Canadians have enjoyed a magnificent race to recover from the COVID-19 recession. House prices have exceeded even the most greedy expectations at more than ten times the after-tax household income; bond prices have completed a 40-year lead; and stock prices have climbed from record to record.
Each asset class has benefited tremendously from the downward trend in multi-year interest rates to near zero, and the release of family savings accumulated during the foreclosure, and in particular the flow of money from government stimulus.
In the optimistic case, the economy continues to grow even after the end of the temporary stimulus measures. In the prudent case, the withdrawal of the stimulus measures leads to problems for households due to over-indebtedness, business closures and a possible correction of extreme levels in asset prices. Time will tell us.
Our previous article explained how these three asset classes were overvalued and warned families and investors to prepare before the bubbles burst. What could go wrong?
Bank of Canada Governor Tiff Macklem has his eye on inflation picking up. There is evidence that inflation is already pushing up prices. Ask buyers. The prices of raw materials have also increased. Count the shortages of industrial supplies.
Inflation generally increases the cost of money. Interest rates have increased recently. Their level of increase depends on the strength of demand as the economy recovers.
Macklem also has his other eye on high household debt. Canadians are paying too much for homes as they expect further price increases. Today, the proportion of highly indebted borrowers is higher than during the real estate boom of 2017. To curb the over-indebtedness, it increases the eligible mortgage rate to the minimum 5.25% as of June 1. Further tightening could follow if inflation persists.
The tougher stress test aims to make marginal borrowing unprofitable, moderate excess demand and curb speculation.
Owners will be on the lookout for new For sale signs in their quarters. This would signal a peak in the market. Crowd thinking may be influencing homeowners to scramble and sell at historically high prices for great earnings.
Some of them would pay off their debts. Many would think about family needs and inheritance issues. It might appeal to seniors. They were in an empty nest when the children left and started their own families. Now, retirement considerations dominate. Often the greatest concern is deteriorating health, the death of a partner, or the risk of falling. Personal safety is a new priority.
Selling the family home would present several accommodation options. They can upgrade to a half-price condominium, or search for a rental apartment and invest the proceeds from the sale, or sign up to live independently in a growing retirement village with a waiting list.
After choosing housing, the next priority is to invest their new money wisely.
Many Canadian seniors rely on their basic income from pensions which on average represent only 70 percent of employment levels, and from the Canada Pension Plan and Old Age Security or Guaranteed Income Supplements. Some of them receive additional income from personal investments.
These investments could include individual securities or mutual funds and exchange traded funds sold by financial advisers to brokers, banks, insurers or financial planners. They are generally remunerated by commissions and fees. Their culture is known for the marketing of many financial products.
Alternatively, there are independent investment advisers. They manage their clients’ individual portfolios without bias. Their remuneration is a management fee based on the value of the investment. Their service is personalized, in a culture known by a fiduciary duty to put the interests of each client first.
When deciding which option is appropriate, it is useful to know some characteristics of an appropriate client-manager relationship:
The composition and balance of the portfolio are adjusted according to the client’s age and state of health. The manager calls to discuss a client’s portfolio, rather than posting a general commentary on the market. The portfolio is not too concentrated in stocks, as feared by the Ontario Securities Commission. The portfolio is sufficiently diversified to capture the increasing returns of income securities. The net performance and benchmarks of the portfolio are relevant to the client’s requirements.
Advisors do not own their clients. If they cannot meet the above criteria, their clients may look elsewhere for a qualified portfolio manager who will provide more personalized service.
Long experience in safely supporting their older clients through previous booms and recessions is a great place to start when evaluating a potential investment manager.