Lessons from Japan and why interest rates will remain low:
Japan shows us that an aging population plays a major role in reducing consumption and demand for credit. Canada and the US are a bit behind Japan in-terms of their old-age dependency ratios, (measures the number of elderly people as a share of those working age) but is starting to catch up with the aging of the baby-boomers. Europe has already started to see the affects with interest rates turning negative. As the population continues to age, we will see slower economic growth and low interest rates for many years to come. Immigration and investment in infrastructure and technology will help mitigate this issue, but the current trend of reversing globalization will not.
The last decade has seen exceptional returns, but as we enter a new investment landscape more ingenuity will be required to generate yield and manage the increased risk investors are being forced to take. Complimenting passive investment with more active strategies could be prudent in finding more yield. Going into the new decade make sure you know the risk you’re taking with your investments and understand return expectations. Morgan Stanley estimates that a traditional 60/40 stock to bond portfolio will return less than 4% a year over the next decade.
A more diversified Canadian market, growing oil glut and shift to alternative energy:
It’s no question the that the US has been the place to invest over the last decade and there will continue to be growth in the future. Over the last decade the TSX lagged the S&P 500, but it’s fortunes may start to change as our economy adapts to the modern world and the composition of the TSX becomes more diversified. Most notably, the resource sector which used to make up almost 50% of the composite now only makes up a quarter.
Concerns about global warming, along with improved technology continue to drive a shift to renewable energy. Global oil production has been growing and is expected to continue to grow, abated at a lower rate. OPEC members have agreed to modest short-term production cuts (1.3% below it’s level in November sites The Economist) but with recent geo-political uncertainty in the middle east there are no guarantees members will abide by agreements. The Economist notes that some members have regularly exceeded their allowed limits. Analysts at Morgan Stanley estimate that in 2020 1.8m additional barrels a day will be pumped in countries outside the OPEC alliance, including Brazil, Guyana and Norway.
Although we’ve seen a recent spike in oil prices, this will likely be short-lived considering the supply glut, technological advances and the burgeoning shift to alternate energy sources. BP, one of the largest multinational oil and gas companies in the world shared it’s expectations of oil’s share of future power generation (see image).
Do you have a stock compensation plan?
Employee Purchase Share Plans, Stock Option Plans, Employer Loans to Purchase Stock
Implementing a strategy to diversify investment and minimize tax will help secure your financial future. Volatility can be managed by having a sound strategy to re-invest a portion of proceeds in a diversified investment portfolio.
It’s great to have some exposure to the growth of the company, but it should be kept in mind that only a small fraction of all publicly traded stocks will generate long-term gain. Hendrik Bessembinder, a finance professor at the W. P. Carey School of Business at Arizona State University demonstrated in his research that only 4 percent of all publicly traded US stocks account for all of the net wealth earned by investors in the stock market since 1926.
Tax planning is crucial to minimize your tax bill. There are intricacies to how stock compensation plans are taxed. With a proper understanding of the rules around these plans a properly planned liquidation strategy can achieve tax deferral, as well as tax savings.
Travel – Avoid costly medical bills, make sure you and your family have adequate travel insurance before traveling abroad
The Ontario Health Insurance Provider (OHIP) has officially ended coverage for Ontarians traveling outside of Canada. If you are traveling outside of Canada be sure to buy insurance coverage if you are not covered through a work benefit program. Emergency medical expenses can be much higher in the US and overseas. Even if you are traveling out of province travel insurance should be considered as certain expenses are not covered by OHIP. Beware of credit card travel insurance as it is often not comprehensive and has exclusions that can limit coverage.
Brendan Greenwood is an Investment Advisor with Worldsource Securities focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionally incorporated individuals, business owners, tech professionals and retirees.
For other articles authored by Brendan Greenwood on issues impacting business owners and investors see https://www.greenwoodwealth.co/blog.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Neither Brendan Greenwood nor Worldsource Securities Inc or its affiliates provide tax, legal or accounting advice. This material is based on the perspectives and opinions of the writer only and does not necessarily reflect views of Worldsource Securities Inc. The opinions or analyses expressed herein are general, and do not take into account an individual’s or entity’s specific circumstances. Investors should always consult an appropriate professional regarding their particular circumstances before acting on any of the information here. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Investments are provided through Worldsource Securities Inc., sponsoring investment dealer and Member of the Canadian Investor Protection Fund and of the Investment Industry Regulatory Organization of Canada.