December 18th, 2012


Title: Things to consider when doing year-end financial planning

Subtitle:  Most Canadian asset classes performed poorly this year.


While yearend is traditionally associated with resolutions and parties, investing professional use the time to cast a quick eye over the economic and market landscape to see what they might do different in the future.


However far too few households are that disciplined and methodical. Many simply ignore the old expression “If you fail to plan, you plan to fail.” Instead they just run by the seats of their pants, paying their bills as they go along and investing their money in whatever vehicle screams loudest.


In this article we highlight a totally arbitrary series of factors and data-points that Canadians who do annual financial planning and portfolio management ought to consider when moving forward.


Housing: biggest asset

For most Canadians their house is their biggest financial asset. However last month, prices fell in value, a rare occurrence here. According to the Canadian Real Estate Association, the average price of homes sold in November via its multiple listing service shrank by 0.8 percent compared to the same month last year to $356,687. Worse, a slew of experts are predicting that prices could fall further. That said, home prices have almost doubled in the past ten years, far outperforming other major asset classes. The question homeowners and prospective homebuyers will need to ask themselves is whether that outperformance will continue.


Jobs: earning power

While residential real estate is most Canadians’ largest tangible asset, their earning power is their largest intangible asset. Right now the employment market looks good. According to the Statistics Canada Labour Force Survery, an impressive 59,300 jobs were created in November. That comes on top of the 1,800 new positions created in October, and the 34,000 and 52,000 created in August and September. It all adds up to a much faster pace of job creation than the number of people entering the workforce. As a result, Canada’s unemployment rate is now down to an eminently respectable 7.2 percent.


Stocks, bonds

Many Canadians put money in equities and fixed income investments, often through their RRSPs. However neither category shined too brightly during 2012. As of this writing (mid-December 2012), the S&P/TSX has risen by just over 5 percent so far their year, including dividends. Although that’s not great, after taxes are paid, it at least beat inflation. That is however not the case with bonds, with ten-year Canadian treasuries yielding less than 2.0 percent.


Pension funds

Defined benefit pension plans are increasingly becoming a thing of the past for everyone but government employees, and private sector workers, who do not compete with foreign workers. That said, according to a variety of experts, notably Bill Gross, an asset manager at Pimco, pension fund returns will leave a lot to be desired during the coming years. That’s important, because low stock and bond yields force companies and beneficiaries put more money into pension funds to ensure they do not go bankrupt.


However CEOs have little incentive to make sure that happens. That’s because the less money a company puts into its pension plan, the bigger its profits and the CEO’s bonus is. Many pensioners at companies ranging from Air Canada to GM found this out the hard way after they became insolvent, and pensioners were forced to take a bath. If you have a pension plan, you may want to spend some time talking to your pension committee rep during coming months, to make sure that everything is in order.


Household debt…

By now you have probably heard that Canadian household debt levels have risen higher than those in the United States just before it entered the 2007-2008 financial crisis and ensuing recession. However as Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities points out, during the third quarter things got even tighter. “For every dollar in disposable income, Canadians held $1.65 in (mortgage and non-mortgage debt,” said Lavoie. “Many believe that the high value of household assets (which increased by 1 percent during the quarter) provides a source for comfort. However if we learnt one thing during the crisis, it is that asset values can disappear quickly, however debt remains.”




The above list of things to consider when doing year-end financial planning is far from conclusive. A variety of other factors some into play ranging from economic projections, to how old you are, to how many people there are in your family and that needs they have.


Nor are there any clear solutions to be found in the above list. For example while paying down debts may seem like an obvious move for many, during much of the past decade, borrowing to buy the biggest house you can has often paid off. 


Taking a step back, the one thing that you can invest in, that will not fall in value is yourself. So for those that can, taking extra courses, developing a skill, or getting healthier, to avoid future medical costs, or a job loss, is probably the best investment you can make.


If you do that, unlike investments in all the other categories, there is no market in the world that can take your gains away from you.






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