Commentary - Hans H. Mathisen
The safe investing dilemma - LifeLetter for July discusses the options available to investers who want to invest "safely" in today's chaotic world.
LIFE LETTER MATURE - July's entry looks at investing in the real estate market outside of Canada. Its up to you to know the consequences and possible pitfalls. August's LLM asks the question, "should you prepare your own will?".
The safe investing dilemma
John was concerned because his 82-year old mother, Betty, was having trouble generating sufficient income to cover her cost of living with interest rates at rock bottom levels. Along with many other investors globally who have poured some $4 Trillion dollars into government bonds since the 2008 Credit Crises, she wanted to feel safe and have her money guaranteed. But the price of safety in a low interest rate world is higher than you may realize.
For example, at time of writing, the best five-year GIC rate among major banks is about 2.2%. The after-tax return is between 1.1% - 1.8%. But include inflation and the net return is likely negative, resulting in a loss of purchasing power.
Legendary investor Warren Buffet recently observed that many fixed income investors missed the party over the past nine months as Wall Street rocketed to all-time highs. “It is brutal. I don’t know what I would do if I were in that position,” Mr. Buffett said at Berkshire Hathaway’s recent annual meeting. “I feel sorry for people that have clung to fixed-dollar investments.”
The real dilemma for Betty and other savers, is do they focus on the short term risks or the long term risks? And which is worse - watching your balances bounce around in other investments such as equities, or the guaranteed risk of going broke slowly over time as purchasing power erodes?
Purchasing power loss is one of those things in life that is hardly noticeable on a day to day basis. Space For example, when John was in his teens, Betty used to send him to the bakery for bread with a dollar and he'd come home with six loaves. Today, he can't even buy two loaves for five bucks.
Another reality today is that the average couple, both aged 65, will be retired for some 30 years due to today’s increasing longevity. This is almost as long as the number of years they spent working and building their nest eggs.
Preserving purchasing power is vitally important to avoid running out of money during one’s retirement years.
There are ways of investing, such as equities that can maintain and possibly increase your purchasing power over time both for retirees and for younger people still building their savings. For the first time since the 1950’s, dividend returns on TSX equities are higher than the interest earned from 10-Year Government Bonds. This is true for some 58% of Canadian equities.
We can throw many statistics at you to show how other forms of investing decrease in risk over time. But the reality is it is difficult if not impossible to convince you of this when emotions always beat out logic and facts.
The real question is: are you more afraid of the short term ups and downs or going broke slowly over time? Other options are available to investors who want to invest “safely” in today’s chaotic world.
Invest for inflation – because it’s the right thing to do.
Call Hans Mathisen today at (306)242-7042.
Copyright © 2013 Life Letter. All rights reserved
Why should we insure our kids?
The purpose of any insurance is to offset possible future financial losses. We can learn from the following examples:
Tom and Sara had three children, two boys and a girl. One of their sons died at the age of five. Nobody wants to imagine a child dying, but unfortunately it sometimes happens. They had to borrow money to pay for the funeral and other last expenses that arose. Now, whenever they make a loan payment, they are reminded of their loss.
Sara took some time off work to deal with her grief and to help their other two children adjust. This further strained their finances and threatened their relationship.
Grace and Kevin have two daughters and their youngest developed juvenile onset diabetes when she was 11. Fast forward twelve years and she is about to get married. It is virtually impossible for her to get affordable life insurance today, yet she and her new husband have certain obligations they would like to cover, like a mortgage and car loans.
Ted and Lynda are excited about their son's upcoming trip to the Middle East, but they are also concerned. Their son has skydiving as a hobby and with an extended stay overseas, he is unable to get life insurance. He also runs the risk of contracting a serious illness in the areas he will be visiting.
Sam and Debbie have two young children. Their son was struck by cancer and needed extensive treatment treatment. As Debbie earned the higher income, Sam stayed home to help their son battle his disease.
They also needed to pay a caregiver to look after their daughter while Sam took their son for treatments and doctors' appointments. This added further strain to their already fragile financial situation.
Life insurance can generally be purchased on a child's life anytime after 14 days of age. A permanent type policy usually has level premiums for the child's life and they may qualify for a non-smoker premium reduction at age 18. Some plans are designed so that premiums last only for a set number of years and coverage will remain in force for the child's life.
Additional benefits can be added to a child's life insurance policy. A guaranteed purchase rider allows the child to purchase additional insurance, regardless of their health, occupation or hobbies, at certain ages or on certain events, like marriage or birth of a child. A rider can be added to cover the premiums if the owner of the policy becomes disabled or dies.
Some parents and grandparents use the build up of cash values in a permanent policy as a way to accumulate and transfer wealth to a child or grandchild. Current tax laws allow this on a tax preferred basis.
A critical illness insurance policy for a child can provide the funds needed to cover the additional costs that arise if a child gets seriously sick.
Insure the kids – because it’s the right thing to do.
Call Hans Mathisen today at (306)242-7042.
Copyright © 2012 Life Letter. All rights reserved
Mutual confidence is the power that binds together all harmonious human relationships.