Inflation and Your Investments

Author: Vince Olfert, MBA, CIM, CFP® – Certified Financial Planner®

High Inflation – Bad for Investing?

We all know inflation leaves less money in our pockets. The cost of food has gone up 3-5% in 2021¹, which has hit some harder than others depending on what they frequently purchase; shelter, fuel – it all adds up to higher costs and less disposable income.

If inflation has a negative impact on us, why do governments target an inflation rate of 2% in North America?² They have found that 2% is the optimal level of inflation which provides economic stability. The reverse of inflation is deflation demonstrated in a shrinking economy where wages and costs are going down. Ideally, for the government, we would have some inflation…but not too much.

Recently, the news has talked about how inflation is too high (estimated 2021 – 3.15%). When inflation is too high, governments often increase interest rates to bring inflation under control. If inflation is not brought under control, there are potential negative effects on various investments options.

Affects of increasing inflation on investments:

Bonds – An increase in interest rates results in lower prices for bonds. Money Managers prefer to buy new bond issues with higher interest rates so current bond holders will need to lower their sale price to get investors interested in buying their lower interest bond.
Stocks – Inflation affects stocks in several ways:
- First, if a company has high debt, their cost of borrowing will go up leading to lower profits and lower share prices.
- Second, if new increased bond rates start to compete for stock returns, investors may sell their stocks and move to bonds
- Third, if governments are trying to cool the economy by increasing interest rates, companies will not be growing their revenues as quickly and investors may move their money to other safer options.
Real estate – The affect of inflation on real estate can be like stocks but the impact may not be as noticeable because of the potential challenge in selling real estate in a tight market.
- First, in high inflation environment rents go up, which can be good unless your property is in an area with rent controls.
- Second, real estate prices will tend to go up over time with inflation. There can be a downward price pressure if mortgage rates go up too quickly and people don’t qualify for the same value of home due to a decreased principal capacity.
- If interest rates jump significantly and you have a large mortgage, when you need to renew your mortgage the increase in your payments can have a significant impact on what is left of your income for other things.

This article is a simplistic discussion of the effects of inflation on investments. There are many other variables that must be taken into consideration such as:

Supply and Demand: If a company sells a product that has limited supply, prices can go up at a rate faster than inflation. This can increase a company’s profitability, which usually results in higher share prices.
A company’s ability to thrive in a high interest rate environment: If they have low debt levels and a product that they can raise prices equal to or faster than inflation, then company profits will increase, which also can result in higher share prices.
Government intervention: Printing money, increase/lower taxes, raise/lower interest rates, increase/decrease capital expenditures, etc. All these things can have an impact on investment performance.

An economy with increasing inflation produces changes in investment strategies for bonds, stocks, real estate, and the bottom line for daily living. At Connect Wealth, we are here to provide sound financial advice to clients to help navigate this challenging environment.

References:

¹Canada’s Food Price Report 2021

²Why does the Federal Reserve aim for inflation of 2% over the longer run?

Connect Wealth is an independent financial planning firm that offers holistic advice to clients based on their current goals and future aspirations. We use well-established workflows and cutting edge technology to maximize planning efficiencies while simplifying the process for clients. Learn how you can maximize your financial opportunities at www.connectwealth.ca

Saving For Retirement

What Are Your Options?
What is the best investment plan to use to save for retirement? It used to be fairly simple; the answer was maximizing your RRSP. Do you know what is the best strategy for your situation? Do you know what your options are?

Here is a basic overview:
1. Save – The first rule of thumb to be concerned about is that you are saving money for your future. Too many Canadians are spending all of what they earn and not putting away any money for their future. A good place to start is to aim at putting away 10% of what you make.

2. Tax Efficient – Ever since the launch of the TFSA, there has been a debate by financial professionals over which investment plan is more tax efficient to use, the RRSP or TFSA? My opinion is that it depends on your situation both now and in the future and should be looked at on a case-by-case basis to see what fits best. I would be cautious if a financial advisor is always only promoting one plan type over the other, both have their benefits. (For more info on TFSAs, see my article from Sept 2013 – http://jaybrecknell.ca/demystifying-tfsa/)

3. Business Owner – If you are a business owner the question can get even more complex as you have more options. Should you use your RRSP, TFSA or instead save your retirement funds in a holding company? Since corporate tax rates are at an all time low in Canada more business owners are saving corporately versus in a RRSP or TFSA. There can be many benefits to saving corporately as it can provide flexibility to the business owner. As this can be complex it needs to be put together by a professional that understands your corporate structure and the tax and legal rules that are involved.

As with any financial strategy we would recommend ensuring that you have your personal situation reviewed by a professional to make sure that is done in the best way possible. If you have any questions or would like your plan reviewed feel free to contact us.

Questions?

December 1, 2014/by Vince Olfert

Business Planning

Business Owners Fail To Plan

Prepare Your Business For Sale
Only 9% of business owners have a documented transition plan in place and yet 70% of small business owners plan to transition in the next 10 years*! As a financial planner I continue to meet business owners who are planning to sell or transition their company but they do not have a plan. Typically they are either unsure of the process, so they procrastinate or the business is their baby and they do not want to let it go. It is understandable that a major decision like this is hard to make, especially without someone to assist you.

When a business owner is considering selling here are some things to consider:

1. Don’t Leave the Party Last – You see this with professional athletes when they face the question of when to retire? In my opinion you are either growing your business or it is shrinking it, there is no standing still. A lot of business owners later in their career can get into maintenance mode, which usually means the business is starting to decrease in revenues. At first the revenues may hold but after a couple of years you typically see them start to decline. If you want to maximize your selling price and be attractive to potential buyers be careful to wait too long.

2. It Takes Time – Selling a business can take you longer than you think. You need to find the right candidate to take over your business. You are looking for an individual that is an entrepreneur; remember there are more employees in the world than business owners. Also, in most transitions the current owner is asked to stay with the company to assist with the passing of the reigns. You should plan for 1-2 years to sell. This means you should be creating a plan 5-7 years prior to your planned exit.

3. Change – Every industry is faced with changes due to technology, regulatory, competition, etc. If you owned a video or record store in the 80 or 90’s, when was the best time to get out? What if the technology that Google is working on to make it so that cars drive themselves eliminate car accidents in the future. Could that affect you if you own an auto body business? What changes face your business?

4. Financials – Often times the financial statements for a business are ignored until it is too late. Yet they will play a very important role in the sale of the business. You want to make sure that your financials present the best view of your company so that a potential buyer is enticed to make an offer.

There are many things to consider when selling a business. The first is to get a professional that can assist you with putting a plan together to ensure that you maximize the value, save tax, and control when and how you sell your business. As with any financial strategy we would recommend ensuring that you have your personal situation reviewed by a professional to make sure that is done in the best way possible. If you have any questions or would like your plan reviewed feel free to contact us.

Questions?

*Source – http://www.advocis.ca/Update2014/index.html

December 1, 2014/by Vince Olfert

Insurance, Personal Planning

Protecting Your Biggest Asset

The Most Overlooked Risk
What is your biggest asset? Most people might answer your house, boat, car, or investments. When in fact it is your income and your ability to earn a living.

When I review a person’s financial situation, one of the most common areas that is overlooked is to protect their ability to earn a living. Disability insurance is a critical part of a person’s risk management plan. When you think about all of the things that people have insurance for, cars, houses, electronics, death, etc. Unfortunately if you do not have an income all of these other areas fall apart.

When it comes to managing risk, a financial planner looks at two main factors:
1. Risk – what is the chance of this happening?
2. Impact – If it does happen, what is the potential damage?

As an example, the risk of a house fire is low but the damage it can cause financially is extreme. Hence why people buy home insurance.

The Risk Is High:
Did you know that 1 in 3 people, on average, will be disabled for 90 days or more at least once before they reach age 65?*

The Impact Can Be Severe:
How long could you survive for without your income? Most families could last maybe 4 to 6 months before they would have to start selling other assets such as investments or their home. How would you survive till age 65 and then into retirement?

The main way to manage this risk is to have long term disability insurance to protect yourself in case of an illness or injury.

Possible Options:
1. Canada Pension Plan – This will only pay for the most severe disabilities and the amount is small.
2. Worker Compensation – This only covers you if it is a work related injury.
3. Group Plan – This is how most Canadians are covered. IMPORTANT! You should have your coverage reviewed to make sure you are properly protected.
4. Individual Plan – You can purchase this through the major insurance carriers.

Key Facts:
• If you are an executive or earn over $80,000 per year and you have group coverage you should have it reviewed, as you may not be fully protected.
• If you have group coverage your plan definition typically will change after 2 years of being disabled. This can allow the insurance company to decline your coverage if your disability is not severe enough. This is done to keep your rates lower for your group plan. You can get individual insurance to protect against this.
• The definition of a disability policy is critical.
• Most disability insurance is designed to cover you till age 65; some may have only a 5-year benefit period.

Questions?

*Source – “A guide to disability insurance”. Canadian Life & Health Insurance Association

December 1, 2014/by Vince Olfert

Inflation and Your Investments

Author: Vince Olfert, MBA, CIM, CFP® – Certified Financial Planner®

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