Friday, November 16, 2012

The Truth about Risk

No doubt you've heard there's no reward without risk. That's as true of investing as it is of anything else in life.

Historically, each of the three major investment asset classes—stocks, bonds, and cash—has produced pretty consistent long-term returns, along with pretty consistent degrees of risk. Understanding these historical patterns can help you handle risk in your own portfolio.
Research done at Vanguard has shown that getting your asset mix right can have more impact on your long-term returns than anything else—it's even more important than the individual investments you choose.
How to strike a balance

For investors, risk comes in many forms. There's the risk of a downturn in stock prices. There's the risk that inflation will erode an asset's purchasing power. There's the risk of political instability affecting international markets. And so on.
How to strike a balance
For investors, risk comes in many forms. There's the risk of a downturn in stock prices. There's the risk that inflation will erode an asset's purchasing power. There's the risk of political instability affecting international markets. And so on.
Achieving long-term financial goals means accepting the trade-off between risk and reward, and understanding the historical patterns that have gone along with the three primary asset classes. Stocks, historically, have offered higher long-term returns than bonds or cash, but they've also carried more risk. Bonds have offered higher returns, with more risk, than cash. Cash has provided a measure of stability, but money that's stuffed in your mattress nets zero return and will probably fail to keep pace with inflation. Paradoxically, taking a conservative approach to market risk may expose you to a high degree of purchasing power risk.
Fundamentally, how you allocate your assets among stocks, bonds, and cash depends on how much risk you're willing to take for an expected return. And that depends on why you're investing, and when you need your money.
So, what's the right way to divvy up your portfolio? You'll need to answer three basic questions:  Read more... and try the How asset mix historically affected volatility calculator
For help in setting up a proper asset mix for yourself, e-mail or call us

Monday, November 12, 2012

Condo or REIT? Which is the better investment?

Looking for a real estate investment that generates income?  Here is a comparison of owning condominiums in Toronto or Calgary against Real Estate Investment Trusts (REITs) that own apartments.

Michael Smith, a real estate analyst at Macquarie Equities Research, in the fourth annual installment of his study comparing a REIT investment in the apartment sector to a condo investment says the REITs are still way ahead.
The Toronto-based analyst compared the returns of a Calgary condo to Boardwalk REIT, which is based in the city, and Toronto condos to Canadian Apartment Properties REIT, which is based in that city. He has now looked at five investment periods.

“In all five periods an equally-weighted REIT portfolio outperformed an equally-weighted condo portfolio,” said Mr. Smith. “Looking at each market independently, REITs also generated superior returns every period.”
Over the first 10 months of this year on equally weighted basis, the condo investments returned 7.4% while the REITs returned 21.4%. Going back the full five years, the two condos have returned 10.4% on equally weighted basis, impacted heavily by price declines in Calgary. Toronto condos returned 41.5% over the same period. Still the REITs, when combined, have returned 74% over that five-year period.

Mr. Smith made a number of assumptions for his model. He acknowledged that condos are leveraged. He used a 900-square foot condo for his example, and included condo fees and prevailing mortgage rates.  For income, he used actual distributions from REITs and Canada Mortgage and Housing Corp.’s latest rental market report for rental income for the condo.  In terms of capital appreciation, he used Royal LePage’s annual house price survey to establish values for condominiums.
Mr. Smith says there are some things he did not consider, which also tip the scales in favour of REITs. Transaction costs, for example, are much lower for selling a REIT than a condo. REITs also offer greater liquidity and diversification. Adding in tax considerations, repairs and maintenance of a condo and the downtime you face sometimes leasing your condo also widens the gap.

Sam Kolias, the chief executive of Boardwalk REIT, said he’s not surprised the REIT sector has won out again versus condos. “The valuation proposition is still more compelling than a condominium. The price of an average apartment versus a condominium, which is nicer, is still a wide gap. The total cost of renting versus owning all in is a wide gap,” said Mr. Kolias.
So why do people keeping buying condominiums as an investment when they could pick up a REIT unit? Ben Myers, vice-president of Urbanation Inc. in Toronto, may have some answers. “People just like that idea of owning the bricks and mortar,” he says.

But the future may look brighter for REITs, if you believe the report.  “First, the condo market is laden with concerns of a correction due to elevated pricing, oversupply and high consumer debt levels,” said Mr. Smith.

“With the general perception that condo prices have peaked, it stands to reason that many prospective condo buyers will delay their purchase, thus putting additional downward pressure on condo prices.”
Those potential buyers are also good news for landlords such as Boardwalk REIT and Canadian Apartment Properties REIT because it means more renters, helping put upward pressure on apartment occupancies and rent.  And if interest rates go up, it could increase demand for rental apartments.  That could mean even more income for REITs and better returns.

The opinions expressed by the people quoted in this article should not be construed as investment advice from this columnist.  To assess the suitability of particular investments for your situation, please contact us via telephone or e-mail us.   

Sunday, November 11, 2012

10 Challenges Facing Boomers

As Baby Boomers we are extremely fortunate. Relative to previous generations, we have been blessed with an endless selection of places to go, things to do, things to have and things to be. We can do things and go places that our parents could only dream of.

At the same time, we have been given the gift of time to enjoy this lifestyle. Significant medical advances, careers that are less physically demanding, and enhanced knowledge of and access to fitness, nutrition and hygiene have all contributed to the gift of extra years, maybe even decades.
However, the real gift is not just these extra years, but that they have been inserted into the middle of our life, when we have the desire, energy and health to pursue meaningful activities. A testament to these bonus middle years is the frequency with which we are reminded that age 70 is the new 50.

Don’t get me wrong, we will still be faced with the challenges of old age; it is just going to take a whole lot longer to get there.
While we have much to look forward to, we cannot ignore that these blessing also come with a host of associated financial challenges. We have identified the 10 greatest of these challenges.

  1. Financing our desired lifestyle. We have become accustomed to a lifestyle that far exceeds that of previous generations. We must understand the annual cash flow required to support a lifestyle we are unwilling to sacrifice. We need to know and reach our savings target before we give up the security of our pay cheque.
  2. Financing a longer life. These bonus years in the middle of our life mean that our desired lifestyle must be funded for much longer than in any previous generation. Relying on outdated rules of thumb for retirement planning is extremely dangerous.
  3. Avoiding expensive distractions. With so many choices and options, we can easily become distracted from the responsibility to defend our financial future. It is not uncommon to take a detour that significantly reduces our accumulated savings. These distractions will eventually prevent us from accomplishing the things that are most important to us. We need to be very clear about what is on our “Must Do” list and live our lives in accordance with that list.
  4. Assuming responsibility for your pension plan. Previous generations relied on their employer to provide a lifelong income, make all of the investment decisions and assume responsibility for any mistakes made along the way. Unless you have been a long-term employee of a government agency, you have been forced to assume total responsibility for these critical risks. Never before has a generation been left so alone to care for its financial future.
  5. Learning strategies for growth and income. Faced with unprecedented volatility in the stock market and record low interest rates, managing your savings and converting them into a reliable retirement income has never been more difficult. Indeed, strategies that served you well while you were accumulating your savings suddenly work against you when you start to withdraw an income.
  6. Thriving in a bear market. The investment strategies that served us so well during the 1980’s and 1990’s are now failing us miserably. Many investors look back in dismay at the lack of progress in their investment portfolio over the past decade. They are just now beginning to realize that new investment approaches and products are required.
  7. Supporting adult children. Economic and social changes are making it more difficult for many of our children to find their place in society. Often we find them requiring assistance far longer than planned. This has become so prevalent that the acronym ‘KIPPERS’ has been developed: ‘Kids In Parents’ Pockets Eroding Retirement Savings’.
  8. Supporting elderly parents. We are not the only ones that are living longer, so are our parents. Unfortunately, their extra years have been tacked onto the end of their life. We are faced with the potential responsibility of providing them with physical, emotional and financial, support. We need to be prepared for the challenge of being sandwiched between the responsibility of caring for our adult children and for our parents.
  9. Coping with loss of job security. Our world is highlighted by commoditization, rationalization, digitization and globalization. Life-long job security and pre-planned retirement are no longer the norm. Large companies and even entire industries are disappearing or being relocated overnight. Over 60% of those who retired last year did so unwillingly, in response to situations that were outside of their control. We need to continue to hone our skill sets and remain flexible to alternative employment opportunities if we have not yet fully funded our retirement nest egg.
  10. Planning for a meaningful and satisfying retirement. Financial issues will be the least of our concerns during the second half of life. We have become known as a society that relies upon our careers to provide our identity and define our relationships. Unless we plan for the future, we risk boredom and loneliness. While medical advances have extended our lives, unless we take care of ourselves through proper exercise and nutrition, ailments such as diabetes, arthritis, dementia and osteoporosis may take their toll on our enjoyment of life. Most of us have spent more time planning our last two-week vacation than we have spent planning the last 30 years of our life. We need to start planning what we will do and who we will do it with once our working years are over.
Previous generations could safely ‘wing it’ through their retirement years. They financed a few years of rewarding leisure before declining health and the aging process took their toll. This traditional thinking is not enough to conquer the many challenges we face. Getting the most from our lives requires detailed planning; we need to carefully consider what will provide the greatest level of happiness and fulfillment. We then need to carefully co-ordinate and direct our resources to live intentionally to achieve the things we really want. The planning tools we have developed have been designed to help you do just that.

Baby Boomers have redefined each phase of life as they passed through it. Retirement will be no different. In fact, it has been suggested that this generation will be best remembered for how it handled the second half of life.
Contact us by e-mail or phone and visit 


Friday, November 2, 2012

Plenty of shortcomings in Canadians' financial habits

Survey shows many Canadians fail to do research before purchasing financial products

Canadian consumers are lacking knowledge and skills in many aspects of their personal finances, a recent survey by Desjardins Group suggests.
The survey of 3,000 Canadians, as part of the Desjardins Personal Finance Index, reveals numerous shortcomings in their financial habits.

For instance, many Canadians don't have enough of a savings cushion to get them through the unexpected loss of a job, accident or illness without relying on credit. Only 50% of respondents said they would be able to take care of their needs and pay their bills for more than three months without resorting to credit; and 14% said they wouldn't last a month with their existing savings.

Retirement planning is another area of weakness. Nearly 60% of respondents said they hadn't set up a retirement savings plan. And of respondents aged 45 to 64 who were still in the workforce, 40% said they hadn't estimated the revenue they'll need upon retirement – and had no savings plan in place.

Many Canadians are also failing to do their research before purchasing financial products, the survey reveals. Insurance products, in particular, remain a mystery to many Canadians. For instance, only 44% of respondents knew that not all insurance policies come with surrender value; and 30% of respondents didn't know whether their credit card includes travel insurance (32% knew that it is included, but weren't sure of the coverage amount).  Furthermore, nearly 40% of those who have a home insurance policy would be unprepared to file a claim in case of a loss, with no lists, receipts or photos of their most valuable goods.

Interest rate calculations are also confusing to Canadians, the survey shows. Roughly half of respondents were unaware that credit card interest charges are calculated as of the date on which the item or service was purchased. Moreover, 60% of respondents were unable to compare total interest paid on two loans with the same terms and different amounts extended at different interest rates.

Young Canadians, in particular, are lacking in their financial knowledge. Half of respondents aged 18 to 24 gave incorrect answers to a simple question on real returns; 45% were unable to handle a simple question on the concept of compound interest; and 70% failed to answer a simple question on investment risk.

If you wish to find out more about how investments and financial instruments work, please e-mail us or visit