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Financial Planning Tips for 2015

In a surprise move, the Bank of Canada (“BoC”) dropped its overnight lending rate on January 21, 2015, in response to the adverse impact the falling price of oil has had – and could continue to have – on the Canadian economy. This move had an immediate impact on the Canadian dollar, which fell in value versus the U.S. dollar, while also causing Canada’s equity market to rise.
The BoC’s rate cut isn’t the only economic event on Canadians’ minds. You have probably been reading about other recent economic shifts on the internet or in your morning newspaper, and you’ve definitely noticed a change at the gas pump. The price of oil is dropping, and so is the cost to you when you fill up your car. But what about all the other things you’ve been reading? Is the economy getting stronger, or is it getting weaker? What are the economic risks in Europe? Or what impact will the on-going geo-political tensions have across various other economies? What is happening to the housing market?
Although the future is uncertain, a number of industry experts are telling us there a few things we could expect to see in 2015:

  1. Interest rates may remain low for some time.Although the longer-term impact of the lower BoC rate on the wider Canadian economy will not be known for some time, there are some things we do know. One is that if Canada’s banks and lenders decide to follow the BoC’s lead, at some point in the future you may be paying less to get a new mortgage and paying less interest on your line of credit. It would also mean you may get paid less for holding short term bonds. And if rates stay low for some time, the Canadian dollar will likely remain weak versus the U.S. dollar, which would be good for Canadian manufacturers but not quite as good for you the next time you’re shopping or taking a vacation in the U.S. 

  2. Rising household debt. If the banks do choose to follow the central banks’ lead and lower interest rates, it could induce householders to borrow more. While potentially positive for consumption spending, higher debt levels today only defers the pain of debt repayment in the future. On the flip side, households could take advantage of the lower rates to pay down debt  more quickly.

  3. The price of gas will probably stay low. The price of gas is likely to stay low until both the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC nations decide to stem their output of oil, something they have been unwilling to do for the past few months. While we don’t know exactly how long the price of gas may stay low, what we do know is that the weaker price of oil will negatively impact the Canadian economy, given we are a significant producer of oil. On a positive note, lower gas prices will help stem inflation.

  4. U.S. economic growth should continue. The U.S. economy has been steadily improving for some time, and it appears the U.S. economy is poised for further growth in 2015. Conversely, the Chinese economy, although still posting relatively strong gains, could continue to slow. Europe’s economy remains a wild card.
What can you do?
While we believe there are a few near certainties (as well as a number of greyer areas), we also believe there are a few things you can do this year to position yourself to take advantage of any market conditions that arise.

  1. Stay calm. Everyone feels the urge to move out of their equity investments when stock markets become volatile, or fall. But that’s historically been the worst time to sell. By staying the course, you’ll continue to be invested when the markets rise again, which they have always done following a period of weakness.

  2. Diversify. If you invest in one asset class or geographic region, you risk seeing the value of your investments fall significantly if that asset class or region posts losses in 2015. We recommend you hold equity and fixed income mutual funds from around the world. That way, any losses in one asset class or region will be balanced against gains from stronger-performing asset classes and regions.

  3. Invest regularly. Investing in lump sums can mean that you’re getting in at the investment’s high. Consider regularly investing smaller amounts to take advantage of dollar-cost averaging.
One of the best steps you can take to plan for 2015 is to contact me. Together, we can review your financial plan and ensure it continues to reflect your long-term needs and current financial circumstances.
Please contact our office today to discuss your financial plan for this year … and beyond.

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