Many of us have rich childhood memories of watching that wonderful movie “The Wizard of Oz”. We can easily recall Dorothy’s fateful words, “Toto, I have a feeling we’re not in Kansas anymore”.
Well, the reality is, we’re not in the same financial world anymore. We are living in a world of near-zero interest rates. No matter how often this is brought to our attention, I wonder if we fully grasp the significance of it. So let’s talk about it. How did we get here? What does it mean?
The history of interest rates is really quite simple:
Rates have been falling for 700 years. Back in the Late Middle Ages, the 1300s, interest rates were around 10%. By World War Two rates had fallen all the way to 2%. In 1941 rates began a forty-year ascent, reaching an all-time high in 1981. And then interest rates reversed direction and began a forty-year descent, reaching an all-time low in our time today.
That’s it: a seven century downward trajectory of interest rates, interrupted by a forty year rise and a forty year fall.
Isn’t it interesting that many of us have lived through both the highest, and the lowest, interest rates in all of history. Perhaps we’re victims of that ancient Chinese curse, “May you live in interesting times”.
Seen with historical perspective, this new world of near-zero interest rates is actually not all that strange. After all, it’s been coming for 700 years.
So, what does this mean for your financial plans and your investment strategy?
One consequence of low interest rates is high cash levels. Governments, corporations, institutions and individuals are piling up record levels of cash. This makes perfect sense. Traditional safe investments like Bonds and GICs are offering next to nothing, so investors are choosing the simplicity and convenience of just sitting on cash.
Another consequence of low interest rates is high debt levels. Governments, corporations, institutions and individuals are piling up record levels of debt. This too makes perfect sense. The cost of borrowing is so low people are taking advantage of the bargain. Our son Josh bought a house last year. His mortgage rate is 2%! For borrowers this is a wonderful time.
For investors, on the other hand, this is a challenging time. Those seeking investment income face a near impossible situation. For example, a retiree requiring $30,000 annual investment income would have to invest three million dollars in an investment paying only 1%. Invest three million to earn thirty thousand?! For most of us this is not a practical solution.
The financial industry is responding by offering all kinds of investments under the “Fixed Income” label. They go by all sorts of names: high-yield corporate debt, collateralized loan obligations, commercial mortgage-backed securities, real estate investment trusts, convertible bonds, preferred stocks, and utility stocks.
These complex securities are being promoted as “safe, income-generating fixed income investments”. I’m afraid many of them will have low returns, possibly even negative returns, and I expect them to have a higher degree of volatility than we’re used to from fixed income investments. And if interest rates rise, which is a possibility, these investments could come under pressure. Many Balanced Mutual Funds and Fixed Income Mutual Funds are loaded with these securities. Our concern is that many people don’t fully understand what they’re investing in.
Last year Signature Asset Management wrote in their summer quarterly report:
“There are no easy or perfectly safe options available. This is the toughest investment environment in our lifetime, but there are solutions.” At BluestoneFinancial we agree. There are solutions. Good solutions.
If cash investments are paying next to nothing, and fixed income investments are questionable, then pursuing capital growth by investing in Equity Mutual Funds becomes an alternative to think about. Of course, Equity Mutual Fund investing is not recommended for everyone. Please regularly review with Terry Rempel what investments best suit your risk tolerance and financial circumstances.
We have always considered this investment strategy to be our strong suit, so, thankfully, this is familiar and comfortable work for us. In fact, we’re starting to feel like life has been a dress rehearsal for this challenging and interesting time. We have never shied away from stating our investing goal: we pursue superior long-term investment results. By that we mean, we want our investments to grow, and we do not want to be careless about risk. We want to invest well…and we want to sleep well.
We believe investing for capital growth is still achievable. In our opinion nothing has changed the global economic growth story. True, the world can be messy, dangerous, and frightening. But the global economic growth machine continues to chug along, and this should show up in corporate profits, lifting share prices on stock exchanges.
What about investment risk? Something very important to all of us. We think the best answer can be summed up in one word, quality. Own quality. In times of stress, uncertainty, and crisis, we think investors holding quality investments are better positioned to weather the storms.
Our Mutual Fund Portfolio Managers are investing our money in quality corporations with solid growth potential, pursuing growth while being careful about risk.
Yes we can invest well…and sleep well.
Thank you for listening. And Happy New Year. May we all do well in 2021, even in this time of pandemic.. Very often it’s in the dark times that the most wonderful light shines through. Please call upon us anytime you like.
Source: Sidney Homer and Richard Sylla – A History of Interest Rates, Federal Reserve, Bank of England
https://www.visualcapitalist.com/the-history-of-interest-rates-over-670-years/
This memo was prepared solely by Terry and Patty Rempel who are registered representatives of FundEX (a member of the Mutual Funds Dealers Association of Canada and the MFDA Investor Protection Corporation). The views and opinions, including any recommendations, expressed in this memo are those of Terry and Patty Rempel. Bluestone Financial is a personal trade name of Terry and Patty Rempel.
