Contact me and we can set up a time to meet.