My 24-year-old daughter was home for the few short days this spring. It's always a pleasure to have her in our home, with her boundless energy and enthusiasm. It never occurred to us that she was really leaving home when she boarded the plane to Rome six years ago for an adventure with her cousin, but we have rarely seen her since.
Although I suspect that the main attractions of her latest visit may have been free home-cooked meals and a new set of tires for her car, she never fails to win us over with her infectious upbeat ways. Spunky? Adorable? Gregarious? - Emphatically, yes! Pragmatic? Not always.
During her last night at home I stayed up late to visit with her on the front end of her all-nighter. Her goals for that evening were to: 1) finish a quilt, 2) watch an old movie, 3) continually update her Facebook status, 4) pack her things, and 5) visit with Dad (I flatter myself with that last one). Sleep was not on her list.
The quilt was for her chilly north-east Idaho student bed, but the design was a heart-warming collage of her Prince George memories. She adorned the feature side with cut-out T-shirts which aptly displayed her busy youth. Once she had it all laid out on the floor I was swimming in the melancholy of memories. Soccer team uniforms, theater productions, dance performances, high school colours, dry-grad, summer camp and so forth.
As she busied herself in multi-tasking glory, I rested on the couch, soaking in a few more minutes with the beautiful young woman who was once my infant - tiny enough to bathe on the kitchen table in a medium-sized mixing bowl. Behind her a buck-toothed freckly pre-teen adorned a frame on the wall, bug-eyed smiling in a frilly dance costume.
She finished the quilting project, a second movie, and finally faded from Facebook not too long before I got up for work the next morning, just in time for a stern lecture about driving while sleep-deprived.
Comfort: a financial term. In risk management we speak of being comforted by some redeeming quality of a dangling financial risk which might otherwise give us uneasy nerves. For example, if a banker was short on tangible collateral for a particular loan deal, she might be "comforted" by the outstanding cash flow and a squeaky-clean credit history of her borrower.
Something similar might be said of investment risks. Ever since the financial crisis of 2008 investors have been understandably anxious, looking for the warm blanket of safety to calm their fears. As investors flocked to safe-haven securities, and as central banks intervened, interest rates bottomed, which in turn has boosted stock markets as people looked elsewhere for better yields.
Now, with rates inching upwards, what can be said? One RBC analyst coined the phrase last week: "three per cent is the new two per cent," referring to the 10-year US t-bill yield's expectant rise. In effect, this takes the heat out of the blanket for nearly all asset classes. As rates rise, the income streams generated by existing bonds look less attractive and their trading values fall. At the same time, some investors are attracted by the higher yields, move out of high-yielding stocks and retreat back to the now slighter-higher yielding bond market.
As our analyst further noted:
"The beginning of the end of (interest rate interventions) has far reaching implications for investors sensitive to volatile interest rates and currencies."
"...Market participants would likely prefer a brief respite from the rise in U.S. rates now, followed by a slow and steady normalization process. Such stability generally proves elusive, suggesting investors should take the respite they have now to position portfolios for a world where the three per cent level on U.S. 10-year yields is the base of support for the next move higher. "
So where do we find comfort in a world where nearly everything is sensitive to increasing interest rates? Do we fling heavily in to growth stocks at the expense of caution? Do we hide out in GIC's in their still very low rate environment?
As usual, the answer is in a tapestry of solutions, balancing risks in various asset classes. Depending on your unique profile, part of the quiltwork of your portfolio might even include some traditionally higher-volatility pieces in the mix, which in this case might actually lower your overall portfolio risk as rates rise. As always, the solution is unique to you, specific to your life and needs, and measured against the risks peculiar to markets today.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
