12 Jul

Interest rates have been kept low to stave off recession


Posted by: Nick Kaaki

  • 1 Jul 2011
  • The Gazette
  • JOHN ARCHER on investing

“Interest rates across the world were lowered even further to keep the economies afloat.”

For many, it is a mystery as to why interest rates are so low and what will possibly cause them to rise one day. This question has challenged investors for decades.

A country’s central bank generally sets interest rate policy.

In Canada, it is set by the Bank of Canada Governing Council which, at the present time, is chaired by governor Mark Carney, while in the U.S. it is set by the Federal Open Market Committee, which is chaired by Ben Bernanke.

The Bank of Canada’s role is to keep inflation within their desired range. One of their main tools for controlling inflation is to increase or decrease the cost of money into the economy through the lowering or raising of interest rates.

Since the early 1980s, the trend has been the lowering of interest rates to keep the economy from tipping into a recession.

Low rates in turn helped contribute to a so-called “housing bubble” in the U.S, which imploded into a full-blown global financial crisis in 2008.

To avert a complete meltdown of the entire financial system and to help minimize the impact of the resulting recession, interest rates throughout the world were lowered even further to keep the economies afloat.

Some may recall the interest rates of the early 1980s when an investment in a 10year Government of Canada bond would yield as much as 16 per cent.

However, what they fail to remember is that inflation (the Consumer Price Index, or CPI, which is a measure of the cost of a basket of typical consumer goods) was running near 12 per cent.

This meant that the real rate of return (the difference between the interest rate and the rate of inflation) produced a four-per-cent return.

Fast forward to early 2000 and the 10-year government bonds were at 6.6 per cent with CPI at 2.7 per cent (for a real return at 3.9 per cent) while currently these bonds yield 3.07 per cent and CPI is clicking in at 3.7 per cent creating a real rate of return of negative 0.63 per cent. And this is before you factor in taxes.

What happened to bring rates so low?

“With short-term rates now near zero, rates must rise as bond investors are no
longer being fairly compensated.”

According to Lorne Steinberg, portfolio manager of the Steinberg High Yield fund in Montreal, “central bankers in the early 1980s had let inflation get out of control. Inflation was running in the double digits and as a result the price of gold had also risen to $800 which was its all-time high at that time.

“By raising interest rates, a concerted effort was made to lower inflation and get it back under control.”

As inflation declined, central bankers were able to continue lowering interest rates, a trend that has lasted over 30 years as indicative of the falling 10-year bond yields over this period.

According to Steinberg “it is clear the 30-year “bull market” in bonds is coming to an end.

“With short-term rates now near zero, rates must rise,” he continues, “as bond investors are no longer being fairly compensated for the risk of inflation.”

A bull market in bonds means that interest rates are falling and that the corresponding market value of the longer maturity bond is rising.

As interest rates begin to rise, the market prices for these existing bonds will fall. However, higher bond yields translate into an opportunity for new investors with cash to invest as they will receive higher yields on their fixed income investments such as term deposits and annuities.

There are some signs of higher rates are creeping into the landscape when recently we saw the U.S. 10 year benchmark treasury bond yield jump 10 per cent from 2.94 per cent to 3.23 per cent.

This may be more indicative of overall market volatility than an actual trend higher. Yet some banks have already increased their five year mortgage rates.

This does not mean we will be heading back to the heady rates of the 1980s anytime soon. In fact, some economists’ outlook for the next 12 months is for a slight moderation in inflation from current levels back toward the two-per-cent range, and a rise in the 10-year bond rates to somewhere around four per cent.

This would bring real interest rates back into positive territory, at least before taxes. That alone would be a move in the right direction for many fixed income investors.

4 Jul

Investing on a Budget


Posted by: Nick Kaaki


Investing on a Budget

June 22, 2011

How to invest with just a little money is a common question for people investing on a small income or trying to balance investing vs paying down debt.  Just because you don’t have a lot of money doesn’t mean you can’t invest, however it does require you to be smarter in your investment strategy. So today I’m going to write about investing on a budget. There are five core concepts I’ll cover and if you follow them you should be able to invest on just about any budget.

Core Concept #1 – Emergency Fund
I’m not the first person to discuss this concept–it’s actually a part of the “debt snowball” idea created by Dave Ramsey. But it’s still a core value in being able to invest on a budget. Before you can invest, you need to have sufficient funds in savings (in case of an emergency) so that you won’t have to tap into your investments the first time your car breaks down or you need a new roof for your house. This is particularly important in terms of tax affecting your investments.

Core Concept #2 – Researching Investment Minimums
If you’re investing on a budget, you might want to go with one of the large no-load mutual fund companies such as Vanguard, T Rowe Price, or Fidelity. You’ll probably be upset to learn that most of these companies require a minimum investment of several thousand before you can even begin investing. Knowing this up front will help you make a decision as to when and where to invest. In the meantime, keep setting money aside in a a “pre-investment” account – you’ll get there sooner then you think. Something else to consider is that the required minimums are often lower if you’re opening a retirement account like an IRA.

There are also companies like ShareBuilder and Betterment that will let you invest just a small amount each month.  The two work a little differently, ShareBuilder charges a $4 fee for each investment you buy and Betterment charges 0.9% of your investment annually.  Here’s a ShareBuilder review and you can look for a Betterment review on this site later this month.

Core Concept #3 – Pay Yourself First
– If you don’t pay yourself first, you won’t pay yourself at all. Period. Again, this isn’t a concept I created (I’m not even sure who did), but it works. A good number is to try and set aside at least $50.00 each month for your investments. If you can’t afford that then you’ll have to do some digging to come up with the money.

Is your cable $50.00 per month? Maybe you could downgrade to save $20 a month and then you’re almost halfway to $50. When you’re on a budget you have to make trade-offs – you have to decide if you’re willing to make cuts to start an investment portfolio or retirement fund. It’s up to you to decide if investing is feasible or not – with some juggling, hopefully you’ll find that its possible. If not, the focus has to be on increasing your income (which of course is always easier said than done).

Core Concept #4 – Diversify
I’ve been over this concept before in prior posts on this site, but it’s just so important when you’re investing on a budget. When you’re investing on a budget, you likely won’t have the funds to survive one big investment mistake. You’re only chance to get the exposure you need, across a wide cross-section and variety of sectors and investments is to diversify.

As I mentioned ealier, I think the best way to accomplish this task is to invest in a low cost brokerage firm, my favorite is Vanguard.  When you only have a little to invest it’s even more important to keep your costs/expenses as low as possible. A diversified mutual fund with a brokerage house will help you achieve both these goals with little hassle.

Core Concept #5 – Get Started as Soon as Possible
Since you won’t have (at least for the foreseeable future) the ability to fully fund most of your investments, you’ll have to obtain your investment and savings value through time rather than volume. The sooner you invest, the sooner you can start the compounding interest that you will need to carry you through to achieve your individual investing goals.


These are, in my opinion, the five core principles of investing on a budget. After you have mastered these concepts, you should be able to start investing now or in the near future–even on a tight budget. I’ve found that there’s always a place I can cut money or a way to earn some extra cash. I understand too that some budgets have more flexibility than others.

As always, it’s important to meet with an appropriate expert prior to making any such important decisions. Best of luck as you embark on investing on a budget. With time, you may realize you don’t even miss the extra money you are investing rather than spending. That sacrifice now should pay dividends, both financially and in your life, for years to come.