OFFICERS & EDITORIAL BOARD
INVESTING Q&A - By: Arturo Santos
How You Can Profit from Lower Interest Rates.
If you are concerned about how today's low interest rates affect your investment performance you are not alone. The Bank of Canada has cut prime lending rate 19 times in the last 18 months. In turn, the interest rate on mid-term fixed-income securities, for example has fallen to just above 5%. That works out to about 3% after taxes, and less than 2% after inflation.
Why are rates so low?
This current down-trend in interest rates is not merely a function of monetary or fiscal policies. Instead, it results from wholsesale changes in the population.
At the root of this upheaval are the baby boomers - the first generation to decide voluntarily against replacing themselves. The number of people under the age of 35 is actually shrinking, and this "middle aging" of citizens of developed economies means that the overwhelming proportion of consumers are just not consuming on a grand scale. Supply is dwarfing demand for money in capital markets and rates of return on fixed income investments are being driven down to levels not seen since the 1950s.
And there is little evidence on the horizon that this situation is temporary. Canada's performance in managing inflation - a key determinant in the level of nominal interest rates - has been remarkable. Fiscal discipline has also made a significant impact in wrestling federal and provincial debt loads to more manageable levels, so governments no longer compete ferociously for funds in capital markets. More dollars are being placed in capital markets; fewer users are competing for them.
It is precisely because this trend is expected to continue that all Canadians must address how they will adapt their savings and investing behavior to assure their ability to capture returns needed for financial independence.
How do I Survive - and Thrive - in a Lower Interest Rate Environment?
Low interest rates, today and in the foreseeable future are going to continue to challenge Canadain savers. This level of rates has taken the easy returns off the table. After all, what was easier than investing in the 1981 series of Canada Savings Bonds at 19.5%? 90-day treasury bills, which paid 17.7% in 1981, are currently yielding 3.59%.
Reality today demands a reassessment of risk and risk tolerance. True risk can be gleaned from the definition of purchasing power.
Over the longer term, spreading your risk over different types of investments can protect your purchasing power. Investing in stocks would have yielded superior returns over the past 40 or so years. Indeed, stock market performance superseded fixed income returns, even through the exceptional early '80s.
Armed with professional advice, and a comprehensive plan that addresses your specific investment needs and goals, you can thrive in this lower interest rate environment.
Mr. Arturo Santos, Jr. is an Investment Advisor with TD Evergreen, and may be reached by fax: (403) 448-8962 or Phone: (403) 448-8567.