Written by Darren Buma, CPA, CA on Jul. 19, 2013
According to the Association of Federated Press (AFP), a blue moon is a rare phenomenon.
Technically, it means there is a second full moon appearing in a single month. More rare still is a blue moon on New Year’s Eve which happens about every twenty years.
Why in a financial quarterly newsletter are we writing about rare astronomical occurrences? Well, as you may have guessed, it sets the scene for what we want to share with you in this report.
Usually when stock prices go down, bond prices go up. When bonds go down it’s usually because investors are shifting into cheap stocks, causing stock prices to go up. Hence, a portfolio of both asset classes tends to smooth out the ups and downs, giving investors a more comfortable ride.
Further adding to the shock absorption of volatility that can come from owning stocks are the other two asset classes found in your portfolios, namely cash and alternatives such as gold.
What is very interesting about the last month though, is a “Blue Moon on New Year’s Eve” has occurred in the financial markets. Restated, a rare occasion that happens so infrequently its last occurrence is a distant, faded memory. However, in June the Federal Reserve (FED) chairman said they would look to stop Quantitative Easing (QE – the stimulus of injecting money into the financial system) because the economy, employment and housing were doing well. Normally this positive sign would cause stocks to rally. Not this time.
Instead of stocks rallying, they dropped sharply. Why? Well, as some pundits have put it, it’s like the “punch bowl” has been taken away, or will be. In other words, the free booze, QE (money printing), that has supported the economy, jobs, real estate and company profits will be taken away. Thus the fear is things will take a turn downwards which is why stocks recently fell by about 7% on the TSX over a span of just over 30 days.
Interestingly, in addition to the FED taking away the QE (money) they said they may raise interest rates if required. This little piece of news had a double negative effect. First, if rates rise, mortgages, car loans, credit card and corporate borrowing costs all go up, thus negatively impacting spending, the economy and corporate profits. This comment caused stocks to decline further.
More important though, was the impact of potentially higher interest rates on the price of bonds. As always happens when interest rates rise, or are expected to rise, the value or price of a bond will drop just as we’ve seen this past month. In fact, all interest rate sensitive investments like REIT’s and Preferred Shares dropped in value. As such, just when bonds are needed to act as a protection against stocks dropping, they too have declined. Think of an unexpected giant pot hole that pops the tire and bends the rim.
As we limp into the repair shop, we find out our system shock absorbers like gold in the alternatives basket of the portfolio, also broke down from the impact of the FED’s announcement. Today’s thinking is if the endless printing of money is going to stop, then we don’t need gold as a protection against paper devaluation.
Short term versus long term. While it’s surprising and even upsetting to see three of the four baskets (stocks, bonds, alternatives vs. cash) in one’s portfolio go down temporarily, it’s important to remember not to let our emotions cause more damage by “changing” things abruptly. Stocks go up and down, we all know that. Usually over time they are higher than what we paid which is how we make capital gains part of our returns.
In the interim, dividends being paid help add to the returns and allow us to be patient. Bonds on occasion do decline in value as they have this past month. It’s important to remember this likely will not occur very often. Likewise, the alternative asset class typically rebounds over time. If anything, today’s prices in all three categories warrant serious consideration for investing more money or repositioning cash into the bargains available.
Time: the healer of all wounds. As we know from past experience, time has a way of curing today’s ailments. Even on a short term view, if one looks at their April statement they’ll see what was arguably an artificial valuation, a high point if you will (meaning stocks had run up hard and fast for six months straight). When compared with a June statement one cannot help but think “I’m down $X .” Yet, if emotion is removed and last November or last June’s prices are used, one most assuredly would see the different valuation points in time and say “I’m up”. Controlling our perspective is the first step to controlling our emotions, which makes for better investment decisions.
The point is to be logical and objective so as to make rational, not emotional decisions.
Darren Buma, CPA, CA
Darren completed is Bachelor of Commerce from the University of Alberta followed by his Chartered Accountant designation while working for one of the big-four firms in Edmonton.
Soon after receiving his accounting designation, Darren left public practice for nine years of experience in industry, holding various senior financial positions in both the high tech and real estate development sectors. In 2004 Darren returned to public practice and joined KWB.
With an aptitude for coaching entrepreneurs, Darren is passionate about delivering KWB’s ONSight Advisory services, helping his clients dramatically improve their businesses, and their personal wealth and happiness.
Internally, Darren focuses on innovation and technology solutions to help drive KWB forward.
Darren is blessed with a wonderful wife of over 25 years and together they are raising two sons who are currently both taking commerce at university. To keep the household busier, the family spends time chasing after their spunky Havanese-Poodle dog.
Darren is a big believer in giving back to the community. With a passion for the benefits of team sports for kids, Darren has coached minor hockey for over 13 years and is President of his local minor hockey association. Also wanting to give back to his profession, Darren is a member of the CPA Alberta Disciplinary Tribunal Roster, and is the past Chair of the Edmonton Chapter of Financial Executives International.
Outside of the office, Darren likes to play a few rounds of golf, spend time out at the lake, and lap his sports car around the local race track.
Darren's Contact Information
Other Posts by Darren
Economic Update on U.S Interest Rates
Are you interested in what is happening with interest rates in the U.S.? Here is a quick and easy to understand summary.
Disaster Recovery 101
Terrible devastation caused by flooding or fires is a potent reminder that one should not delay planning for disasters in advance. Learn how to approach designing your own Disaster Recovery Plan (DRP).
If one of your New Year’s resolutions was to save more money, then the Tax-Free Savings Account (TFSA) may be a good option for you to use. Learn more about the TFSA rules and limits.
RRSP Contribution Room
RRSP’s can be a simple concept but they are also governed by some complex rules. Learn more about how your annual contribution limits are calculated and what to do if you have over contributed.
The Value of Advice
What is the value of advice? When it comes to portfolio management, the overall value of the advice can be measured by comparing the performance of one portfolio over another in a specific amount of time. However, when it comes to wealth management, the overall value of the advice discussed regularly with clients is much more difficult to measure. Read on to see some real life examples of the value of the advice given.
US Tax Filing
Are you a US citizen? Do you spend more than 120 days per year in the US? If so you may be required to file a US personal tax return.
Highly Affected Sectors Credit Availability Program (HASCAP)
If your small business has been hard-hit by the economic effects of COVID-19, you may be eligible for the Highly Affected Sectors Credit Availability Program (HASCAP).
HASCAP offers low-interest loans, of up to $1 million per entity, over an extended term to help manage business continuity expenses.
The Government of Canada
Developing and Tracking Your Success: Are You Measuring Your KPIs?
Do you want to make sure your business is heading in the best direction to achieve your goals? By establishing, tracking, and improving your key performance indicators, you have a much greater chance of getting there.
We can work with you to customize financial and non-financial KPIs, and create a reporting tool to
2014 Tax Filing Deadline
We would like to remind our clients that for the majority of Canadians, your personal income tax returns normally need to be filed by April 30.
If you haven’t already brought us the information we need to prepare your return, we would ask you to do so shortly.
CRA has extended the filing and payment
Online Backups - Keeping it simple
Do you know someone who has lost critical and precious information that was stored on their computer?
Are there things on your computer that you don’t want to lose such as financial or business records or personal information like family photos? We live in a digital world and we don’t have hard copies of anything
FACTA Bank Reporting Requirements
Beginning in July of 2014, Canadian financial institutions will be required to start gathering and reporting information on accounts held by U.S. residents and U.S. citizens, including those who are resident of Canada.
The account information will be collected and reported to the Canada Revenue Agency (CRA), who will then transfer the information
Principal Residence Exemption
If you have sold your home and it is your principal residence then you should be able to use the principal residence exemption to reduce or eliminate any capital gain for income tax purposes on the sale of the property.
CRA states that a principal residence can be a house, cottage, condominium, apartment, trailer, mobile
Chartered Professional Accountants: It’s all in the name
On July 31, 2015 legislation in Alberta came into effect that will govern all professional accountants under one organization and one brand: Chartered Professional Accountants or CPA for short.
Prior to this change, you would have found Chartered Accountants (CA’s), Certified Management Accountants (CMA’s) and Certified General Accountants (CGA’s) all practicing in Alberta. Although
New Business Guide for setting up your business
If you are starting a new business in Canada or are operating one already, then this article is for you.
Types of business structures
The type of structure you choose has a significant effect on the way you report your income, the type of returns you file each year, and many other matters.
Registered Education Savings Plan (RESP)
An RESP is an education savings account that is registered with the Government of Canada that helps you save for a child’s or grandchild's post-secondary education.
With an RESP, you may be able to receive other saving incentives, such as the:
Canada Learning Bond
Basic and Additional Canada Education Savings Grant
There are two different
What if you knew the impact of an important decision before you made it? Could you and your business benefit from this “what if” strategic planning?
You would be able to look at the potential outcome and financial impact of business decisions before they are made. At KWB we use software called Profit Driver to
What’s the difference between eligible and non-eligible dividends? What are the implications to you?
Dividends are payments made to shareholders to allocate the earnings of a corporation. There are two types of taxable dividends that a corporation can issue, non-eligible and eligible.
non-eligible dividends are taxed at approximately 10% more than an
There are many apps that can be integrated into your Quickbooks Online software in order to provide extra value and Dryrun is one of them.
Forecast cash flow and sales
Dryrun was created right here in Edmonton and is a forecasting tool that will assist you in making better decisions about your business. You
To our valued clients and business partners – a KWB announcement
KWB Chartered Professional Accountants has a proactive plan for
continued operation in this new environment. You and our team are our
first priority. We want to inform you of what changes we have made, so we
can continue to complete the work you need us to do, while protecting both you
Canada Recovery Caregiving Benefit (CRCB) Explained
“The Canada Recovery Caregiving Benefit (CRCB) gives income support to employed and self-employed individuals who are unable to work because they must care for their child under 12 years old or a family member who needs supervised care.
This applies if their school, regular program or facility is closed or unavailable to them due to COVID-19
Best Practices for Submitting Documents Electronically
We are encouraging you to send us your personal tax information or corporate records electronically. This guide will assist you through the process while ensuring your data is secure and well managed.
File Types: We can accept pretty much any file types (PDF, jpeg, bmp, tiff, png, etc.)