Building wealth with the times

The world is changing. Financially speaking, we’re in what can only be described as a “disinflationary” era. Inflation is low and the days of rising interest rates to compensate for inflation are over, the world over. Low interest rates are here to stay, for a long, long time.

Nevertheless, these could be some of the most exciting and opportunistic times for Canadian investors of all ages, as long as they’re willing to build wealth with the times. For some, this will require a shift in traditional attitudes about investing, from a heavy reliance on fixed-income investments to a broader portfolio which includes, and will benefit from, the long-term growth potential of stocks. We’re all getting older — we can’t change that. But we’re living longer, and that means we must learn to make our retirement savings and other investments work that much harder. Our savings must be built to last longer than we do!

Portfolio planning

Correct initial structuring of our investment portfolios is critical. Studies have shown that 80 per cent of a portfolio’s eventual performance depends on it being properly set up. That is, investment assets ing correctly allocated when the portfolio is first created. Subsequently, there will be periods of adjustment and rebalancing along life’s journey; but if we set up properly at the start, we can be even more assured our investment portfolio will grow and compound in superior fashion over the years. What’s more, it’s never too late — or too soon — to start.

The Investment Strategy Committee at Midland Walwyn, of which I’m a member, believes everyone should ideally have two portfolios; a normal taxable portfolio, and a tax-sheltered RRSP that will eventually become a RRIF. To give investors some perspective on the asset allocation of each of these portfolios, we’re currently recommending two sets of general benchmarks. In the taxable income portfolios, we recommend 40 per cent be in bonds (and related fixed-income products), 50 per cent in equities (and related), and 10 per cent set aside in cash for emergencies, special opportunities in the marketplace, etc.

In the RRSP portfolio, we suggest 45 per cent in each of bonds and equities, with the remaining 10 per cent held in a reserve. We stress that these are general benchmarks. It’s important to discuss one’s individual needs with a financial advisor who can then help build and maintain a truly customized portfolio.


Despite today’s low interest rates, every portfolio must always have a balance between fixed income and equity. This is particularly true for older Canadians who need, and deserve, minimum investment risk to ensure their savings will be secure. On reviewing the fixed income portion of our portfolios we should continue with the fundamentals: Building a ladder of maturities (so the bonds in our portfolios will come due in successive years), using only Government of Canada and other high-quality bonds. Bonds yielding six per cent still have a lot going for them, and in this way the extreme volatility in today’s securities markets can be smoothed out, while the fixed-income section of portfolios can be structured to drop interest income into your account every month.

With inflation in Canada under control, yields don’t have to be as high as previously to provide a decent return. Real rates of return (the interest yield minus inflation) of over four per cent are still very worthwhile. That’s the good news. The bad news is that the trend in long-term bond yields is continuing down and anyone relying too heavily on this type of investment could see their nest egg dwindle and their income requirements from investments falling short.

A year ago, long-term Government of Canada bonds were yielding seven per cent. Today, these same bonds are yielding six per cent, begging the question: “How low can they go? People looking back and saying, “Gee, why didn’t I invest in Government of Canada bonds when they yielded 10, nine, eight and seven per cent?”, are going to be saying “Why didn’t I invest when they were yielding six?” in a couple of years time. But the real question those investors should be asking is: “Does my portfolio contain a sufficient balance of equities, including growth stocks, which will provide total returns of dividends and capital growth to at least compensate for the decline in the interest or fixed-income side?

The role of stocks

Equities, or stocks and related products, are the tried and tested way of building wealth over the long haul. But even in the short-term it’s become imperative to offset the impact of low interest rates on our fixed-income investments with a healthy representation of stocks and equity products for growth and total return. These should come from a selection of blue chip, world-ranking Canadian stocks. There’s no need for Bre X-type speculations in one’s portfolio when there are any number of quality names to choose from. The stock markets in Canada have pulled back from their all-time highs of last summer, but it has still been a terrific year for Canadian equities. A year ago, the Toronto Stock Exchange (TSE 300) index, which contains a basket of 300 stocks that is used as a performance benchmark for the entire Canadian equities markets, was at the 5,900 level. At the time of writing, it was at 6,500, down from an earlier peak of 7,200. The year-to-date TSE 300 average return, combining growth plus dividends, is currently about 13 per cent, on top of annual returns of 14 per cent and 28 per cent in 1995 and 1996, respectively. These are exceptional numbers, and Canada’s economy can take heavy credit for them.

Canada is a newly-revitalized, competitive, fiscally-balanced country. Our turn for economic and investment excellence is truly at hand. In this knowledge, we should maintain an appropriate balance between fixed income and growth in our portfolios; and be sure to have a goodly Canadian equity representation in them.

The U.S. portion

The stock markets have been on an incredible run in the United States as well. An expanding U.S. economy and the accompanying bull market have been around for seven years now, and many are bracing themselves, wondering: “When will it slow down?” The Dow Jones was at 2,000 not too many years ago, and in the latter part of 1997 reached a staggering 8,000. Quite simply, the U.S. economy continues to expand for all sorts of good reasons that include productivity and demographics.

A rejuvenated U.S. dominates the world economy. In addition, the U.S. accounts for 40 per cent of the world’s stock market capitalization, compared to Canada’s two and a half per cent. Its strong domestic economy and its worldwide economic presence are both contributing to the outstanding performance of the American equities markets.

American investment habits are also fuelling the fire. Unlike Canadian investors, our friends down south have always been fond of stocks. When they need to save they buy stocks, or equity mutual funds. And now, with huge numbers of post-war baby boomers actively investing as they start to think about their retirement and financial future the good news for investors will continue. This makes it imperative for Canadians to feature U.S. stocks in their investment plans as part of the all-important need for diversification — one of the essential requirements for successful investment.

Europe gaining

Canadians should also consider European representation in the stock portion of their portfolios. Britain is already experiencing an economic boom, and now other countries within the single European Union scheduled to come into being in 1999 are restructuring their economies, positioning and restructuring themselves. A lot of tumult and turmoil will accompany the countdown to the new Europe, but never forget that in turmoil and tumult lies investment opportunity.

The other opportunity is to make this combined geographical diversification work to our advantage. Diversifying geographically means we can enjoy the benefits of the whole, wide world.

So how should we build-in geographic diversification with stocks? One way is to buy good mutual funds that specialize in U.S. and European companies. Another, in consultation with one’s financial advisor, is to buy well-known international stocks directly. A third option is to invest in Canadian companies that do business in the U.S. or Europe.

And, referring back to Midland Walwyn’s general benchmarks, if 50 per cent of our portfolio is invested in equities, we recommend roughly half be allocated to Canada, one third to the U.S., and the remaining one sixth to the rest of the world, with an emphasis on Europe. That’s true geographic diversification — but remember, give the benefit of the doubt to Canada!

Canada’s legacy

We Canadians have inflicted a long and large legacy of debt on ourselves. After decades of spending and borrowing, we have created a huge mountain of debt. The result? We must face up to paying high taxes probably for the rest of our days.

This legacy of debt just adds to the urgency of the investment challenge; to build wealth during a time of declining interest rates and diminishing social safety nets. But it also allows us to consider wealth building beyond our own lifetimes, for our successors. No one wants Revenue Canada to become the main beneficiary of their estate! So proper tax planning and succession planning must also be incorporated into our investment decisions, as well as our overall financial plan.

Again, we’re all going to live longer. Above all, remember it’s never too late to set up a proper investment portfolio. Now, more than ever, time is still on your side.