The Bank of Canada announced today the overnight rate will remain at one percent. The policy will continue to challenge advisors struggling to maintain client retirement plans.
The decision to maintain rates is not a surprise. The Canadian dollar has fallen more than any other currency over the last year suggesting a pick-up in exports was in the offing. But the most recent trade stats show exports unexpectedly dropped last month. And while inflation has moved up sooner than anticipated, the increase was a result of higher energy prices, not a pick-up in general economic activity. Considering global economic growth was lower than expected in the first quarter it is no wonder the central bank decided to maintain interest rates at their historically low levels.
But while the central bank continues to work to maintain overall economic stability, advisors working to fund the retirement of clients will continue to be challenged. The return on bonds will continue to be low. Generating yield from a conservative bonbd portfolio continues to be a challenge. “Where do you go? This is the question we’re all asking,” said Dylan Brown, principal of Brown & Associates Financial Services in Windsor Ontario. “Do we put our money under the mattress?”
Contacted last week Brown explained how low rates are making it tough for conservative clients to generate returns on their capital. The answer for him has been to add some equity into a portfolio as a way of reducing the risks in a low interest rate environment. "GIC Rates barely keeping up with inflation. A little equity that’s the only way,” says Brown. “To reduce risk an investor has to put some equity back into the portfolio.”
The idea that an all-bond portfolio might be more risky than a portfolio with a balanced fund may sound counter-intuitive. But these are the unique challenges of this odd, ultra-low rate environment.
“The yields just aren’t there,” says Brown. He wonders what will happen when rates do begin to rise in another year or so. “Will we see a liquidity crisis as many get out of bonds?” The challenges facing advisors are greater than ever. What are you doing to manage this low-rate environment?