This newsletter was emailed to clients 2March2020
In this update;
- NEW CONTACT INFORMATION!
- CORONA VIRUS AND THE BERNIE DIVIDEND - A WORD OF CAUTION FOR INVESTORS
- MORTGAGE MARKET, AND LAST MINUTE RRSP CONTRIBUTIONS
CONTACT INFORMATION UPDATE!
My recent move to teach business at the College of New Caledonia in Prince George, BC this year, has me wondering, " why do I have five phone numbers! "
Consequently, I have decided to combine them all into one - 250-884-5125
Please update your records, I hope this will not cause any inconvenience.
CORONA VIRUS and THE “DEMOCRATIC DIVIDEND" - A WORD OF CAUTION FOR INVESTORS
As I am sure you are aware the world has been beset by the COVID-19 virus (AKA Corona Virus). The virus is rapidly spreading from its origin in Wuhan, China all over the world. Fortunately, the virus has proven to be less deadly than some pandemics. But it is still deadly-enough to cause wide-spread quarantines and shut downs of schools, businesses, international travel and trade at an astonishing pace. Hopefully, a cure will be discovered soon.
In the meantime however, there will be extensive economic consequences from the virus infections, and the rush to quarantine it, coming down the pipe. I believe the reduction in production and trade from China alone will have major downstream effects on sales, employment, profits, and asset prices in Canada and the world. Now there are a number of factors emerging which suggest the impact will be much more global. Factors like the:
Spread of the virus to over 60 countries within weeks of its discovery
Contagion to individuals with no connection to people coming from infected areas
Sluggish response by the US government to commit funds and resources toward a cure.
Lack of available testing kits in developed countries, much less in the developing world, suggests the levels of infection are already much higher than reported.
Recent discovery that some virus patients are contagious - even after they have been cured!
It's this last announcement from just two days ago, that I believe led the World Health Organization to raise the likelihood of a major global pandemic to “High”. All of this, the virus and the response to the virus is on track to affect families, economies, and employment security much sooner and much longer than we imagine. I believe the economic consequences have not even begun to be felt. That's the first point.
" The Bernie Dividend ”
On the morning after Donald Trump upset Hillary Clinton in the 2016 US Presidential election, all the investment analysts went back to their desks and dutifully adjusted their corporate earnings projections. They plugged in expectations of significantly reduced regulations and tax rates. This combination that extended the stock market boom has been called the “Trump Dividend”. The trickle down economic benefits of these tax cuts is a matter for debate, but the stock market expansion has certainly been shadowed and fueled by the mushrooming US budget deficit.
Because of this, and other factors, I believe that even if Trump is re-elected, the "Trump Dividend" has largely been spent, and the economy will be weaker in the next four years while it rationalizes.
On the other hand, there is a good chance the Democratic party will do well in the fall elections. I personally believe universal healthcare, free public college, and environmental protection are good long-term investments for the US and the economy, but you can be sure those same investment analysts will also be punching in projections of higher taxes and higher regulation if and when the Democrats rise in the polls. So, no matter who gets elected, stock market valuations are poised to lose steam.
What to Do Now
In response to the spectre of a global pandemic and US political tides, and also because stock prices are still pretty high, I believe there is a lot more risk to the downside than there is potential for significant growth from here.
Given the above, I am recommending existing investments shift to a more “defensive” asset allocation strategy. For example, going from 65/35 stocks / bonds, it might be wise to go 35/65 or 30/70 for while. I have the alternative investments in mind and the forms ready. If and when the market falls significantly, it will be a tougher decision to make because you want to be buying, not selling, when stocks are down. That's why I believe a balanced approach is still appealing, albeit a conservative one, for the time being.
Sorry to present you with such an ominous forecast en masse, but the situation is changing really fast and I think we should use this relative calm to trim the sails, make some changes, until we see what comes next.
Let's talk about what you can do individually to strengthen your investments and / or financial position via mortgage financing if that makes sense.
MORTGAGE MARKET, AND LAST MINUTE RRSP CONTRIBUTIONS
One silver lining of an economic slow-down is potentially reduced interest rates. Right now the best 5 year fixed mortgage rates range from 2.69% to 3.09% depending on whether you are doing a purchase or a refinance. Good variable rates are prime-1.05% (2.9%) to Prime-.6% (3.35%) for a purchase or refinance respectively. If the economy slows down, the variable rate may be the better choice over the next 5 years but there's no guarantee and fixed or variable, rates are low at the moment.
The government has also indexed the mortgage qualifying rate to 2% above the average available fixed rates. At current mortgage rate levels, this will likely increase buying power by about $ 10,000 to $ 20,000 depending on the size of the mortgage. This change comes into effect April 6, 2020.
Another thing to note, the tight mortgage regulations we have endured these past 12 years is that the government will be able to stimulate the economy by relaxing the mortgage rules when the next recession hits. This is what's known in economics as "keeping some powder dry". :)
Last Minute for RRSPs is Monday - That's Today!
IF YOU WANT TO MAKE A LAST MINUTE RRSP CONTRIBUTION, MARCH 2ND, MONDAY, IS THE DEADLINE! CALL ME WITH YOUR BANKING INFO AND WE CAN MAKE YOUR CONTRIBUTION ON THE SPOT!
Please update your address book with my contact info below and feel free to call, text, or email with any questions you may have about the right financial moves to make right now. I look forward to speaking with you very soon.
If you earn more than $46,000 per year, every dollar you contribute to an RRSP will increase your tax refund, or reduce your tax bill, by 28-55%. Here are three non-mutually exclusive strategies for taking full advantage of your RRSP.
1. Jump Start With an RRSP Loan
Unless you have been saving 18% of your earned income every year through RRSPs and Pensions, chances are you have accumulated a large block of available RRSP contribution room. At current rates, a $200 per month payment will pay off an $18,000 RRSP Loan over a 10 year period. With a few assumptions, this will generate an immediate tax refund of $6,000, plus, your RRSP investment will have grown to $32,000 by the end of the 10 year period, assuming a 6% average rate of return.
You can find your unused RRSP contribution room on your most recent Canada Revenue Agency Notice of Assessment. You can apply your deduction all in one year or divide it up over succeeding years, but it is best to use it before your highest taxable income years are behind you.
2. Pre-Authorized Savings Plan
If you employ one of the new account tracking apps, like www.mint.com, you might be shocked at how easy it is to find money to put into your RRSP every month. Once people implement a savings plan they usually find it easier to handle the reduced spending power than expected. Investing monthly, also known as "dollar cost averaging", is thought to be a good way to invest through times of uncertainty, which are always around the corner.
3. The RRSP Gross-up Strategy - Maximize Your Contribution Each Year
Set your monthly payments as high as you sustainably can. Then employ an RRSP loan calculated to match the amount of your expected refund each year. Under this plan, for example, you could set up monthly contributions of $500 x12 = $6000 and then get a Loan for $3,000 before the RRSP deadline and even defer payments for up to 120 days. Your total contribution for the year would be $9,000. The roughly 30% or $3,000 tax refund would be used to pay out the balance of the loan.
Some General Merits of RRSP Investing
The deadline for contributions deductible from 2017 income is March 1, 2018
Please reply to this email or call me to book a time to discuss your options.
The Greater Victoria, BC residential real estate market remained strong last month, and favors sellers still. Some of the upward pressure may be caused by a rush of home buyers wanting to beat the B20 tightening mortgage rules coming into effect in January 2018. It will be easier to qualify for a purchase or a refinance if you get an approved mortgage prior to that.
Either way, I expect the rate of price appreciation to slow as average home prices exceed the CMHC purchase insurance limit of $1,000,000 and also because local incomes may have reached the limit of what they support mortgage-wise - especially under the new qualification guidelines.
Welcome to The RIGDEN FINANCIAL blog. For our first post here is an essay on linked in, on the nature of wealth. Please enjoy this!