Q1 Recap

The Theme for 2015 : 

"Expect The Unexpected"

1. BOC cuts the Bank Rate by .25%
2. Deflation takes centre stage.
3. $US soars. Euro/$US hits lowest level since 2002.
4. US economic growth stalls.
5. No Fed rate increase (yet).
6. Eurozone economy shows growth.
7. Shenzen (China) has an approx. +38% return to lead global equity market performance.
8. Other top performing markets:

• Copenhagen (Denmark) +29%
• Argentina +28%
• Lisbon (Portugal) +25%
• Germany +23%
• Italy +22%

My 60/40 Model:

Best performing asset classes:

• You guessed it!! International Equities!
• Both Large Cap (large companies) and Emerging Markets up a little over 12%.
• Canadian Inflation Indexed bond index was next best with a return of over 7%.
• Canadian REIT index provided a return of a little under 7%.

Not so good performing asset classes (with some energy exposure):

• Canadian Preferred Share index was down about 4%.
• Canadian High Yield bonds down about 2%.
• Canadian Small Cap (small companies) flat.

Total return for the 1st quarter was approx. 2.75% (before fees and taxes), projected to an annualized return this comes to a little over 11%.

Unexpectedly ahead of target.

However, much can happen in the short-term and most of these numbers will change as the year progresses.

In the long-term, we expect annual average returns of between 7 and 8% (before fees and taxes) over multiple years.

Stay Tuned.

Oh Canada

"True Patriot Love" can add risk when it comes to "home country bias" in a portfolio.

 A 2012 study by the International Monetary Fund (IMF)

more here: http://www.imf.org/external/pubs/ft/wp/2014/wp14187.pdf

 showed that on average between 2001-2012, approx. 70% of equity assets owned by Canadians were Canadian equity assets.

Interestingly, the rules that limited foreign content in RRSP's were changed in 2005, so that there was no longer any limit on foreign content.

In July, 2014 Vanguard published a study titled : 

Balancing Home Bias and Diversification:

more here: https://www.vanguardcanada.ca/documents/global-equities-tlor.pdf

• The premise of this study is that a diversified global equity index would allocate approx 4% to Canadian equities.
• Canadians only have approx 40% foreign equity in their portfolios.
• In other words, Canadians are, on average, significantly over-weight Canadian Equities.
• This is, in turn, adding a great degree of risk to portfolios because they lack the global diversity that would help to lower risk levels in a portfolio.
• Historically, Canadian equities have had a greater degree of volatility relative to the global equity market, without a commensurately higher level of return.
• Canada has over exposure to the Financial and Energy sectors

According to modern portfolio theory, individual securities, sectors and countries can be combined into portfolios that can have a lower level of risk per level of return than the individual assets held in isolation. This phenomenon is called the diversification benefit and occurs because the correlations among the assets in the portfolio are less than perfect and the universe of securities has expanded. For each level of risk, we can create an efficient portfolio out of the global set of securities that maximizes expected return for each level of expected risk. 

Why don't Canadians look beyond their own borders?

• Familiarity with company names, loyalty to Canadian institutions.
• Dividend tax credit for Canadian companies.
• Concern over currency risk.
• Higher costs for exposure to some global markets.

However, with Exchange Traded Funds (ETF's) costs are being reduced, currency risks can be hedged and you can still own "Canadian" but with significantly less risk.

Makes sense to think about broadening your global exposure and perhaps being a little lighter with Canadian exposure.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Checking In On China

At the beginning of March, China lowered its growth forecast for 2015 to 7% (from 7.4% in 2014). 

At a meeting this past weekend, the governor of the Chinese central bank warned of the potential of deflation.

Financial markets have reacted to this with expectations of further easing of monetary policy. The Peoples Bank Of China has lowered interest rates twice since November.

Chinese leadership has referred to the slowing growth as "the new normal" as they try to reduce expectations for growth and emphasize the "restructuring" of the economy to focus on trade and investment initiatives:

“China’s economy shouldn’t be viewed only by its growth rate,” Mr Xi said. “China’s economy entering the new normal will continue to provide countries, including Asian nations, [with] more markets, growth, investment and co-operation opportunities.”

more here: http://www.ft.com/intl/cms/s/0/05c7a06c-d5ec-11e4-a598-00144feab7de.html#axzz3Vry487fz

What is important here is to recognize the continued global theme that deflation is the key concern for central bankers as they monitor how the global economic situation is evolving.

While it is expected that the US Federal Reserve may start with an interest rate increase in September (and chairwoman Yellen has been quite clear on this point so that it will reduce the impact on financial markets), the theme of deflation is still a major priority .

What we also must remember (and is one of my ongoing blog themes) is that central bankers will continue to engage in dialogue in order to ensure that there is coordination with their efforts to compliment each other's policies.

Looking to the future, as China growth slows (which is widely expected), it is important that the Advanced Economies take up some of the slack to get keep global growth on track.

(click on the chart to enlarge it)

 The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Volatility and the Bank of Canada

(and possibly other central banks to follow)

I have been pounding the table on volatility a fair bit in this blog in the last while and my theme has been that central bankers do not like volatility.

In a speech in London, England to the Canada - United Kingdom Chamber of Commerce on Thursday, BOC governor Poloz addressed that very topic:

more here

http://www.bankofcanada.ca/2015/03/central-bank-credibility-policy-normalization/

Certainly central bankers did not like the extreme volatility brought on by the 2008 financial crisis and the subsequent "after-shocks" of volatility that have followed the Great Recession.

Historically low interest rates (ordinary monetary policy tools) and Quantitative Easing (extraordinary monetary policy tools) have been utilized on a global scale to fight of deflationary pressures that threatened the global economy.

In most cases, central bank mandates are to promote "price stability", which for all intents and purposes is an inflation rate of 2%. (the US Federal reserve has a dual mandate of achieving  price stability and maximum employment).

What does this all mean to us?

• If there is economic growth, there is likely to be inflation of some degree.
• We all desire economic growth because it allows us to improve our standard of living: 
• greater likelihood of employment = potentially better income.
• In other words, a little inflation is a good thing.
• Too much inflation erodes purchasing power and is counter-productive.
• low inflation, disinflation and deflation are all symptoms of a weak economy and nobody wants that (except the doom and gloom types).

To get economic growth, individuals and businesses need to be confident that the future will hold the potential for higher incomes and growing earnings.

As I have repeatedly mentioned (like the proverbial broken record), central banks have been trying to turn the tide of non-confidence with their aggressive (extraordinary) monetary policies.

Now....

They want to start to "wean" us off of our expectations that they will be there to hold our hands through the inevitable volatility that may arise as they begin to "normalize" interest rates. 

That is what Governor Poloz was talking about on Thursday.

It is time to "take the punch bowl away from the party" and that as a result we should anticipate higher levels of volatility in financial markets. We need to adjust our expectations.

So prepare yourselves, as I have suggested so many times before, for a bumpy ride. For the short-term, this may provide lower than hoped for portfolio returns. Certainly lower than what we have been experiencing over the last few years and quite possibly, lower than the long-term averages.

Repeat after me....

Balance

Diversification

Long-term planning

And so on and so on.....

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund

Talking the Talk, Walking the Walk.

So....

I write this daily blog about Wealth Management.

Do you wonder how I actually invest my money?

It might be somewhat hypocritical if I were to go on and on as I do and not have my money invested in one of my models.

Oh, and the other question, do I rent or own?

• Rent.

and...

I prefer the 60% equity / 40% fixed income model with a few caveats (at this time):

• I have a little more cash that I have come into recently and I am being patient with it (keeping it in a short-term money market fund) for the moment.
• My fixed income holdings are a little overweight in high yield bonds and preferred shares because the yields are so relatively attractive.
• However, once I feel more comfortable about the equity and fixed income markets (yes, I am watching what the Fed and BOC are up to next, the general economic trends and volatility), I plan to ear-mark that cash for the 60/40 target model.
• Yes, because I believe in what I write about, but more importantly, I feel it is paramount to invest for the long-term.
• This 60/40 model, in all the research that I have done, consistently provides returns on average, over multiple years of approx. 7-8% .

I still spend a significant amount of time researching and back-testing as to how to best allocate the 60% equity into sub-categories:

• % of Canadian Equity (do you know that Canadian Equity makes up only approx. 4% of the World Equity Index).
• % of US Equity (clearly the best performer over the last few years, but perhaps ahead of itself at the moment?)
• % of International Equity (and in this category how much in Emerging Markets)
• % of Alternative Strategies (ie a more tactical approach other than ETF's?)
• Speaking of ETF's...which ETF's are best suited to providing me with what I consider to be good liquidity, strong performance, distribution yield and very importantly, cost.

Equal research goes into analysis of the 40% that makes up the cash and fixed income sub-categories:

• % dedicated to the safety of Government and Investment Grade Corporate bonds (relative to their very low yields and high prices).
• % of inflation indexed bonds (will inflation pick up into the future and when?)
• % of high yield bonds (pretty inexpensive at the moment, with some fairly attractive yields, but you want to have those that will survive to pay their coupons and return their principal).
• % of preferred shares with tax efficient dividend yields.

I believe in balance and diversification and know that whatever comes that may, in the long-term, that is where I want my money. So that is where it is/will be. 

Same place that I would want my clients money to be. 

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Checking in with Copper

More Positive Signals?

• I have often talked about Copper as a metal that is regarded as a leading indicator of the future health of the global economy.
• Monday witnessed a spike in the price of copper that seemed rather surprising.

• According to the Wall Street Journal:

Possible explanations for Monday’s move ranged from an earthquake in Chile, the world’s No. 1 copper producer, to harried trading ahead of a contract expiration to anticipation of Chinese manufacturing data that was due later Monday. Copper is used extensively in manufacturing and construction, making it sensitive to economic data. 

• Regardless of the reason, buyers were scrambling to get into copper (or cover short positions) and the technical picture appears to be changing  from a downward trend that has existed since 2011 to what is either a correction of significance or a new trend altogether.
• I first noticed this turnaround in my blog of February 26: "Positive Signals".
• Since hitting a multi-year low at just above 2.40 in January (prices not seen since 2009), copper has rebounded to trade near 2.80 (after spiking above 2.90 on Monday) as I write this. 
• That would be a 16% move from the lows.
• While it is certainly too soon to say that this is in fact a new up-trend developing, it may well suggest that  there may be a more positive story beginning to take shape for the global economy .
• It will probably be worthwhile to continue to monitor Copper's progress.

And on the Inflation / Deflation Front:

• The Bureau of Labour Statistics announced yesterday that the US Consumer Price Index (CPI) for February grew at a rate of .2% (the first positive number in 4 months), a change of 0% over the last year. 
• The Fed would like to see this number at 2%.
• The core (without the more volatile food and energy components) CPI data showed a 1 year change of 1.7%. 
• We do all have to eat and use energy, however!!
• Nonetheless, it was slightly higher than expected which market participants will view as a signal for a sooner than later increase in the Fed Funds rate.
• However, this is just one month's data, we will need to see the next few months to determine a pattern.

 The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Euro Zone Recovery

• European Central Bank (ECB) Quantitative Easing (QE) has pushed some short-term interest rates across the euro zone to negative levels.
• This helps to force money to move to potentially more productive assets.
• The Euro/$US has tumbled from near 1.40 last May to current levels near 1.10 (after touching below 1.05 last week).
• This assists the export sector and forces higher prices for imports to limit the deflationary impact.
• Oil prices have remained at lower levels, reducing transportation costs to both business and consumers.
• Led by Germany, recent economic data had shown signs of the beginning of economic recovery.

• The latest data show that this is gathering steam:

• Data firm Markit, which surveys more than 5,000 businesses across the eurozone, said Tuesday its composite purchasing managers index—a measure of activity in the manufacturing and services sectors—rose to 46-month high of 54.1 in March from 53.3 in February. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.
• more here: http://www.wsj.com/articles/eurozones-modest-economic-recovery-gathers-momentum-1427189791

• more here: http://www.ft.com/intl/cms/s/0/ed0eae0c-d204-11e4-a1a0-00144feab7de.html?siteedition=intl#axzz3VIgOUTGw

• Expectations are that this growth momentum will continue.
• It should continue to lift confidence levels among businesses and consumers.

• There are still some issues that are unresolved:
• The ongoing debt problems for Greece and the concerns as to whether they will remain in the Euro zone.
• Russian aggression continues to be a geo-political concern.

However:

Central Bank actions appear to have had the desired impact and while it is early going, the Euro zone appears to pulling out of the its long-standing economic stagnation.

Most importantly:

With Euro/C$ at 1.37... 

A European Vacation is still looking like an excellent option for the summer!!!

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Checking in on Volatility

The VIX hit a new low for the year on Friday at a little above 12.5, before closing near 13. 

For perspective: the high this year was 23.43 in mid January. The high last October when the S&P 500 was correcting was near 31.

• One of my key themes since I started actively writing this blog to help investors make some sense of all things impacting the management of their wealth, has been that central banks do not like volatility because it erodes confidence in financial markets.
• Investor confidence is directly related to economic confidence and plays a major role in the decision making of households and businesses as they determine their desire for future spending.
• If households are confident about the future of their net worth (asset growth and income growth), they will be more inclined to spend.
• If businesses are confident about future prospects for growth, they will invest in growing their respective companies.
• Future economic growth is contingent on "upbeat" consumer and business spending.

There is a lot riding on this confidence thing:

• At the moment, businesses are still sitting on very large amounts of cash.
• A recent survey of global investors by Barclays suggests some of the key concerns that investors have:
• more at : http://www.bloomberg.com/news/articles/2015-03-23/five-charts-that-show-what-investors-are-thinking-now

(click on the chart to enlarge)

Are the central banks just buying time?

or

Do they actually have control?

• This is an important consideration.
• There are still many uncertainties hovering over financial markets and the global economic condition.

In addition to the concerns in the chart above:

• Are current asset prices inflated by so much global monetary stimulus? 

• As we end Q1 2015, what impact will the strong $US have on S&P 500 earnings? Earnings and future earnings are the key fundamentals for equity valuation. At this point earnings (for Q1) expectations have declined by an approx. 8% since Dec. 31.  more here:(file:///C:/Users/JScott/Downloads/EarningsInsight_032015.pdf

• If volatility should return, do central banks have enough "arrows in their quiver" to answer it?
• 
  

From 2004 until 2006 volatility was subdued and began picking up in 2007 and spiked in 2008.

From 2012 until 2014 volatility was subdued and has picked up in 2015, will history repeat?

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

"Risk-Adjusted" Returns and Costs

• If we are heading into a period of lower returns (with a protracted period of low interest rates) there are some very real concerns that investors need to be mindful of:

• A portfolio of 60% equity assets and 40% fixed income assets has, over the last 5 years has returned close to 10% (on average).
• The long-term average for this model is closer to 7.5%.

(click on this chart to enlarge)

• In all likelihood, then, the next 5 years may prove to be under-performing years.
• The "human behaviour" response to this might be to want to be more "aggressive" with your portfolio.
• Expectations of lower returns in the future can and may inspire investors to take on more risk to try to generate higher returns.
• When we discuss "risk-adjusted" returns and look at the above chart, we can see how, historically, a more aggressive (70% equity weighted) portfolio has not necessarily generated longer-term higher returns.
• In times of higher levels of volatility it will take a 70% equity portfolio more time to recover from a negative performance.
• That is longer "down-time", when a portfolio is not growing but playing "catch-up".
• This impacts the compounding potential of a portfolio.
• My counsel, stick to your plan, don't be tempted to make a short-term adjustment, it may just backfire.

Costs

• In a lower return environment, one way to improve your "net" return is to pay close attention to the costs associated with investing.
• If you are in the "old school " per transaction brokerage commission world, what is your advisor making when he/she buys and sells securities for you and how does this impact your return?
• If you are in the world of "fee-based" advisory services, what other (hidden) costs are you paying?
• Mutual Fund or ETF MER's are adding cost and reducing your "net" returns (and are not tax-deductible as are the fees). Do you know what these are?
• Fortunately for investors, the regulators are going to require that you are made aware of all of these costs in the upcoming implementation of the :
• Client Relationship Model - Phase 2 
• Performance Reporting and Fee / Charge Disclosure 

• More here: Client Relationship Model - Phase 2 Performance Reporting and Fee / Charge Disclosure amendments to Dealer Member Rule 200 and to Dealer Member Form 1

Ask your Advisor more about this. Ensure that you have the transparency that you deserve!

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

Later Rather Than Sooner: 

The Fed (Part 2)

From the outset of the Fed's post-meeting press release, it was fairly obvious that there were some concerns with recent economic data:

• Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat.

more here:

 http://www.federalreserve.gov/newsevents/press/monetary/20150318a.htm

And in the end:

• When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

The $US collapsed on this statement.

Financial Markets began to build in a scenario of lower interest rates for a longer period of time:

• Bond yields fell: US 10 year yields to 1.92% (from 2.03%).
• Bond prices rose.
• Equity markets rose.
• The "party" continues for asset prices.

Remember that the Fed is "data dependant" and the data has not been good lately (other than the employment data).

• So we wait to see what the future data will reveal.

Does this impact our longer-term view?

• It could, if we are looking at lower levels of inflation for longer periods (and that's what the bond markets are suggesting), we will have to brace ourselves for potentially lower returns for our portfolios into the future (especially for the lower risk investments).
• To get greater returns, investors will be forced to take on greater risk and this can be dangerous.
• More importantly, investors will need to be vigilant to ensure that the fees they pay are not going to eat into their returns.

While we wait for the data and the Fed (and the other central banks), we need to assess the prospects for our portfolios and what steps might need to be taken to ensure continued reasonable "risk-adjusted" returns.

More on this to come.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

All Eyes On The Fed (Part 1)

•  The US Federal Reserve’s FOMC (Federal Open Market Committee) is meeting for 2 days which began yesterday.

•   Financial market participants will be keenly awaiting Today’s press release (at 2:15pm) for signs of clues for when the Fed will begin to start “normalizing” interest rates.

•     The US Yield Curve is suggesting that the bond market is pricing in a September increase in the Fed Funds rate by .25%.

(click on the chart to enlarge)   

• Some analysts are suggesting it could happen as early as June, some think that it may not happen until 2016. 
• The latter group are focusing on the strength of the $US and the inherent monetary policy “tightening” that has caused more recent US economic data to come in at levels well below expectations.
•  The word that all will be watching for in the Fed’s release will be “patient”. 
• In previous statements the Fed has continued to stress that is prepared to be patient in its assessment of the current economic environment and in its desire to start raising interest rates. 
• Global deflationary pressures have allowed the Fed this option as while one of its 2 mandates, the employment picture, continues to strengthen, the other, inflation, has been declining.
•  Some fear that low interest rates have inflated asset (stock and bond) prices and that even marginal increases in interest rates will have a significantly negative impact on them which will increase volatility.
•  Central Banks loathe volatility (and the uncertainty erodes confidence in financial markets) and accordingly the Fed wants to try to negotiate interest increases in as smooth a manner as possible to avoid any serious market disruption. 
• This is the Fed’s dilemma and market participants will be watching closely, perhaps too closely for any signals of the Fed’s next moves.
•  Stay tuned, analysis of the Fed’s press release (Part 2) tomorrow.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.

The Canadian Household

The headlines tend to be a bit scary when they show  the upward sloping Canadian Household Debt to Income charts:

(you will have to click on this chart)

• What the media (and others) tend to focus on is the orange line that shows that debt levels vs. disposable income are at record levels.
• However, that is only part of the story:
• The blue line represents the debt service ratio which is interest payments vs. incomes, which is declining (as the costs of borrowing have declined) and at record lows.
• In other words, households can still afford the current debt levels.

Digging deeper into March 12th's Stats Can. release:

(more here: http://www.statcan.gc.ca/daily-quotidien/150312/dq150312a-eng.htm)

• 2014 was a strong year for asset growth for Canadians as average net worth rose by 7.5%.
• Financial Liabilities only grew by 4.6%.
• Ultimately that means that Canadians are borrowing intelligently and using debt to build their assets.
• Financial assets grew by 9.5%.
• Non-financial (mostly real estate) assets grew by 6%.
• Interestingly: looks like Canadians are better off investing in their portfolios rather than houses.

More interestingly:

(click on this chart to see it better)

•  Canadian Debt to Net Worth has been declining since 2008 (orange line), which means that Canadians have been building their net worth at a quicker pace than they have been increasing their levels of debt. This is a good thing!!

• Although they built Financial assets (as a % of Net Worth, blue line) faster in the 1990's, the "Nortel Effect" and 2008 have been left in the past and investors have returned to building their portfolios more than their real estate holdings.

While this makes good financial sense at the moment, Canadians are vulnerable to both higher interest rates and declining assets prices because they have greater amounts of leverage.

Another reason not to be complacent.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.