Tuesday, May 31, 2011
If interest rates rise, expect increased volatility in bond prices. As interest rates go up, new bonds are issued at the higher rate, making them more attractive than existing bonds. For example, if you buy a bond that yields (pays) 5 per cent interest and interest rates rise to 6 per cent, your bond will be worth less because new investors are getting a better yield.
Keep in mind that the impact of interest rate changes on existing bonds depends on the type of bond you invest in. For example, if interest rates increase by just 0.25 per cent, the value of a long-term bond could drop by more than 1 per cent, while a short-term bond would typically see a much smaller drop in value.
If interest rates experience a steady rise, income from bond mutual funds will eventually climb as fund managers find greater value by adding bonds with higher yields, which will help to slowly rebuild income levels and provide better volatility protection.
Inflation expectations can also produce bond market volatility. Inflation usually leads to higher interest rates and even the expectation of an inflationary period can drive down bond prices well in advance of an actual interest rate change.
If interest rates remain flat or fall, cash flow from bond interest flat lines or declines making it more difficult to achieve your financial goals and effectively eliminating protection against price increases.
Faced with low interest rates, some investors choose to move to higher yielding corporate bonds in hopes of increasing their income. Corporate bonds typically perform well in a stable economy but during economic crises there is more risk that high yield bond issuers will become insolvent. That creates volatility in high yield bond prices and results in a flight to quality investments and risk free assets like T-Bills or perhaps Canadian government bonds, further reducing the value of lower credit quality assets such as high yield bonds.
Any way you look at it, volatility and low yields are expected continue in the bond market for some time. Even so, investors should still view fixed income investments as an important asset class to manage market risk. The cost for this relative stability is it’s lower long-term growth potential, which makes portfolio diversification among all asset classes – cash, stocks, equity mutual funds, bonds and other fixed-income investments – the key to successfully reaching your long-term financial goals. Talk to your professional advisor about how to keep your financial life safe and balanced come what may.
Monday, May 23, 2011
The concept of Tax Freedom Day was developed by Canada’s Fraser Institute to provide a practical calculation of the taxation levels placed on Canadians. It uses a statistic model and tax calculator to estimate a household’s tax liability based on province of residence, age, income, marital status, and number of dependants.
A significant portion of the taxes you pay are federal and provincial government income tax – and how much you pay can be positively influenced by taking full advantage of tax planning opportunities. You can bump up your personal Tax Freedom Day with strategies like these:
- Use an RRSP to pull the trigger on taxes Depending on your province of residence and with a marginal tax rate of 46 percent, if your family were to make a $10,000 tax-deductible RRSP contribution, you could save as much as $4,600 in taxes and advance your Tax Freedom Day by as many as 18 days.
- Invest your non-registered dollars tax-efficiently For example, if your family earns $10,000 in interest income, taxed at a personal marginal rate of 46 per cent, you will pay $4,600 in taxes. But if that $10,000 of interest income is derived from more advantageously taxed investments – say, $3,000 invested in Canadian equities that pay dividends, $2,000 in realized capital gains investments, and $5,000 in deferred capital gains investments – your tax cost would be reduced by $3,361 – advancing your Tax Freedom by about 13 days.
- The family that tax-plans together, saves together Families can reduce their tax liability by having the spouse with the higher marginal tax rate make a prescribed rate loan to the spouse at a lower marginal tax rate. Often referred to income-splitting, this strategy may also be used with children or other relatives. Here’s an example: Transfer $10,000 from a family member taxed at a 46 per cent marginal rate to another family member taxed at a 25 per cent marginal rate and (based on a prescribed loan interest rate of 1 per cent), the tax savings would be $2,100 – or 9 tax freedom days.
Sunday, May 15, 2011
How common is the need for long term care?
- About 50,000 strokes occur in Canada each year* – and stroke is the leading cause of transfer from hospital to long term care.
- 1 in 11 Canadians over 65 is affected by Alzheimer’s disease or a related dementia.**
- 7% of Canadians age 65 and over reside in health care institutions.***
- An additional 28% of Canadians 65 and over receive care for a long term health problem but do not live in a health care institution.***
Will the retirement nest egg you’ve built be adequate to cover long term expenses? Why risk putting your retirement, assets and estate at risk or becoming a financial burden on your family when there is an effective alternative: Long term care insurance.
Long term care insurance pays out benefits when you require nursing home care or – and this is important – care in your own home. This type of insurance generally provides benefits related to physical or cognitive impairment, including: medical care, home care, daily care in an adult day care center, 24-hour care in a long term care facility, the services of a registered nurse in your home, homemaker services, respite care to allow a caregiver a needed break, or any other costs that may arise during the period of impairment. With long term care insurance, you will not have to rely on your family for financial help or hands-on care – giving you and those you love the opportunity to spend quality time together in a financially stress-free environment.
A long term care insurance policy can help protect you, your family and your assets from the financial impact of health care services by providing cash when you need it, for as long as you need it.
* Canadian Institute for Health Information, 2003
** Alzheimer Society website, 2009
*** Statistics Canada, 2002
Sunday, May 1, 2011
Those are valid concerns. Let’s look into and beyond fixed-income investments to see what can be done to alleviate them.
- Conservative investors like fixed-income securities such as bonds, GICs, and savings accounts because they have a reputation for reliability, stability, and security – and they do have an important place in a well-diversified portfolio. The suitability of fixed-income investments really depends on each investor’s objectives. If you’re looking to generate a steady income over many years, long-term bonds and GICs can make sense. If you are seeking capital preservation and liquidity, money market investments may be for you. If you need growth in a rising interest/inflation rate environment, short-term bonds may be the answer. As well, equity investments can be a good way to further diversify the portfolio while potentially improving the return, even for a conservative investor.
- The key is to always have a well-balanced portfolio tailored precisely to your expectations for growth, tolerance for risk, and life/retirement objectives. But well-balanced today doesn’t necessarily mean well-balanced tomorrow.
- Interest and inflation rates go up and down
- Markets and the economy go up and down
- Your life changes – maybe you are now taking care of an adult child or have additional health care costs
- You revise your retirement dreams – adding more travel or deciding to downsize earlier rather than later
- That’s why reassessing your financial life and plans are critical to ensuring a well-funded retirement. Your initial plan provided guidance on your goals at that time and how to invest to achieve them. But, as time goes by, the actual returns on your investments may be different than anticipated, or your retirement objectives may have changed – so you need to re-evaluate … and the best way to do that is through an annual review of your current portfolio and retirement plans to ensure your investment plan and retirement income measure up to your expectations.