U.S. financial planner Blair Duquesnay argues that it’s not portfolio returns or the rate of withdrawal that determines retiree standard of living, it’s inflation.
Most investors are familiar with the calculations that show how long it takes for a rate of inflation to cut the value of one dollar in half. Ms. Duquesnay turns this on its head to make a good point – these formulas also show how long it takes for living expenses to double.
The column includes a chart showing that an average inflation rate of 2 per cent doubles living expenses in 35 years, 3 per cent accomplishes the same task in 23 years and 4 per cent in a short 17 years. With Canadians living longer, spending longer in retirement, these numbers are extremely important.
Canadians haven’t had to worry about inflation for a long time. Both the U.S. Federal Reserve and the Bank of Canada have repeatedly failed to push inflation levels to their 2 per cent target rate, and definitely not through lack of trying.
Morgan Stanley global strategist Andrew Sheets believes that, with his estimate of 7.4 per cent real global GDP growth in 2021, the era of ultra-low inflation and bond yields (which reflect inflation expectations) is ending.
In Morgan Stanley’s Outlook 2021, edited by Mr. Sheets, the research team wrote “we expect Treasury yields to move higher over the forecast horizon. We see 10-year Treasury yields trading slightly below 1.5 per cent by the end of 2021, and continuing to move higher into 2022.” The team expects Canadian bond yields to closely track Treasuries.
We are not yet at the point where older investors need to attempt portfolio inflation-proofing. It is not, however, too early to consider the potential effects of rising inflation levels down the road.
“Inflation is the single most important assumption in a financial plan,” writes Ms. Duquesnay. “It’s the reason retirees cannot live on a ‘fixed’ income and will need stock market appreciation to keep pace with price increases.”
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Greenlane Renewables Inc. (GRN-X) This Canadian company is a provider of biogas upgrading systems. On Friday, the share price closed at a record high on high volume. The stock has six buy recommendations and an average one-year target price that implies a 51 per cent return - on top of its 107 per cent year-to-date gain. Jennifer Dowty gives us a profile of the stock. (for subscribers)
Large pile of cash awaits corporate Canada when spending ways return
Canadian businesses have built up an excess cash position of approximately $80-billion over and above the pre-pandemic trend, according to CIBC estimates. And that means good news for investors when it comes to the continuity of dividends. Tim Shufelt reports. (for subscribers)
Does the bitcoin comeback really have legs?
Bitcoin is back. The flagship cryptocurrency, left for dead a couple of years ago, has more than doubled in value in recent months. It has far outshone gold, the traditional shelter for nervous investors. It has also left high-flying tech stocks, such as Amazon.com Inc. or Netflix Inc., in the dust. At nearly US$18,000, bitcoin is within spitting distance of its record high of almost US$20,000 back in 2017. Can it continue its rise? That depends on what is propelling its ascent. As Ian McGugan tells us, there are at least three theories that deserve attention. (for subscribers)
A steeper yield curve is a bank investor’s new best friend
Bank investors, meet your new best friend: a steeper yield curve. Canada’s Big Six bank stocks have risen nearly 15 per cent since the start of November, on average, and are now down less than 4 per cent for the year. To be sure, there are several factors working in the banks’ favour right now. But the role of the yield curve, which compares short-term government bond yields with longer-term government bond yields, is a welcome tailwind that could help lift bank stocks even as vaccine euphoria wears off. David Berman explains. (for subscribers)
Global dividends forecast to inch back from coronavirus cliff edge
Dividend payouts by the world’s biggest firms in 2020 will fall by 17.5-20 per cent, equivalent to some US$263-billion, as a result of the coronavirus crisis, a report on Monday forecast, but could rebound strongly next year. However, some firms that axed payments have restarted them, even if at lower levels, while vaccine breakthroughs are also providing hope of a bounce back in 2021. Marc Jones of Reuters reports. (for subscribers)
Others (for subscribers)
Monday’s Insider Report: Company president invests $900,000 after a selloff and an 8.7% dividend hike is announced
Research report: What the charts are saying about where markets will go from here
Others (for everyone)
Ask Globe Investor
Question: I’m wondering what your thoughts are about the company Stripe Inc. I have read some interesting things about it and have a small amount of spare funds that I’m considering investing in it. – Teresa S.
Answer: Stripe is a San Francisco-based software company that provides complete payments infrastructure for the internet. Its customers include Shopify Inc., Instacart, Microsoft Corp., Amazon.com Inc., Slack Technologies Inc, and Zoom Video Communications Inc. Its platforms support 135 currencies and payment methods. According to its website, 90 per cent of U.S. adults have bought from businesses using Stripe.
What we don’t know is what this means in terms of revenue and profits. Stripe is not a public company, so it is not required to release financial information. Since the shares are not publicly traded, individuals can’t buy in.
Presumably, the company will eventually announce an initial public offering (IPO) and list on a major exchange. There would be an opportunity to buy the stock at that time. But, based on recent hot IPOs, there will likely be high demand which could drive the shares sharply higher in the early days of trading. And the initial pricing will probably be higher than the company’s financials warrant.
I suggest you advise your broker of your interest in the stock and ask to be put on the list in the event he/she gets an allotment (not likely for a Canadian broker so if you have a U.S. contact try there). When the IPO is announced, check the financials carefully and decide whether the share price is reasonable. It probably won’t be.
What’s up in the days ahead
The Contra Guys have some advice when it comes to Suncor Energy. And Rob Carrick makes an argument for locking in the TFSA maximum contribution at the current $6,000 level for many years to come.
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Compiled by Globe Investor Staff