May 31, 2011

Bonds and bond funds are key components to a portfolio. They typically provide stability and are critical for RIF’s which require regular withdrawals. However, medium to long term bonds are sensitive to rises in interest rates and can decline dramatically if interest rates rise sharply – especially corporate bonds. The following article explains why I’ve been recommending a move to funds that purchase shorter term bonds to protect portfolio values.

One of the most confusing explanations is the inverse relationship between prime interest rate and the values of bond and bond funds. For the detailed explanation go here:

For the purpose of this article, understand that a sharp rise in interest rates will have a dramatic decline in any security that trades based on yield – in other words, any investment that provides a regular return in the form of interest. This includes government and corporate bonds, REIT’s, principle protected notes and income trusts. Note that GIC’s don’t trade – you buy and hold to maturity.  So they don’t fluctuate in value.

We haven’t seen a sharp rise in interest rates in over 15 years – in fact interest rates have declined and stayed low for a long time – but all things go through cycles.

The issue is liquidity – or the availability of money for borrowing purposes. There’s lots of it, especially in the US and some European countries, because they’ve been printing it!  Lot’s of liquidity means low interest rates, which allows businesses to borrow and expand. Too much liquidity creates inflation – which is too much money chasing too few goods. As more money is available to buy fewer goods in a recovery, prices go up with demand and inflation is the result. Controlling inflation is a mandate of all governments and raising interest rates is the medium.

The US has not yet turned off the money machine because liquidity is driving their recovery but it will end soon. Some analysts are suggesting the US is not reacting fast enough and should have reduced liquidity months ago. This is one reason we are seeing a rise in prices of certain goods – commodities for one. When liquidity decreases (and it will!) interest rates will rise and the value of long term bonds will fall – the more dramatic the rise the more dramatic the fall. Now if you held those bonds to maturity – you’ll get what you invested plus the interest rate. But individual bonds and bonds held in a fund have to be priced on a daily basis – and will decline in value with rising rates depending on the amount of longer term bonds in the portfolio.

This happened from 1994 to 1995. The US decreased liquidity by raising the interest rates on their government bonds (US Treasuries) from 3.25% to 6% over two years. All fixed income investments: bonds, dividend paying utility stocks, REIT’s dropped in value. The longer the maturity of the investment, the farther it dropped!

Although I don’t believe rates will rise significantly anytime soon, any rise will impact long term bonds.  So, the message is – stay primarily in short term fixed income products (or bond funds that do this for you!) until we get through this current liquidity cycle.

Think carefully when asked to be an executor

I’m almost at the end of a 3 year estate settlement as executor for a friends’ estate. It took far too much time and was much more difficult than it should have been. My interest in the process as a Financial Planner over took my gut feel about the whether I should take on the responsibility.

It was a last minute request which I reluctantly agreed to and my friend did not take my advice in using the estate lawyer I work with. The Will was poorly written and my friend left his assets to 10 beneficiaries in 3 countries with a condo in another country left directly to his estranged son. Here are the questions I’ll be asking next time around:

1 – Was the Will completed by an estate lawyer?

A lawyer that specializes in estates understands the complexities and can help avoid the pitfalls an executor could get involved. If the estate has any level of complexity, a poorly written Will or one completed without good advice can create all kinds of difficulty for the executor.

2 – Where are the assets?

If the assets are outside the country it will likely involve a lawyer from that country and even when language is not the issue, the laws are different, documents need to be created and signed and this all takes time.

3 – Will the assets all be liquidated and distributed or transferred “in kind?”

If an asset is to be left directly to a beneficiary it still must be valued for the final tax return then transferred. Maybe not that difficult in Canada but more so if it’s a condo in Portugal.

4 – How many beneficiaries and where are they?

The more beneficiaries outside the country create additional difficulty with documents and translation.

5 – How does the Will compensate the executor?

Think carefully before you decline the compensation or not ask about it. The standard compensation for an executor is 5% of the value of the estate – although in certain circumstances, this can be disputed. If the estate is valued at $1M, in cash and there is one Canadian beneficiary this may be too much compensation. If the estate is $250,000 with accounts in 3 countries, an apartment in Greece with a mortgage, 12 beneficiaries in 4 countries and a child under 18 who was unnamed in the Will, 5% may be too little. It would be preferable for the Will to have a clause which pays the executor based on an hourly rate and with the ability to pre-take compensation. As executor for my friends Will, I worked for 2 1/2 years before I could receive compensation for the 300 or so hours I spent.

The estates lawyer I work with is Donna Neff – I recommend you check out her website for more information on estate planning and being an executor.


May 2, 2011

In 1999 it was dot com stocks that just couldn’t go down.  In 2004 to 2006 it was real estate that had to keep going up – because everyone knows real estate always goes up.  Now its gold – the latest hot investment which after rising from $250 in the late 90’s to over $1500 must be where we need to be invested.  A speculator might be interested but no true investor should care.   The one universal truth all true investors are certain of, price and value are inversely correlated.  Find the investment that is currently scorned and you might have something.  Value does not rise with price, risk does.  By the way, gold at $1500, is actually down in real, inflation adjusted terms by 30% from its last peak in 1980.  This was the last time spectulators when crazy for it.

The Amani Children’s Home

I mentioned in my last newsletter I’ll be hiking up Mount Kilimonjaro this July with 6 other advisors from across Canada.  As part of our climb we will be raising funds for the Amani Children’s Home in Tanzania.  This short video (with an introduction by me!) will give you more information on the Amani home. 

The Amani Home

If you are interested in donating, please make your cheques payable to, “Friends of Amani Canada” and send them to my attention to my office address (46 Beechfern Dr, Stittsville, ON, K2S1E3).  I will forward to the organizers of the fundraising program.   If you would like a copy of their Annual Report or have more questions, please give me a call.

Canada’s Demographic Time Bomb

So will you get your Old Age Security income in retirement?

Canada’s demographic time bomb

What Motivates us

Apparently how we want to be motivated (and how we should motivate others) is not what most of us think.  For anyone who manages people – you must watch this video!   

What motivates us

But will it work for teenagers?