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Slow down and look around…you can’t control the direction of the wind, but you can adjust the sails

Updated: Dec 5, 2022

Slow down and look around…you can’t control the direction of the wind, but you can adjust the sails

Brendan Greenwood, CFP, CIM, B.Comm | November 21, 2022

Looking around the world at real estate prices

Homeowners have felt a lot wealthier in recent years. Large gains have been the result of a growing population, constrained supply and ultra low interest rates. That environment paved the way for excessive borrowing and pushed the housing market to stratospheric heights. UBS, recently released a research report highlighting cities around the world that are currently in a housing bubble. Toronto topped the list, above cities like Hong Kong and San Francisco. The research looked at price growth relative to underlying rents and real incomes.

Cities with strong population growth may not see a major reversal in prices downwards, but will likely see stagnation in nominal price growth. This will likely mean low to negative real returns for potentially years until a new housing market equilibrium is established. The Toronto housing market no longer seems to be a good value proposition for those who previously took on second or third mortgages to invest in rental properties. It may take longer than people think for the market to find it’s balance again.

Is the Nasdaq really on sale?

The Nasdaq has fallen 30% from it’s highs and is now trading close to its 2019 valuations. Some might consider this a bargain, but the value of technology companies tends to be influenced by future cash flow projections. When interest rates rise, the present value of future cash flows fall.

Today’s rising interest rates are a major factor contributing to the fall in value of most publicly listed companies and especially high growth technology stocks listed on the Nasdaq (down over 30%). The US treasury rate (risk-free rate) today is more than double the rate in 2019.

Interest rates will likely continue to rise and stay higher than expected for longer than expected until inflation drops to a level central banks are comfortable with. It will take time for the effects of higher interest rates to reduce businesses investment and consumers spending. With technology companies tending to be more leveraged than other businesses they will likely continue to fall in value as interest rates rise and the economy slows.

Tread carefully and consider adding value companies with established cash-flow to your portfolio that have done well in past inflationary environments. Quality companies with growing cashflow will prove the most resilient in weathering a looming recession.

Bonds will have their time in the sun

You may hold a balanced fund that’s fallen in value more than expected. This is because both bonds and stocks fell in value in response to the rise in interest rates from a very low level.

Be patient, investment grade bonds are now providing a much higher yield with capital gains potential when interest rates fall. When central banks start to lower interest rates, bonds will rise in value. It wouldn’t be unreasonable for bonds to return 6 to 7% annually for investors in the years to come making bonds once again an attractive portfolio diversifier and growth opportunity.

Protecting your family

Most people don’t want to think about what happens when they’re gone. A small amount of planning can make a big difference for your children or a cause you care about. On the second death, your estate may have a much bigger tax bill than you realize and take much longer to settle than expected.

Even the simplest family’s estates can take 2 to 3 years to settle. Without proper planning your children will be left to pay unplanned bills without being able access proceeds from the estate. No one knows exactly what the world will look like in the future; how easy it will be to sell assets and what value you will get.

Permanent insurance can be a very effective tax efficient strategy to introduce more certainty and prevent the erosion of wealth transferred to your children and causes you care most about. None of us like to think about our mortality, but a little planning can go a long way.

Brendan Greenwood is an Investment Advisor and Financial Planner with Worldsource Securities Inc. focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, incorporated individuals, business owners, retirees and their families.

For other articles written by Brendan Greenwood focused on smart wealth planning for individual investors and business owners visit his Blog | GreenwoodWealth

Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed income securities. Diversification may not protect against market risk and loss of principal may result. Commissions, trailing commissions, management fees and expenses all may be associated with investing in exchange-traded funds (ETFs). Please read the relevant prospectus before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

This material has been prepared for informational purposes only and should not be considered personal investment advice or solicitation to buy or sell any securities. As well, it is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It may include information concerning financial markets as at particular point in time and is subject to change without notice. Every effort has been made to compile it from reliable sources, however, no warranty can be made as to its accuracy or completeness. Investors should seek appropriate professional advice before acting on any of the information here. The views expressed here are those of the authors and writers only and not necessarily those of Worldsource Securities Inc., its employees or affiliates. There may also be projections or other "forward-looking statements." There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Before acting on any of the information provided, please contact your advisor for individual financial advice based on your personal circumstances. Worldsource Securities Inc., is the sponsoring investment dealer and the member of Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. Insurance strategies and solutions are provided by Brendan Greenwood as part of comprehensive financial planning through Pelorus Transition Planning.

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