The second half of the year in personal finance is about turning setbacks into opportunities.
Britain’s referendum vote to leave the European Union has once again put the global financial system on the defensive. The Canadian dollar has fallen, money has flowed into the safety of bonds, stocks have been up and down and there’s less reason to think the economy will break out of its funk. Here are three ideas on how turn these developments to your advantage.
- Consider the variable rate mortgage.
Variable rates mortgages can be had for 2.3 per cent these days, which is only 0.19 of a percentage point below the 2.49 per cent rate that is widely available for a five-year fixed rate. If you’re new to home ownership or want one less thing to worry about in life, go with the five-year fixed option and rest assured you’ve got a super rate by historical standards.
The case for the variable-rate mortgage is that interest rates could conceivably go lower. VR mortgages are priced off the prime rate at your lender, which is in turn guided by the Bank of Canada’s overnight rate. Even before the Brexit vote, there was a wisp of speculation that further cuts in the overnight rate might conceivably be needed to sustain growth in Canada. Now, with the vote adding uncertainty to global trade and investment, the chances of a rate cut are just a bit higher.
If rates don’t fall, they’ll likely sit more or less at current levels for a while. This outlook addresses the biggest worry if you have a variable-rate mortgage – that the prime rate will start to climb and thereby increase your borrowing costs steadily over time. Remember: Variable-rate mortgages come with an escape hatch in the form of a feature that lets you lock in a fixed rate mortgage.
- Buy the dips on the stock market.
Stocks in Canada, the United States and other parts of the world fell sharply following the Brexit vote and then rebounded. Expect more of this volatility in the months ahead as investors work through what’s ahead for both Britain and the European Union. A particular risk is that pressure builds in other countries to have a referendum on EU membership.
Any market shocks ahead are buying opportunities for investors who have 10 or more years until they need their money. Don’t worry about comparisons of the sharpness of the Brexit-driven market declines to the 2008-09 crash. Unlike back then, the underlying global financial system isn’t reeling. One of the root causes of that crisis was a collapse in the U.S. housing market that dragged down banks around the world. Britain leaving the EU would be disruptive, but not a global disaster.
Something to keep in mind is that stocks in Canada were gaining momentum in the months leading up to the Brexit vote, in large part thanks to a rise in hard-hit areas like mining and energy. Those are sectors that rise when investors look ahead to better times.
- Buy unhedged U.S. and international exchange-traded funds and mutual funds.
When global investors are unnerved, they race for the security of the U.S. dollar and sell assets in Canada and elsewhere. Net result: Our dollar hits the skids. It happened after the Brexit vote and it will probably happen again if there are complications or surprises ahead in Europe. Capitalize on this outcome by owning funds that invest outside Canada and don’t use hedging to reduce the impact on returns from currency fluctuations.
A falling Canadian dollar adds to the returns from investments in stocks and funds in U.S. dollars and some other foreign currencies, while a rising loonie hurts your returns. As I noted in my Portfolio Strategy column on Saturday, non-hedged ETFs investing in the U.S. market nicely outperformed hedged funds in the brief Brexit sell-off. Non-hedged international ETFs did a touch better than their hedged counterparts.
The case for owning hedged funds is that you’ll be protected in the Canadian dollar’s next run higher. In preparation for that day, have a portion of your holdings in hedged funds. But if you’re going to take advantage of opportunities in market volatility ahead, you’ll definitely want some non-hedged exposure.