Shooting for the moon might lead to a crash, says seasoned advisor

Senior financial planner warns against chasing high returns in private equity

Shooting for the moon might lead to a crash, says seasoned advisor
Rob McClelland, centre, and team

If you feel the Bank of Canada has gone too far and too fast in raising interest rates, you’re in good company. Rob McClelland, Senior Financial Advisor of the McClelland Financial Group at Assante Capital Management Ltd, expects at least one more rate hike before the year’s end, though much as he would with his clients, he advocates that the Bank of Canada take a much more deliberate approach.

Despite the economy looking somewhat robust, with a boost from new immigrants and inflation at lower levels than last year, there remains an ongoing chorus of economists predicting a recession to hit Canada before 2023 ends – albeit more gently than anticipated previously.

“I think the Government are still going to put another increase before the end of the year. They should have stopped two increases ago and let things simmer for six to eight months. It takes time for previously implemented hikes to show results. Inflation has already decreased since last year, let it settle for a bit.” McClelland said.

The rate hikes will continue to make it a tougher landing for Canadian households and especially those with mortgage increases on the horizon.

“From Jan. 1,, 2022, to today, the variable mortgage rate has gone from around 1.3 per cent to 6.4. If you've got a $500,000 mortgage, that's a $25,000 increase in payment: on a million-dollar mortgage, that's $50,000. It is a huge difference and, you’re going to hurt a lot of people by doing that,” McClelland warns.

Diving deeper into the financial advisor's own practice, McClelland favours proven moneymaking methods, in the face of potentially challenging circumstances in the form of significantly higher mortgage payments. McClelland warns and pushes against, for example, fashionable alternative investments.

“There's a big push today for alternative investments and I think it is a dangerous place to go. Especially when you get into private equity. It's illiquid. Alternative investments require a much longer period, and most investors need liquidity. Clients like the flexibility of a shorter time frame and I see a lot of dollars chasing too few private companies.

“Again, there's just not tremendous liquidity in that area. The big pension plans have already taken the cream of the crop because they have been doing it for 30-40 years.

“Other newer companies are coming in and they're picking up the ones that everyone rejected. Yes, it is a private company, but is it a viable private company? Who knows? I think it's a dangerous place to go.” 

He continues, “I believe in having complete liquidity and using the global marketplace that I can trust.
I started losing trust in private equity and I've done some personal private equity investments. It's not a case of whether you can get six or eight per cent. It's whether you make 75 per cent or lose all your money.”

After the low-interest and stimulus fuelled bull market it is tempting to chase high returns to protect client portfolios. This seasoned advisor admonishes against such inclinations.

Opinions expressed in this article are those of the author only and do not necessarily reflect those of Assante Capital Management Ltd. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.