Expect volatility – Equity valuations rising!

April 10, 2014

After such a strong 2013, you’d expect a pause in rising equity markets and that means greater volatility.  We are noticing the valuation of stocks on average in Canada, the US, and Europe to be close to or at long term averages.

While it’s easier for portfolios to do well when equity markets are doing well, it’s much more difficult when markets pause and average valuations are high.  This is where the value managers I prefer shine, when stock pickers with concentrated portfolios tend to do better.  Our portfolio managers have a greater percentage of cash in portfolios than last year – waiting for the right opportunity.  The right opportunity may be after a market decline and stock prices approach the ideal discounted price.

Our recommended long term allocations continue to be approximately 0-15% fixed income, 10-15% Canadian Equity funds and 70-85% Global large to small company funds, and 10-15% emerging market equity fund.

The recommended increase in exposure to certain emerging market funds we began last year will eventually pay off as these equities are at historically low valuations.

As investors this means temper expectations for returns – last year was a very good year! There is no need to change allocations unless investment goals and or time horizon has changed.

Your children’s first home – Should you and if you should how would you loan money to your kids for their first home?

I get this question more often as the children of my baby boomer compatriots begin nesting and do what we did in our 20’s.

The first question you need to ask is: “Does it make sense for my children to own a home at this time?”

After deciding their jobs are secure and they will likely stay in one place for a while, then the question is really regarding return on investment.  I know it’s almost heretical to question home ownership but investing is never about just looking in the rear view mirror. Home prices in Canada have a long term average price increase of 5.4% according to TD’s March 2013 housing report.  (for full report, go here) This report also predicts a 3.5% average increase to about 2015 and 2% over the next decade.  Owning a home is a forced savings strategy, tax free growth and mortgage rates are low for now – but the costs of owning a home are increasing, utilities (don’t get me started about hydro and gas costs!) property taxes, condo fees, maintenance etc. all add up.  You also need to include the cost of buying a home and the land transfer tax.  All these things add to the cost of a home and with low projected increases in home prices, will impact the future return.

The strongest argument for home ownership is the cost of rent.  The strongest negative for owning a home is the rising cost of purchasing and maintaining a home compared to rent along with the opportunity cost of not investing the down payment somewhere else.  Investing in securities (mutual funds or individual stocks and bonds) come with their own challenges and it depends on which side of the fence you sit regarding these types of investments.  Although I continue to believe equity based mutual funds provide a higher return than home ownership over the long term, (history supports this) I acknowledge there are a number of 5 year and a few 10 year periods where investors’ patience has been strained and this just wasn’t so.

Having considered all this, you may feel that real estate is still a method of diversification of investments and buying the right property in the right location can still be a reasonable investment over time.  If you’ve decided this is the case, then how do you help your children buy their first home?

An outright loan to your children creates taxable interest to you and probably at a time when you are earning a higher income and paying more tax.  A loan to your children also carries the risk of interrupted payments and looks more like a “hand out” rather than a “hand up”.  If your goal is also to allow your children to experience managing a mortgage and required payments, this doesn’t work well. The most tax preferred income is capital gains and having some ability to control when you realize those gains would also be useful.  (i.e. in retirement when income is lower)

So here is what you can do; Offer your children an interest free demand loan of a certain percentage of the purchase price.  Your child applies to a bank or mortgage broker for a mortgage using your loan as a down payment.  The amount of the loan and consequently the size of the mortgage is based on what your child can afford to pay for the mortgage plus all the other costs of home ownership.

If we assume you loaned them 25% of the purchase price, your agreement states you will receive 25% of the sale price of the home (less sales costs).  You can include some conditions such as, no monthly payment required, the home must be in the province where you live – which is an outright bribe allowing more frequent visits, the loan must be secured by a second mortgage (which requires a lawyer to put in place) – this secures your investment in the event of a potential marriage breakup.  You can also limit the loan for a specific period, say 10 years, or if the house is sold, when it must be paid back – which of course you can decide to change if circumstances dictate.  The gain on your initial investment would be a capital gain, 50% of which would be taxable at your marginal tax rate at the time.

A simple document between each of you can confirm the arrangement (although you may want to consult with a lawyer if you want to make it legal).

This approach to helping out your children involves them directly in the home purchase process – (they sign the mortgage documents) it allows them to experience setting up and paying a mortgage and managing a budget.  It does not tie up a large part of your retirement assets – only the down payment amount.  It also lets you pay a lower rate of tax – 50% of the gain with your child getting tax free growth on their first principle residence.

The Role of Values in Defining Financial & Life Satisfaction

Whether you are satisfied or not with your financial and life satisfaction largely depends on whether you are spending your money on things that support your values.


The word “satisfaction” describes a feeling of fulfillment or contentment.  Its meaning is relative and often dependent on each person’s definition of success as applied to specific areas of life.

Therefore, in the area of finances, satisfaction is more of an emotional issue than a practical one.  That is because our sense of satisfaction is highly subjective and greatly influenced by our attitudes and beliefs.  As a result, the degree to which we feel satisfied with our financial lives is based on a unique and personal interpretation of our own financial needs and circumstances.

For example, one person can feel grateful for an annual income of $100,000 while another person will feel disillusioned and deprived at this same level of income.  In addition, one person can be very comfortable carrying an ongoing credit card balance of $5,000, while another person will feel stressed out until his or her credit card balance is zero.

Also keep in mind priorities can change over time and affect our feelings of satisfaction.  A person can live with disorganized financial records for years with little concern, and then one day become frustrated with the disorder and think, “I can’t live this way anymore!”

Keep in mind that those who feel dissatisfied with their financial lives are often unsure of the source.  For instance, an individual can know intellectually that they are financially independent, and yet the fear of economic vulnerability can persist on the emotional level. Others strive for and achieve wealth, but feel little gratification from their accomplishments.

However, the foundation for making positive change in our financial lives is awareness—the freedom and enlightenment that comes from first assessing our individual levels of financial satisfaction, and then recognizing the unique and personal circumstances, behaviors, and attitudes that impede our sense of financial well-being.


Like satisfaction, the meaning of “values” is subjective and unique to each individual.  In a nutshell, our values reflect what matters most to us as individuals.

When trying to define our values, we often think in terms of principles or standards that we consider important such as “honesty,” “loyalty,” or “altruism.”  We also tend to think of values in terms of what we as individuals hold most dear such as “my family,” “my faith,” or “my health.”

Our values are also those intangibles that keep us motivated.  Motivators vary from person to person, but examples include recognition, achievement, knowledge, contribution, creativity, spirituality, challenge, adventure, harmony, and so on.

In addition, our values define the purpose for our activities and the criteria we use for allocating our personal resources of time, energy, skills, and money.  When there is incongruence between our values and the way we “spend” those resources, we experience inner conflict or dissatisfaction.

 In Everything You Know about Money is Wrong, Karen Ramsey wrote:

In personal financial management, the place to begin is to adopt a realistic perspective. Money will only improve the quality of your life when it is used with clarity.  Only when you learn to spend money in concert with your underlying values—things that you most deeply care about—will it become a tool for creating a more fulfilling life.

Therefore, to achieve higher levels of life and financial satisfaction, your objective will be to clarify what is most important to you.  Next, allow that understanding to guide your interactions with your financial advisor and provide a framework for your financial goals.

Always remember that financial and life satisfaction evolve from a clear understanding of the nature, influence, and importance of your values.  Your sense of well-being will multiply when you clarify your priorities and make choices in life that align with what is most important to you.

Reprinted by permission of Money Quotient, NP