March 30, 2020Money Financial literacy Economy News Trending
Financial Planning during the Pandemic of 2020
Below are some essential resources and financial planning assistance for clients and their families; details on pricing issues during extreme volatility; and an update on Telus shares post-split.
In early March, we eliminated the two holdings of oil stocks the week before Russia and Saudi Arabia decided to increase production and pressure the U.S. shale oil drillers. In place of these holdings, we purchased utilities and telephony companies, typically low volatility securities with high dividends. During the bottoming of the market, technology, utilities, telephony, and consumer staples are the safest holdings. Coming into the economic recovery, we will move into industrials, materials and bank stocks, followed by consumer discretionary holdings.
Tax relief & financial support from the Canadian government:
Here are details on the tax relief and financial support for Canadians, including income tax deferral, employment insurance, and how to apply for assistance.
Consider deferring your property taxes this year:
Many British Columbians over 55 years old are eligible to defer property taxes. Interest rates on tax deferrals are currently 1.95% with interest rates resetting on April 1. This rate may decrease alongside most other interest rates being set in Canada, and interest is calculated on a simple interest basis (not compounded). If you'd like to discuss whether this makes sense for you and your family, please call me. You can use these funds to meet other obligations or to invest at a higher return than the interest rate charged.
Consider reducing your RRIF payment:
The federal government has decreased the minimum prescribed RRIF payment by 25%. Reducing your retirement savings withdrawals during times of extreme volatility can help protect the long-term value of your plan. Please contact our office if you’re interested in reducing your RRIF payment, or any other regular withdrawals.
Canadian banks offer mortgage payment deferrals:
The major banks are offering mortgage payment deferrals on a case by case basis. Deferring your mortgage payments will increase your overall borrowing costs for the term of your mortgage but will alleviate current payment obligations in the short-term. Contact your bank directly to apply for this and other financing flexibility.
Lower mortgage interest rates:
With the current low interest rate environment, there may be opportunities to reduce the interest rate that you pay on your mortgage. If you'd like to discuss the interest rate market or the 'blend-and-extend' options available, give me a call or contact your banker.
Telus shares split on a two-for-one basis on March 17. Most clients hold this stock in their investment portfolios. The additional shares have been added to your account over this past weekend.
Volatility is causing issues with bond and note pricing:
Bonds, structured notes and some ETFs appear to have lost significant value despite the medium to low-risk levels. I've described the market reasons why this is taking place below and expect that this will resolve once the extreme volatility subsides.
Pricing on bond has moved to a price-discovery mode. Imagine that everyone put their house for sale, but no one was buying homes. What would your house be worth if no transactions were taking place to gage market values? That's similar to what is happening in the bond market. It doesn't mean that the bonds don't have value, that they won't keep paying their interest coupons, or that they won't be paid back at maturity.
The notes use with what's called a maturity observed 'knock in' put to create the downside barrier. These puts are sold (short) to buy the upside call options. This is what provides the downside protection and the call payouts.
During periods of extremely high volatility, the short-put position has a much higher sensitivity to the price of the underlying index than the long call position. When you're short something that is shooting up in value, the paper value of the security drops. When volatility calms down, the value of the put reverts to normal, raising the price of the notes to more familiar levels.
These are rules-based investments, and they will pay out according to their structure at the valuation date. The critical thing to remember is that the barrier observations don't happen until maturity, which is still far away, and your strike levels have not changed.